Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Mill City Ventures III, Ltdtm2029600d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Mill City Ventures III, Ltdtm2029600d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Mill City Ventures III, Ltdtm2029600d1_ex31-1.htm

 

 

 

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, 2020
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 814-00991

 

 

 

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

 

 

     
Minnesota   90-0316651
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
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 every Interactive Data File required to be submitted 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 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 company x
     
    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 October 30, 2020, Mill City Ventures III, Ltd. had 10,696,735 shares of common stock, and no other classes of capital stock, outstanding.

 

 

 

 

- 2 -

 

MILL CITY VENTURES III, LTD.

  

Index to Form 10-Q

for the Quarter Ended September 30, 2020

 

 

    Page No.
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited)  
     
  Condensed Balance Sheets – September 30, 2020 and December 31, 2019 3
     
  Condensed Statements of Operations – Three and nine months ended September 30, 2020 and September 30, 2019 4
     
  Condensed Statements of Shareholders’ Equity – Three and nine months ended September 30, 2020 and September 30, 2019 5
     
  Condensed Statements of Cash Flows – Nine months ended September 30, 2020 and September 30, 2019 7
     
  Condensed Schedule of Investments – September 30, 2020 and Schedule of Investments – December 31, 2019 8
     
  Condensed Notes to Financial Statements – September 30, 2020 10
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 4. Controls and Procedures 22
     
PART II. OTHER INFORMATION  
     
Item 6. Exhibits 23
     
SIGNATURES 23

 

 

- 3 -

  

PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

  

   September 30, 2020 (unaudited)   December 31, 2019 
ASSETS          
Investments, at fair value:  $8,178,263   $1,740,897 
Non-control/non-affiliate investments (cost: $8,309,325 and $1,976,370 respectively)          
Cash   2,120,389    8,066,656 
Note receivable   250,000    250,000 
Prepaid expenses   50,995    31,557 
Receivable for sale of investments   127,679     
Interest and dividend receivables   106,723    6,500 
Right-of-use lease asset   27,794    40,823 
Property and equipment, net   141    2,071 
Total Assets  $10,861,984   $10,138,504 
           
LIABILITIES          
Accounts payable  $26,053   $24,996 
Lease liability   30,869    44,975 
Total Liabilities   56,922    69,971 
Commitments and Contingencies          
           
SHAREHOLDERS EQUITY (NET ASSETS)          
Common stock, par value $0.001 per share (250,000,000 authorized; 10,696,735 and 11,067,402 outstanding)   10,696    11,067 
Additional paid-in capital   10,616,757    10,774,653 
Accumulated deficit   (1,159,665)   (1,159,665)
Accumulated undistributed investment loss   (2,142,644)   (2,397,865)
Accumulated undistributed net realized gains on investment transactions   3,610,980    3,075,816 
Net unrealized depreciation in value of investments   (131,062)   (235,473)
Total Shareholders' Equity (net assets)   10,805,062    10,068,533 
Total Liabilities and Shareholders' Equity  $10,861,984   $10,138,504 
Net Asset Value Per Common Share  $1.01   $0.91 

  

See accompanying Notes to Financial Statements

 

 

- 4 -

 

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   Three Months Ended   Nine Months Ended 
   September 30,
2020
   September 30,
2019
   September 30,
2020
   September 30,
2019
 
Investment Income                    
Interest income  $285,338   $28,241   $740,008   $83,917 
Dividend income   1,696    14,766    15,461    41,458 
Total Investment Income   287,034    43,007    755,469    125,375 
Operating Expenses                    
Professional fees   58,719    69,503    133,016    168,342 
Payroll   58,191    56,768    174,768    283,359 
Insurance   20,672    20,487    61,793    62,119 
Occupancy   16,562    16,384    49,693    57,250 
Director's fees   22,500    22,500    67,500    67,500 
Depreciation and amortization   643    643    1,930    1,930 
Other general and administrative   3,659    3,421    11,548    28,493 
Total Operating Expenses   180,946    189,706    500,248    668,993 
Net Investment Gain (Loss)   106,088    (146,699)   255,221    (543,618)
Realized and Unrealized Gain (Loss) on Investments                    
Net realized gain on investments   335,440    1,374,287    535,164    4,476,497 
Net change in unrealized appreciation (depreciation) on investments   141,816    (1,572,874)   104,411    (4,414,995)
Net Realized and Unrealized Gain (Loss) on Investments   477,256    (198,587)   639,575    61,502 
Net Increase (Decrease) in Net Assets Resulting from Operations  $583,344   $(345,286)  $894,796   $(482,116)
                     
Net Increase (Decrease) in Net Assets Resulting from Operations per share:                    
Basic and diluted  $0.05   $(0.03)  $0.08   $(0.04)
                     
Weighted-average number of common shares outstanding   10,696,735    11,067,402    10,881,382    11,067,402 

 

See accompanying Notes to Financial Statements

 

 

- 5 -

 

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

Three Months Ended September 30, 2020  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
Depreciation
in value of
Investments
   Total
Shareholders'
Equity
 
Balance as of June 30, 2020   10,696,735   $10,696   $10,616,757   $(1,159,665)  $(2,248,732)  $3,275,540   $(272,878)  $10,221,718 
Net investment gain                    106,088            106,088 
Net realized gain on investment transactions                        335,440        335,440 
Appreciation in value of investments                            141,816    141,816 
Balance as of September 30, 2020   10,696,735   $10,696   $10,616,757   $(1,159,665)  $(2,142,644)  $3,610,980   $(131,062)  $10,805,062 

 

Three Months Ended September 30, 2019  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, 2019   11,067,402   $11,067   $10,774,653   $(1,159,665)  $(2,122,016)  $2,925,406   $159,244   $10,588,689 
Net investment loss                    (146,699)           (146,699)
Net realized gain on investment transactions                        1,374,287        1,374,287 
Depreciation in value of investments                            (1,572,874)   (1,572,874)
Balance as of September 30, 2019   11,067,402   $11,067   $10,774,653   $(1,159,665)  $(2,268,715)  $4,299,693   $(1,413,630)  $10,243,403 

 

 

- 6 -

 

Nine Months Ended September 30, 2020  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
Depreciation
in value of
Investments
   Total
Shareholders'
Equity
 
Balance as of December 31, 2019   11,067,402   $11,067   $10,774,653   $(1,159,665)  $(2,397,865)  $3,075,816   $(235,473)  $10,068,533 
Repurchase of shares   (370,667)   (371)   (157,896)                     (158,267)
Net investment gain                    255,221            255,221 
Net realized gain on investment transactions                        535,164        535,164 
Appreciation in value of investments                            104,411    104,411 
Balance as of September 30, 2020   10,696,735   $10,696   $10,616,757   $(1,159,665)  $(2,142,644)  $3,610,980   $(131,062)  $10,805,062 

 

Nine Months Ended September 30, 2019  Common
Shares
   Par
Value
   Additional
Paid In
Capital
   Accumulated
Deficit
   Accumulated
Undistributed
Net
Investment
Loss
   Accumulated
Undistributed
Net Realized
Gain on
Investments
Transactions
   Net
Unrealized
Appreciation
(Depreciation)
in value of
Investments
   Total
Shareholders'
Equity
 
Balance as of December 31, 2018   11,067,402   $11,067   $10,774,653   $(1,159,665)  $(1,725,097)  $376,566   $3,001,365   $11,278,889 
Dividend distribution                        (553,370)       (553,370)
Net investment loss                    (543,618)           (543,618)
Net realized gain on investment transactions                        4,476,497        4,476,497 
Depreciation in value of investments                            (4,414,995)   (4,414,995)
Balance as of September 30, 2019   11,067,402   $11,067   $10,774,653   $(1,159,665)  $(2,268,715)  $4,299,693   $(1,413,630)  $10,243,403 

 

See accompanying Notes to Financial Statements

 

 

- 7 -

 

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   Nine Months Ended 
   September
30, 2020
   September
30, 2019
 
Cash flows from operating activities:          
Net increase (decrease) in net assets resulting from operations  $894,796   $(482,116)
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) depreciation on investments   (104,411)   4,414,995 
Net realized gain on investments   (535,164)   (4,476,497)
Purchases of investments   (7,655,802)   (875,160)
Proceeds from sales of investments   1,858,011    6,845,428 
Proceeds from sales of investments sold short       30,119 
Depreciation & amortization expense   1,930    1,930 
Changes in operating assets and liabilities:          
Prepaid expenses and other assets   (6,409)   5,471 
Interest and dividends receivable   (100,223)   (8,099)
Receivable for investment sales   (127,679)   (12,948)
Accounts payable and other liabilities   (13,049)   (11,905)
Net cash provided (used) in operating activities   (5,788,000)   5,431,218 
Cash flows from financing activities:          
Payments for repurchase of common stock   (158,267)    
Payments for common stock dividend       (553,370)
Net cash used by financing activities   (158,267)   (553,370)
Net increase (decrease) in cash   (5,946,267)   4,877,848 
Cash, beginning of period   8,066,656    966,121 
Cash, end of period  $2,120,389   $5,843,969 

 

See accompanying Notes to Financial Statements

 

 

- 8 -

 

MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2020

 

Investment / Industry  Cost   Fair Value   Percentage
of Net
Assets
 
Short-Term Non-banking Loans               
Consumer - 15% secured loans  $400,000   $400,000    3.71%
Financial - 52% secured loans   500,000    500,000    4.64%
Financial - 44% secured loans   1,400,000    1,400,000    12.99%
Real Estate - 15% secured loans               
Tailwinds, LLC   3,000,000    3,000,000    27.83%
Other   239,000    239,000    2.22%
Total Short-Term Non-Banking Loans   5,539,000    5,539,000    51.39%
                
Common Stock               
Consumer               
Ammo, Inc. (1,000,000 restricted shares)   1,750,000    2,016,000    18.70%
Business Services   28,606    32,223    0.30%
Total Common Stock   1,778,606    2,048,223    19.00%
                
Preferred Stock               
Information Technology   150,000    300,000    2.78%
                
Warrants               
Advertising           0.00%
Healthcare   679        0.00%
Total Warrants   679        0.00%
                
Other Equity               
Leisure & Hospitality   291,040    291,040    2.70%
Oil & Gas   550,000        0.00%
Total Other Equity   841,040    291,040    2.70%
                
Total Investments  $8,309,325   $8,178,263    75.87%
                
Total Cash   2,120,389    2,120,389    19.67%
                
Total Investments and Cash  $10,429,714  $10,298,652    95.54%

 

See accompanying Notes to the Financial Statements

 

 

- 9 -

 

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2019

 

Investments (1)  Investment
Type (5)
  Interest
Rate (2)(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   35,714   $   $    0.00%  $   $   $—
                                         
Consumer                                          
Tzfat Spirits of Israel, LLC  LLC Membership Units (8)  n/a  n/a   55,000    101,019    15,000             86,019   (86,019)
                   101,019    15,000    0.15%       86,019   (86,019)
Financial                                        
Manning & Napier, Inc.  Common Stock  n/a  n/a   86,700    188,969    150,858             38,111   (38,111)
                   188,969    150,858    1.50%       38,111   (38,111)
Healthcare                                           
Reshape Life Sciences Inc.  Warrants (8)  n/a  8/16/2024   67,860    679                 679   (679)
                   679        0.00%       679   (679)
Information Technology                                           
Kwikbit Inc. (fka MAX 4G)  Preferred Stock (8)  n/a  n/a   300,000    150,000    300,000         150,000       150,000
                   150,000    300,000    2.98%   150,000       150,000
Leisure & Hospitality                                           
DBR Enclave US Investors, LLC  LLC Units  n/a  n/a   369,200    369,200    369,200               
                   369,200    369,200    3.67%         
Oil & Gas                                        
Northern Capital Partners I, LP  Limited Partnership Units (8)  n/a  n/a   550,000    550,000    150,000             400,000   (400,000)
                   550,000    150,000    1.49%       400,000   (400,000)
Publishing                                           
Educational Development Corp.  Common Stock  n/a  n/a   122,304    616,503    755,839    7.50%   150,106    10,770   139,336
                                           
Total Equity Investments                 1,976,370    1,740,897    17.29%   300,106    535,579   (235,473)
                                           
Total Cash                 8,066,656    8,066,656    80.12%         
                                           
Total Investments and Cash                $10,043,026   $9,807,553    97.41%  $300,106   $535,579   ($235,473)

 

(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.
(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.
  
At December 31, 2019, aggregate non-qualifying assets represented approximately 0.9% of our total assets.
At December 31, 2019, the estimated net unrealized loss for federal tax purposes was $58,586, based on a tax cost basis of $1,799,483.
At December 31, 2019, the estimated aggregate gross unrealized gain for federal income tax purposes was $300,106 and the estimated aggregate gross unrealized loss for federal income tax purposes was $358,692
   

See accompanying Notes to Financial Statements

 

 

- 10 -

 

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2020

 

NOTE 1 – ORGANIZATION

 

In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.

 

We were incorporated in Minnesota in January 2006. On February 7, 2013, we filed Form N-54A to become a business development company (“BDC”) under the 1940 Act. We operated as a BDC until we withdrew our election to be treated as a BDC by filing a Form N-54C with SEC on December 27, 2019. As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC, and we are seeking opportunities to invest in short-term non-bank lending and specialty finance. Nevertheless, any investment we make in business will be limited and structured in such a way as to ensure that no more than 40% of our total assets consist of investment securities.

 

Because we operated as a BDC or investment company from 2013 through December 27, 2019, the comparative financial statements for the periods during or ending on December 31, 2019 in this report reflect our operations as a business development company, or “BDC,” under the Investment Company Act of 1940 (the “1940 Act”). During that time, we were primarily focused on investing in or lending to privately held and small capitalization publicly traded U.S. companies, and making managerial assistance available to such companies. A majority of our investments by dollar amount were structured as purchases of preferred or common stock or loans evidenced by promissory notes that may have been convertible into stock by their terms or that may have been accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investment objective was to generate income and capital appreciation that ultimately became realized gains.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation: Our accompanying unaudited condensed financial statements 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

The condensed balance sheet as of December 31, 2019 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 financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates, 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. We present our financial statements as an investment company following accounting and reporting guidance in ASC 946.

 

Cash deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.

 

Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments were 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 have been engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures.

 

 

- 11 -

 

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2020

 

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.

 

Income taxes: Due to our change in business model, we now account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.   Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

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 believe we have no significant unrecognized tax positions.  Our evaluation was performed for the tax years ended December 31, 2016 through 2019, which are the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2020.  We do not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

 

Prior to the business model change in 2019, we operated as a BDC under the 1940 Act.  As such, we planned to be taxed as a regulated investment company, or “RIC”. Compliance with the requirements of the Internal Revenue Code applicable to RICs required us to distribute at least 90% of our investment company taxable income to shareholders. Our intention was to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain, therefore we made no provision for income taxes prior to 2019. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences were reclassified to paid-in capital.  For more information of the current year provision, see Note 6, “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. 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.

 

 

- 12 -

 

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2020

 

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.

 

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.

 

Recently adopted accounting pronouncements: In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements held at the end of the reporting period. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU. The adoption of the ASU effective January 1, 2020 did not have a material impact on our financial statements.

 

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, 2020 (together with the corresponding percentage of the fair value of our total portfolio of investments):

 

   As of September 30, 2020 
   Investments at
Amortized Cost
   Percentage of
Amortized Cost
   Investments at
Fair Value
   Percentage of
Fair Value
 
Short-term Non-banking Loans  $5,539,000    66.7%  $5,539,000    67.7%
Preferred Stock   150,000    1.8    300,000    3.7 
Common Stock   1,778,606    21.4    2,048,223    25.0 
Warrants   679             
Other Equity   841,040    10.1    291,040    3.6 
Total  $8,309,325    100.0%  $8,178,263    100.0%

 

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2019 (together with the corresponding percentage of the fair value of our total portfolio of investments):

 

   As of December 31, 2019 
   Investments at
Amortized Cost
   Percentage of
Amortized Cost
   Investments at
Fair Value
   Percentage of
Fair Value
 
Preferred Stock  $150,000    7.6%  $300,000    17.2%
Common Stock   805,472    40.8    906,697    52.1 
Warrants   679             
Other Equity   1,020,219    51.6    534,200    30.7 
Total  $1,976,370    100.0%  $1,740,897    100.0%

 

 

- 13 -

 

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2020

 

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of September 30, 2020:

 

   As of September 30, 2020 
   Investments at
Fair Value
   Percentage of
Fair Value
 
Business Services  $32,223    0.4%
Consumer   2,416,000    29.5 
Financial   1,900,000    23.2 
Information Technology   300,000    3.7 
Leisure & Hospitality   291,040    3.6 
Oil & Gas        
Real Estate   3,239,000    39.6 
Total  $8,178,263    100.0%

 

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2019:

 

   As of December 31, 2019 
   Investments at
Fair Value
   Percentage of
Fair Value
 
Consumer  $15,000    0.9%
Financial   150,858    8.7 
Information Technology   300,000    17.2 
Leisure & Hospitality   369,200    21.2 
Oil & Gas   150,000    8.6 
Publishing   755,839    43.4 
Total  $1,740,897    100.0%

 

We do not “control,” and we are not an “affiliate” of (as each of those terms is defined in the 1940 Act), any of our portfolio companies as of September 30, 2020.

 

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.

 

 

- 14 -

  

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2020

 

Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investment portfolio as of September 30, 2020 may differ materially from values that would have been used had a readily available market for the securities existed.

 

The following table presents the fair value measurements of our portfolio investments by major class, as of September 30, 2020, according to the fair value hierarchy:

 

   As of September 30, 2020 
   Level 1   Level 2   Level 3   Total 
Short-term Non-banking Loans  $   $   $5,539,000   $5,539,000 
Preferred Stock             300,000    300,000 
Common Stock   32,223    2,016,000        2,048,223 
Warrants                
Other Equity           291,040    291,040 
Total  $32,223   $2,016,000   $6,130,040   $8,178,263 

  

The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2019, according to the fair value hierarchy:

   As of December 31, 2019 
   Level 1   Level 2   Level 3   Total 
                 
Preferred Stock  $   $   $300,000   $300,000 
Common Stock   906,697            906,697 
Warrants                
Other Equity           534,200    534,200 
Total  $906,697   $   $834,200   $1,740,897 

  

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the nine months ended September 30, 2020:

 

   For the nine months ended September 30, 2020     
   ST Non-banking
Loans
   Preferred Stock   Common Stock   Warrants   Other Equity 
                     
Balance as of January 1, 2020  $   $300,000   $   $   $534,200 
Net change in unrealized depreciation                   (164,000)
Purchases and other adjustments to cost   5,793,000                 
Sales and redemptions   (254,000)               (79,160)
Net realized gain (loss)                      —               —     
Balance as of June 30, 2020  $5,539,000   $300,000   $   $   $291,040 

 

The net change in unrealized depreciation for the nine months ended September 30, 2020 attributable to Level 3 portfolio investments still held as of September 30, 2020 is $150,000.

 

 

- 15 -

  

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2020

 

The following table lists our Level 3 investments held as of September 30, 2020 and the unobservable inputs used to determine their valuation:

 

Security Type 9/30/20 FMV  Valuation Technique Unobservable Inputs Range
ST Non-banking Loans $5,539,000  discounted cash flow determining private company credit rating 14-52%
Other Equity  291,040  last secured funding known by company economic changes since purchase 14-16%
     discounted cash flow illiquidity of company cash flow based on oil market price per barrel
economic changes since last funding
$20 - $40 per barrel
Preferred Stock  300,000  last funding secured by company economic changes since last funding  
  $6,130,040       

 

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31, 2019:

   For the year ended December 31, 2019 
   Preferred Stock   Common Stock   Warrants   Other Equity 
                 
Balance as of January 1, 2019  $1,014,258   $3,136,432   $   $1,013,629 
Net change in unrealized appreciation (depreciation)   12,478    (2,848,275)       (348,629)
Purchases and other adjustments to cost                
Sales and redemptions   (726,691)   (3,341,639)   (128,775)   (130,800)
Net realized gain (loss)   (45)   3,053,482    128,775     
Balance as of December 31, 2019  $300,000   $   $   $534,200 

 

The net change in unrealized depreciation for the year ended December 31, 2019 attributable to Level 3 portfolio investments still held as of December 31, 2019 was $348,629, 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, 2019 and the unobservable inputs used to determine their valuation:

 

Security Type   12/31/19 FMV Valuation Technique Unobservable Inputs Range
Other Equity $ 384,200    last secured funding known by company economic changes since last funding  
    150,000    discounted cash flow cash flow based on oil market price per barrel $35 - $45 per barrel
Preferred Stock   300,000    last funding secured by company economic changes since last funding  
  $ 834,200         

 

NOTE 5 – RELATED-PARTY TRANSACTIONS

 

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 with the SEC. Our related-party transactions requiring disclosure under this policy are:

 

·Mr. Joseph A. Geraci, II, our Chief Financial Officer, and Mr. Douglas M. Polinsky, our Chief Executive Officer, hold direct and indirect interests in the common stock of Southern Plains Resources, Inc. (SPR), a company in which we made investments in common stock in each of March and July 2013. The company disposed of their investment in SPR in 2019.

 

 

- 16 -

 

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2020

 

·On August 10, 2018, we entered into a loan transaction with a shareholder and her spouse who own approximately 1,500,000 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. 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 625,000 shares of our common stock. The pledged shares are held in physical custody for us by our custodial agent Milliennium Trust Company.

 

NOTE 6 – INCOME TAXES

 

Prior to December 27, 2019, before we withdrew our election to be treated as a BDC, we planned to be taxed as a regulated investment company (RIC). Compliance with the requirements of the Internal Revenue Code applicable to RICs required us to distribute at least 90% of our investment company taxable income to shareholders. Our intention was to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain, therefore we have made no provision for income taxes prior to December 27, 2019. Ultimately, we never elected to be a RIC. As of December 27, 2019, we are a C-Corporation for tax purposes. Income taxes as of September 30, 2020 are described below.

 

As of September 30, 2020 and December 31, 2019, we maintained a full valuation allowance against its net deferred tax assets of $384,059 and $446,000, respectively. Our determination of the realizable deferred tax assets requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, we may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. We will continue to assess the need for a valuation allowance in future periods. Because of the full valuation allowance, our effective tax rate is expected to be near 0% and therefore the income tax expense is not material for any period presented.

 

As of September 30, 2020, we had a federal NOL of approximately $298,065. The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code. Certain NOLs will expire in years 2036 and 2037. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely. The estimated federal NOL that does not expire included in the total above is $356,000. States may vary in their treatment of post-2017 NOLs. We have state NOL carryforwards arising from both combined and separate filings. The state NOL carryforwards may expire in 2036 and 2037.

 

NOTE 7 – SHAREHOLDERS’ EQUITY

 

At September 30, 2020, we had 10,696,735 shares of common stock issued and outstanding.

 

On May 6, 2020, we repurchased and retired 100,000 shares of common stock at a purchase price of $0.50.

On May 19, 2020, we repurchased and retired 270,667 shares of common stock at a purchase price of $0.40.

On February 15, 2019, we announced that our Board of Directors had approved a special cash dividend of $0.05 per common share. The dividend was paid on March 15, 2019 to stockholders of record as of the close of business on March 8, 2019.

 

NOTE 8 – PER-SHARE INFORMATION

 

Basic net gain per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. 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, 
   2020   2019 
Numerator:  Net Increase (Decrease) in Net Assets Resulting from Operations  $583,344   $(345,286)
Denominator:  Weighted-average number of common shares outstanding   10,696,735    11,067,402 
Basic and diluted net gain (loss) per common share  $0.05   $(0.03)

 

 

- 17 -

 

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2020

 

   For the Nine Months Ended September 30, 
   2020   2019 
Numerator:  Net Increase (Decrease) in Net Assets Resulting from Operations  $894,796   $(482,116)
Denominator:  Weighted-average number of common shares outstanding   10,881,382    11,067,402 
Basic and diluted net gain (loss) per common share  $0.08   $(0.04)

  

We do not have any common stock equivalents outstanding during the periods presented.

 

NOTE 9 – OPERATING LEASES

 

On January 1, 2019, we adopted ASU No. 2016-2, Leases (Topic 842), and its amendments and elected the effective date transition method. We are subject to two non-cancelable operating leases for office space expiring March 31, 2022. 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, 2019 was 4.5% and the weighted average remaining lease term is 2 years.

 

Under ASC 840, rent expense for office facilities for the three and nine months ended September 30, 2020 was $16,562 and $49,693, respectively. Rent expense for office facilities for the three and nine months ended September 30, 2019 was $16,384 and $57,250, respectively.

 

The components of our operating lease were as follows for the three and nine months ended September 30, 2020:

 

   Three Months   Nine Months 
   Ended   Ended 
   September 30, 2020   September 30, 2020 
Operating lease costs  $4,779   $14,337 
Variable lease cost   4,351    13,059 
Short-term lease cost   7,432    22,297 
Total  $16,562   $49,693 

 

Variable lease costs consist primarily of property taxes, insurance and common area or other maintenance costs for our leased facility.

 

2020  $5,138 
2021   21,162 
2022   5,449 
Total lease payments   31,749 
Less: interest   (880)
Present value of lease liabilities  $30,869 

 

 

- 18 -

 

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2020

 

NOTE 10 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights for the nine months ended September 30, 2020 through 2016:

  

   Nine Months Ended September 30, 
   2020   2019   2018   2017   2016 
Per Share Data (1)                         
Net asset value at beginning of period  $0.91    1.02    0.87    0.77    0.72 
Net investment income (loss)   0.02    (0.05)   (0.04)   (0.04)   (0.01)
Net realized and unrealized gains (losses)   0.06    0.01    0.15    0.06    (0.01)
Repurchase of common stock   0.02            0.04     
Payment of common stock dividend       (0.05)            
Net asset value at end of period  $1.01    0.93    0.98    0.83    0.70 
                          
Ratio / Supplemental Data                         
Per share market value of investments at end of period  $0.76    0.70    0.82    0.51    0.47 
Shares outstanding at end of period   10,696,735    11,067,402    11,067,402    12,151,493    12,151,493 
Average weighted shares outstanding for the period   10,881,382    11,067,402    11,067,402    12,151,493    12,151,493 
Net assets at end of period  $10,805,062    10,588,689    11,278,889    9,555,551    8,354,165 
Average net assets (2)  $10,220,482    12,304,975    9,955,674    9,504,851    8,670,320 
Total investment return   8.79%   (8.82)%   12.64%   2.60%   (2.78)%
Portfolio turnover rate (3)   18.18%   7.11%   11.55%   11.87%   11.90%
Ratio of operating expenses to average net assets (3)   (6.49)%   (7.70)%   (6.98)%   (7.38)%   (3.30)%
Ratio of net investment income (loss) to average net assets (3)   3.35%   (6.40)%   (5.53)%   (5.89)%   (2.86)%
Ratio of realized gains (losses) to average net assets (3)   7.06%   57.36%   (12.79)%   16.51%   (12.02)%

 

(1)Per-share data was derived using the ending number of shares outstanding for the period.
(2)Based on the monthly average of net assets as of the beginning and end of each period presented.
(3)Ratios are annualized.

  

NOTE 11 – GENERAL UNCERTAINTY

 

On March 11, 2020, the World Health Organization declared the outbreak of the coronavirus (COVID-19) a pandemic. As a result, economic uncertainties and market volatility have arisen which are likely to negatively impact our investment valuations and net increase or decrease in net assets resulting from operations. Other financial impacts could occur though such potential impact is unknown at this time.

  

NOTE 12 – SUBSEQUENT EVENTS

 

On October 26, 2020, the Board of Directors approved a stock repurchase program of up to $400,000 of the Company’s outstanding shares of common stock.  Repurchases, if any, are expected to begin two complete trading days after the filing with the SEC of the Company's quarterly report on Form 10-Q for the period ended September 30, 2020, and may be completed in public or private transactions.  The repurchase program does not require the Company to acquire any specific number of shares, and may be suspended from time to time in accordance with the Company's insider trading policy and existing best practices, or it may be discontinued.  Repurchases completed under the program are expected to be funded from available working capital.

 

- 19 -

 

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. was 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 provide non-bank lending and specialty finance to companies and individuals on both a secured and unsecured basis. The loans we provide typically have maturities that range from 9 to 12 months and may involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale; other real estate projects; title loans; cash inventory needs; inventory financing, or for other purposes. We intend to remain opportunistic, however, and may engage in transactions that involve other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make.

 

Our principal sources of income are interest, dividends and other fees associated with lending such as origination fees, closing fees or exit fees. We may also receive reimbursement of legal costs associated with loan documentation. Our statement of operations also reflect increases and decreases in the carrying value of our asset and investments (i.e. unrealized 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 MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, 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.

 

PORTFOLIO AND INVESTMENT ACTIVITY

 

During the nine months ended September 30, 2020, we made $7,655,802 of investments in portfolio companies and had $1,858,011 of redemptions and repayments, resulting in net investments at amortized cost of $7,200,566 at the end of the period.

 

During the nine months ended September 30, 2019, we made $875,160 of investments in portfolio companies and had $3,380,422 of redemptions and repayments, resulting in net investments at amortized cost of $7,555,775 at the end of the period.

 

Our portfolio composition by major class, based on fair value at September 30, 2020, was as follows:

 

   Investments at
Fair Value
   Percentage of
Fair Value
 
Short-term Non-banking Loans  $5,539,000    67.7%
Equity/Other   2,639,263    32.3 
Total  $8,178,263    100.0%

 

 

- 20 -

 

RESULTS OF OPERATIONS

 

Our operating results for the three and nine months ended September 30, 2020 and September 30, 2019 were as follows:

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
   2020   2019   2020   2019 
Total investment income  $287,034   $43,007   $755,469   $125,375 
Total expenses   180,946    189,706    500,248    668,993 
Net investment gain (loss)  $106,088   $(146,699)  $255,221   $(543,618)

 

Investment Income

 

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt investments we own. We may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire. In some cases, the interest on our investments 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. We may also generate revenue in the form of commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned.

 

For the three and nine months ended September 30, 2020, our total investment income was $287,034 and $755,469, For the three and nine months ended September 30, 2019, our total investment income was $43,007 and $125,375. The increase is due to the change in our business structure which now focuses on short-term non-bank lending. Our loan portfolio generates interest income, with an average rate on the loans of 24%.

 

Professional Fees

 

For the three and nine months ended September 30, 2020, we had $58,719 and $133,016 professional fees expense, respectively. For the three and nine months ended September 30, 2019, we had $69,503 and $168,342 professional fees expense, respectively. The decrease is due to a refund received during the first quarter of $59,957, which related to expenses incurred during 2018 and 2019.

 

Net Realized Gain from Investments

 

For the three and nine months ended September 30, 2020, we had $665,187 and $1,858,011, respectively, of sales of investments, resulting in $335,440 and $535,164, respectively, of realized gains. For the three and nine months ended September 30, 2019, we had $3,495,125 and $6,875,547, respectively of sales of investments, resulting in $1,374,287 and $4,476,497 respectively, of realized gains, due primarily to the acquisition of our holding in BiteSquad LLC by Waitr Holdings.

 

Net Change in Unrealized Appreciation (Depreciation) on Investments

 

For the three and nine months ended September 30, 2020, our investments had $141,816 and $104,411 of unrealized appreciation, respectively. For the three and nine months ended September 30, 2019, our investments had $1,572,874 and $4,414,995, of unrealized depreciation, respectively.

 

Changes in Net Assets from Operations

 

For the three and nine months ended September 30, 2020, we recorded a net increase in net assets from operations of $583,344 and $894,796, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2020, our per-share net increase in net assets from operations was $0.05 and $0.08, respectively. For the three and nine months ended September 30, 2019, we recorded a net decrease in net assets from operations of $345,286 and $482,116, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2019, our per-share net decrease in net assets from operations was $0.03 and $0.04, respectively.

 

Cash Flows for the Nine months Ended September 30, 2020 and 2019

 

The level of cash flows used in or provided by operating activities is affected by the purchases of investments, redemptions and repayments of portfolio investments, among other factors. For the nine months ended September 30, 2020, net cash used in operating activities was $5,788,000. Cash flows used in operating activities for the nine months ended September 30, 2020 were primarily related to purchases of investments of $7,655,802, offset mostly by redemptions and repayments of investments totaling $1,858,011 For the nine months ended September 30, 2019, net cash provided in operating activities was $5,431,218. Cash flows provided in operating activities for the nine months ended September 30, 2019 were primarily related to redemptions and repayments of investments of $6,845,428, offset mostly by purchases of investments totaling $875,160.

 

 

- 21 -

 

FINANCIAL CONDITION

 

As of September 30, 2020, we had cash of $2,120,389, a decrease of $5,946,267 from December 31, 2019. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies, cash distributions to our shareholders or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment.

 

To the extent our Board of Directors determines in the future, based on our financial condition and 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.

 

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, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

During the nine months ended September 30, 2020, 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 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 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;
·the adequacy of our cash resources and working capital; and
·the timing of cash flows, if any, from the operations of our portfolio companies.

 

 

- 22 -

 

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 30, 2020 (related to our year ended December 31, 2019) 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, 2020, 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, 2020.

 

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.

 

 

- 23 -

 

PART II. OTHER INFORMATION

 

ITEM 6.EXHIBITS

 

  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

 

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: October 30, 2020 By: /s/ Douglas M. Polinsky
    Douglas M. Polinsky
    Chief Executive Officer
 
 
Date: October 30, 2020 By: /s/ Joseph A. Geraci, II
    Joseph A. Geraci, II
    Chief Financial Officer