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 June 30, 2018

 

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.)
     
328 Barry Avenue South #210, 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 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 August 10, 2018, Mill City Ventures III, Ltd. had 11,067,402 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 June 30, 2018

 

    Page No.
PART I. FINANCIAL INFORMATION
     
Item 1. Financial Statements  
     
  Balance Sheets – June 30, 2018 and December 31, 2017 3
     
  Statements of Operations – Three and six months ended June 30, 2018 and June 30, 2017 4
     
  Statements of Changes in Net Assets – Six months ended June 30, 2018 and June 30, 2017 5
     
  Statements of Cash Flows – Six months ended June 30, 2018 and June 30, 2017 6
     
  Schedule of Investments – June 30, 2018 and December 31, 2017 7
     
  Notes to Financial Statements – June 30, 2018 12
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 4. Controls and Procedures 24
     
PART II. OTHER INFORMATION  
     
Item 6. Exhibits 25
     
SIGNATURES 25

 

   - 2 -  

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MILL CITY VENTURES III, LTD.

BALANCE SHEETS

 

    June 30, 2018
(unaudited) 		    December 31, 2017
(audited) 		 
ASSETS            
Investments, at fair value:   $ 9,135,268     $ 7,240,860  
Non-control/non-affiliate investments (cost: $7,222,366 and $7,000,745 respectively)                
Cash     1,127,225       2,158,314  
Prepaid expenses     85,823       62,549  
Receivable for sale of investments     —       267,119  
Interest and dividend receivables     55,639       39,574  
Leasehold improvements, net     3,502       7,557  
Property and equipment, net     5,932       7,218  
Total Assets   $ 10,413,389     $ 9,783,191  
                 
LIABILITIES                
Current Liabilities                
Accounts payable     32,112       37,091  
Payable for purchase of investments     —       106,222  
Deferred rent     9,869       10,663  
Total Current Liabilities     41,981       153,976  
Total Liabilities     41,981       153,976  
Commitments and Contingencies (Note 6)                
                 
SHAREHOLDERS EQUITY (NET ASSETS)                
Common Stock, par value $0.001 per share (250,000,000 authorized; 11,067,402 and 11,067,402 outstanding)     11,067       11,067  
Additional paid-in capital     10,774,653       10,774,653  
Accumulated deficit     (1,159,665 )     (1,159,665 )
Accumulated undistributed investment loss     (1,471,930 )     (1,194,773 )
Accumulated undistributed net realized gains on investment transactions     304,381       957,818  
Net unrealized appreciation in value of investments     1,912,902       240,115  
Total Shareholders' Equity (net assets)     10,371,408       9,629,215  
Total Liabilities and Shareholders' Equity   $ 10,413,389     $ 9,783,191  
Net Asset Value Per Common Share   $ 0.94     $ 0.87  

 

See accompanying Notes to Financial Statements

 

   - 3 -  

 

 

MILL CITY VENTURES III, LTD.

STATEMENTS OF OPERATIONS (UNAUDITED)

 

    Three Months Ended     Six Months Ended  
    June 30, 2018     June 30, 2017     June 30, 2018     June 30, 2017  
Investment Income                                
Interest income   $ 25,506     $ 27,854     $ 59,652     $ 51,051  
Dividend income     13,544       8,655       13,923       22,022  
Total Investment Income     39,050       36,509       73,575       73,073  
                                 
Operating Expenses                                
Professional fees     45,192       59,814       105,473       126,550  
Payroll     56,272       67,429       117,325       108,787  
Insurance     19,583       18,694       38,474       36,140  
Occupancy     22,547       22,509       45,302       42,331  
Director's fees     15,000       15,000       30,000       30,000  
Depreciation and amortization     2,670       2,747       5,341       5,495  
Other general and administrative     2,887       2,340       8,817       5,444  
Total Operating Expenses     164,151       188,533       350,732       354,747  
Net Investment Loss   $ (125,101 )   $ (152,024 )   $ (277,157 )   $ (281,674 )
                                 
Realized and Unrealized Gain (Loss) on Investments                                
Net realized gain (loss) on investments     (705,189 )     35,799       (653,437 )     748,070  
Net change in unrealized appreciation (depreciation) on investments     1,032,893       304,886       1,672,787       (298,253 )
Net Realized and Unrealized Gain on Investments     327,704       340,685       1,019,350       449,817  
Net Increase in Net Assets Resulting from Operations   $ 202,603     $ 188,661     $ 742,193     $ 168,143  
                                 
Net Increase  in Net Assets Resulting from Operations per share:                                
Basic and diluted   $ 0.02     $ 0.02     $ 0.07     $ 0.01  
                                 
Weighted-average number of common shares outstanding     11,067,402       12,151,493       11,067,402       12,151,493  

 

See accompanying Notes to Financial Statements

 

   - 4 -  

 

 

MILL CITY VENTURES III, LTD.

STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)

 

    Six Months Ended     Six Months Ended  
    June 30, 2018     June 30, 2017  
Net Assets at Beginning of Period   $ 9,629,215     $ 9,387,408  
Net investment loss     (277,157 )     (281,674 )
Net realized gain (loss) on investments     (653,437 )     748,070  
Net increase (decrease) in unrealized appreciation on investments     1,672,787       (298,253 )
Net increase  in net assets resulting from operations     742,193       168,143  
Total  net increase in net assets resulting from operations     742,193       168,143  
Net Assets at End of Period   $ 10,371,408     $ 9,555,551  
                 
Accumulated undistributed net investment loss   $ (1,471,930 )   $ (1,611,879 )

 

See accompanying Notes to Financial Statements

 

   - 5 -  

 

 

MILL CITY VENTURES III, LTD.

STATEMENTS OF CASH FLOWS (UNAUDITED)

 

    Six Months Ended  
    June 30,
2018 		    June 30,
2017 		 
Cash flows from operating activities:                
Net increase in net assets resulting from operations   $ 742,193     $ 168,143  
                 
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 or depreciation on investments     (1,672,787 )     298,253  
Net realized (gain) loss on investments     653,437       (748,070 )
Payments for purchases of investments     (1,824,303 )     (1,128,365 )
Payments for purchases of investments sold short     (200,341 )     —  
Proceeds from sales of investments     971,652       2,397,699  
Proceeds from sales of investments sold short     177,934       85,936  
Depreciation and amortization expense     5,341       5,495  
                 
Changes in operating assets and liabilities:                
Prepaid expenses     (23,274 )     (26,549 )
Interest and dividends receivable     (16,065 )     (14,381 )
Receivable for investment sales     267,119       —  
Accounts payable     (4,979 )     (2,378 )
Deferred rent     (794 )     (315 )
Payable for investment purchase     (106,222 )     106,288  
Net cash provided (used) in operating activities     (1,031,089 )     1,141,756  
Net increase (decrease) in cash     (1,031,089 )     1,141,756  
Cash, beginning of period     2,158,314       2,344,751  
Cash, end of period   $ 1,127,225     $ 3,486,507  

 

See accompanying Notes to Financial Statements

 

   - 6 -  

 

 

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

JUNE 30, 2018

 

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       —       21,429       0.21 %     21,429       —       21,429  
Business Services                                                                    
Spar Group Inc.   Common Stock (8)   n/a   n/a     200,012       284,592       252,015       2.43 %     —       32,577       (32,577 )
Consumer                                                                    
Bridgford Foods Company   Common Stock   n/a   n/a     2,959       43,805       40,242               —       3,563       (3,563 )
Famous Daves of America, Inc.   Common Stock   n/a   n/a     38,963       154,409       263,000               108,591       —       108,591  
HG Holdings, Inc.(fka Stanley Furniture Co, Inc.)   Common Stock (8)   n/a   n/a     200,000       199,118       130,000               1,413       70,531       (69,118 )
J Jill Inc.   Common Stock (8)   n/a   n/a     10,000       89,512       93,400               3,888       —       3,888  
Nordstroms, Inc.   Common Stock (8)   n/a   n/a     872       42,549       45,152               2,603       —       2,603  
Tzfat Spirits of Israel, LLC   LLC Membership Units (8)   n/a   n/a     55,000       101,019       25,000               —       76,019       (76,019 )
                          630,412       596,794       5.75 %     116,495       150,113       (33,618 )
Education                                                                    
Nat'l Amer. Univ. Holdings, Inc.   Common Stock   n/a   n/a     132,053       204,773       125,305       1.21 %     1,561       81,029       (79,468 )
Financial                                                                    
OTC Markets Group Cl A   Common Stock   n/a   n/a     11,076       179,456       320,096               140,640       —       140,640  
Hi-Crush Partners, LP   Common Stock (9)   n/a   n/a     10,000       104,222       118,000               13,778       —       13,778  
                          283,678       438,096       4.22 %     154,418       —       154,418  
Healthcare                                                                    
Reshape Life Sciences Inc.   Preferred LLC Units (4) (8)   n/a   n/a     156       155,321       98,397               —       56,924       (56,924 )
Reshape Life Sciences Inc.   Warrants (8)   n/a   8/16/2024     67,860       679       —               —       679       (679 )
HemaCare Corp.   Common Stock (8)   n/a   n/a     139,697       430,876       1,075,667               644,791       —       644,791  
Opiant Pharmaceuticals, Inc.   Common Stock (8)   n/a   n/a     10,000       201,856       143,900               —       57,956       (57,956 )
                          788,732       1,317,964       12.71 %     644,791       115,559       529,232  
Industrial Goods                                                                    
CPI Aerostructures Inc.   Common Stock   n/a   n/a     12,540       121,925       131,670               9,745       —       9,745  
                          121,925       131,670       1.27 %     9,745       —       9,745  

 

   - 7 -  

 

 

Information Technology                                                                    
Energous Corp.   Common Stock   n/a   n/a     5,000       90,122       74,150               —       15,972       (15,972 )
Insite Software Solutions, Inc   Warrants (8)   n/a   12/30/2023     108,960       —       —               —       —       —  
International Game Technology, Inc.   Common Stock   n/a   n/a     2,000       57,219       46,480               —       10,739       (10,739 )
Kwikbit Inc. (fka Max 4G, Inc.)   Preferred Stock (8)   n/a   n/a     300,000       150,000       300,000               150,000       —       150,000  
Microvision, Inc.   Common Stock   n/a   n/a     100,000       125,000       112,000               —       13,000       (13,000 )
Points International, Inc.   Common Stock   n/a   n/a     8,000       98,932       131,680               32,748       —       32,748  
Simulations Plus, Inc.   Common Stock   n/a   n/a     25,001       246,710       556,262               309,552       —       309,552  
Travelzoo, Inc.   Common Stock   n/a   n/a     15,100       138,966       258,210               119,244       —       119,244  
Western Digital Corp.   Common Stock   n/a   n/a     2,000       157,752       154,820               —       2,932       (2,932 )
Zynga Inc.   Common Stock   n/a   n/a     50,000       205,232       203,500               —       1,732       (1,732 )
                          1,269,933       1,837,102       17.71 %     611,544       44,375       567,169  
Leisure & Hospitality                                                                    
Bitesquad.com LLC   Preferred LLC Units (4) (8)   n/a   n/a     13,227       726,736       726,736               —       —       —  
Bitesquad.com LLC   Common Stock (8)   n/a   n/a     60,316       288,157       1,293,490               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       24.30 %     1,005,333       —       1,005,333  
Oil & Gas                                                                    
Matrix Service Company   Common Stock (8)   n/a   n/a     10,000       182,580       183,500               920       —       920  
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 )
                          1,462,580       672,129       6.48 %     920       791,371       (790,451 )
Publishing                                                                    
Educational Development Corp.   Common Stock   n/a   n/a     65,202       660,848       1,222,538       11.79 %     561,690       —       561,690  
                                                                     
                                                                     
Total Equity Investments                         7,222,366       9,135,268       88.08 %     3,127,926       1,215,024       1,912,902  
                                                                     
Total Cash                         1,127,225       1,127,225       10.87 %     —       —       —  
                                                                     
Total Investments, Cash                       $ 8,349,591     $ 10,262,493       98.95 %   $ 3,127,926     $ 1,215,024     $ 1,912,902  

 

(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.
(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 June 30, 2018, aggregate non-qualifying assets represented approximately 9.5% of our total assets.

(10) At June 30, 2018, the estimated net unrealized gain for federal tax purposes was $2,114,336, based on a tax cost basis of $7,020,932. At June 30, 2018 the estimated aggregate gross unrealized gain for federal income tax purposes was $3,214,666, and the estimated gross unrealized loss for federal income tax purposes was $1,100,330.

  

   - 8 -  

 

 

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2017

 

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       5.19 %     —       —       —  
                                                                         
Total Debt Investments                             1,250,000       500,000       5.19 %     —       750,000       (750,000 )

 

   - 9 -  

 

 

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       —       42,857       0.45 %     42,857       —       42,857  
Consumer                                                                    
Famous Daves of America, Inc.   Common Stock   n/a   n/a     37,923       159,087       248,395               89,308       —       89,308  
Forward Industries, Inc.   Common Stock (8)   n/a   n/a     20,100       23,969       24,723               778       24       754  
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     171,292       181,871       149,024               —       32,847       (32,847 )
Tzfat Spirits of Israel, LLC   LLC Membership Units (8)   n/a   n/a     55,000       101,019       25,000               —       76,019       (76,019 )
                          512,106       447,942       4.65 %     90,086       154,250       (64,164 )
Education                                                                    
Nat'l Amer. Univ. Holdings, Inc.   Common Stock   n/a   n/a     100,000       172,757       142,000       1.47 %     3,321       34,078       (30,757 )
Financial                                                                    
OTC Markets Group Cl A   Common Stock   n/a   n/a     11,279       182,557       327,655               145,098       —       145,098  
Hi-Crush Partners, LP   Common Stock (9)   n/a   n/a     10,000       106,222       107,000               778       —       778  
QC Holdings, Inc.   Common Stock (8)   n/a   n/a     15,000       10,655       6,862               —       3,793       (3,793 )
                          299,434       441,517       4.59 %     145,876       3,793       142,083  
Healthcare                                                                    
Reshape Life Sciences Inc.   Preferred LLC Units (4) (8)   n/a   n/a     156       155,321       100,433               —       54,888       (54,888 )
Reshape Life Sciences Inc.   Warrants (8)   n/a   8/16/2024     67,860       679       —               —       679       (679 )
HemaCare Corp.   Common Stock (8)   n/a   n/a     136,897       421,839       413,429               6,396       14,806       (8,410 )
                          577,839       513,862       5.34 %     6,396       70,373       (63,977 )
Industrial Goods                                                                    
ClearSign Combustion Corp.   Common Stock   n/a   n/a     3,400       11,310       12,240               930       —       930  
                          11,310       12,240       0.12 %     930       —       930  
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       402,509               155,799       —       155,799  
Travelzoo, Inc.   Common Stock   n/a   n/a     30,000       324,848       193,500               —       131,348       (131,348 )
                          721,558       896,009       9.31 %     305,799       131,348       174,451  
Leisure & Hospitality                                                                    
Bitesquad.com LLC   Preferred LLC Units (4) (8)   n/a   n/a     13,227       726,736       726,736               1,005,333       —       1,005,333  
Bitesquad.com LLC   Common Stock (8)   n/a   n/a     60,316       288,157       1,293,490                                  
DBR Enclave US Investors, LLC   LLC Membership Units   15%   1/31/2020     500,000       500,000       500,000               —       —       —  
                          1,514,893       2,520,226       26.17 %     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       5.07 %     —       791,371       (791,371 )
Publishing                                                                    
Educational Development Corp.   Common Stock   n/a   n/a     65,202       660,848       1,235,578       12.83 %     574,730       —       574,730  
                                                                     
Total Equity Investments                         5,750,745       6,740,860       70.00 %     2,175,328       1,185,213       990,115  
                                                                     
Total Cash and Cash Equivalents                         2,158,314       2,158,314       22.41 %     —       —       —  
                                                                     
Total Investments, Cash and Cash Equivalents                         9,159,059       9,399,174       97.60 %     2,175,328       1,935,213       240,115  

 

   - 10 -  

 

 

(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 December 31, 2017, aggregate non-qualifying assets represented approximately 1.1% of our total assets.

 

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

 

(11) At December 31, 2017, the estimated net unrealized gain for federal tax purposes was $541,796, based on a tax cost basis of $6,699,064. At December 31, 2017, the estimated aggregate gross unrealized gain for federal income tax purposes was $2,365,077, and the estimated gross unrealized loss for federal income tax purposes was $1,823,281.

 

   - 11 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

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.” 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 have elected 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 available 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 accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. Our future revenues will relate to 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 result in gains.

 

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 June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

The condensed balance sheet as of December 31, 2017 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, 2017.

 

Reclassifications: Certain December 31, 2017 amounts have been reclassified to conform to the current period end presentation.

 

Use of estimates : The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below.

 

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

 

Valuation of portfolio investments : We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by the 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.

 

   - 12 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

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.

 

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 realized, the PIK-generating investment will be placed on non-accrual status. Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment is placed on non-accrual status.

 

Recent accounting pronouncements : In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-02,  Leases (Topic 842) . The guidance in this ASU supersedes the leasing guidance in  Leases (Topic 840) . Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The guidance requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. While we are currently evaluating the impact of ASU No. 2016-02, we expect an increase to the balance sheets for the lease assets and associated lease liabilities for our lease agreements previously accounted for as operating leases.

 

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.

 

   - 13 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

NOTE 3 – INVESTMENTS

 

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of June 30, 2018 (together with the corresponding percentage of the fair value of our total portfolio of investments):

 

    As of June 30, 2018  
    Investments at
Amortized Cost 		    Percentage of
Amortized Cost 		    Investments at
Fair Value 		    Percentage of
Fair Value 		 
Senior Secured Loans   $ —       — %   $ —       — %
Preferred Stock     1,032,057       14.3       1,125,133       12.3  
Common Stock     5,038,611       69.8       6,975,077       76.4  
Warrants     679       —       21,429       0.2  
Other Equity     1,151,019       15.9       1,013,629       11.1  
Total   $ 7,222,366       100.0 %   $ 9,135,268       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, 2017 (together with the corresponding percentage of the fair value of our total portfolio of investments):

 

    As of December 31, 2017  
    Investments at
Amortized Cost 		    Percentage of
Amortized Cost 		    Investments at  
Fair Value 		    Percentage of  
Fair Value 		 
Senior Secured Loans   $ 1,250,000       17.9 %   $ 500,000       6.9 %
Preferred Stock     1,032,057       14.7       1,127,169       15.6  
Common Stock     3,566,990       51.0       4,557,205       62.9  
Warrants     679       —       42,857       0.6  
Other Equity     1,151,019       16.4       1,013,629       14.0  
Total   $ 7,000,745       100.0 %   $ 7,240,860       100.0 %

 

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of June 30, 2018:

 

    As of June 30, 2018  
    Investments at  
Fair Value 		    Percentage of
Fair Value 		 
Advertising   $ 21,429       0.23 %
Business Services     252,015       2.76  
Consumer     596,794       6.53  
Education     125,305       1.37  
Financial     438,096       4.80  
Healthcare     1,317,964       14.43  
Industrial Goods     131,670       1.44  
Information Technology     1,837,102       20.11  
Leisure & Hospitality     2,520,226       27.59  
Oil & Gas     672,129       7.36  
Publishing     1,222,538       13.38  
Total   $ 9,135,268       100.00 %

 

   - 14 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2017:

 

    As of December 31, 2017  
    Investments at
Fair Value 		    Percentage of
Fair Value 		 
Advertising   $ 42,857       0.59 %
Consumer     447,942       6.19  
Education     142,000       1.96  
Financial     941,517       13.00  
Healthcare     513,862       7.10  
Industrial Goods     12,240       0.17  
Information Technology     896,009       12.37  
Leisure & Hospitality     2,520,226       34.81  
Oil & Gas     488,629       6.75  
Publishing     1,235,578       17.06  
Total   $ 7,240,860       100.00 %

 

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 June 30, 2018. 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.

 

   - 15 -  

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

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 Policy and 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 examples of these circumstances, such as when a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors). Other situations identified in our Valuation Policy and Procedures 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 Policy and Procedures 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.

 

On a quarterly basis, our management provides members of our Valuation Committee with (i) valuation reports 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); (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; (iii) quarter- or period-end statements from our custodial firms holding any of our portfolio investments; and (iv) recommendations to change any existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing. The committee 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.

 

We made no changes to our Valuation Policy and Procedures during the reporting period.

 

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 June 30, 2018 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 June 30, 2018, according to the fair value hierarchy:

 

    As of June 30, 2018  
    Level 1     Level 2     Level 3     Total  
Senior Secured Loans   $ -     $ -     $ -     $ -  
Preferred Stock     -       98,397       1,026,736       1,125,133  
Common Stock     5,681,587       -       1,293,490       6,975,077  
Warrants     -       21,429       -       21,429  
Other Equity     -       -       1,013,629       1,013,629  
Total   $ 5,681,587     $ 119,826     $ 3,333,855     $ 9,135,268  

 

The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2017, according to the fair value hierarchy:

 

    As of December 31, 2017  
    Level 1     Level 2     Level 3     Total  
Senior Secured Loans   $ -     $ -     $ 500,000     $ 500,000  
Preferred Stock     -       100,433       1,026,736       1,127,169  
Common Stock     3,262,915       800       1,293,490       4,557,205  
Warrants     -       42,857       -       42,857  
Other Equity     -       -       1,013,629       1,013,629  
Total   $ 3,262,915     $ 144,090     $ 3,833,855     $ 7,240,860  

 

   - 16 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the six months ended June 30, 2018:

 

    Senior Secured
Loans 		    Preferred Stock     Common Stock     Warrants     Other Equity  
Balance as of December 31, 2017   $ 500,000     $ 1,026,736     $ 1,293,490     $ -     $ 1,013,629  
Net change in unrealized appreciation (depreciation)     750,000       -       -       -       -  
Purchases and other adjustments to cost     -       -       -       -       -  
Sales and redemptions     (550,000 )     -       -       -       -  
Net realized gain     (700,000 )     -       -       -       -  
Balance as of June 30, 2018   $ -     $ 1,026,736     $ 1,293,490     $ -     $ 1,013,629  

 

The net change in unrealized depreciation for the six months ended June 30, 2018 attributable to Level 3 portfolio investments still held as of June 30, 2018 is $0.

 

The following table lists our level 3 investments held as of June 30, 2018 and the unobservable inputs used to determine their valuation:

 

    Security Type   6/30/18 FMV     Unobservable Inputs
Insite Software Solutions, Inc   Warrants   —     company is a going-concern
Tzfat Spirits of Israel, LLC   Other Equity     25,000     last funding secured by company
MAX 4G, Inc.   Preferred Stock     300,000     last funding secured by company
Bitesquad.com LLC   Preferred Stock     726,736     last funding secured by company
Bitesquad.com LLC   Common Stock     1,293,490     last funding secured by company
DBR Enclave US Investors, LLC   Other Equity     500,000     cost
Northern Capital Partners I, LP   Other Equity     488,629     company is generating substantial revenue and allocated income
Southern Plains Resources, Inc.   Common Stock     —     company has substantially ceased operations
        $ 3,333,855      

 

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the period ended December 31, 2017:

 

    Senior Secured
Loans 		    Preferred Stock     Common Stock     Warrants     Other Equity  
Balance as of January 1, 2017   $ 680,000     $ 3,047,011     $ -     $ -     $ 513,629  
Net change in unrealized appreciation     (97,305 )     (867,012 )     1,005,333       -       -  
Purchases and other adjustments to cost     10,000       (288,157 )     288,157       -       500,000  
Sales and redemptions     (182,695 )     (746,225 )     -       (5,884 )     -  
Net realized gain     90,000       (118,881 )     -       5,884       -  
Balance as of December 31, 2017   $ 500,000     $ 1,026,736     $ 1,293,490     $ -     $ 1,013,629  

 

The net change in unrealized appreciation for the year ended December 31, 2017 attributable to Level 3 portfolio investments still held as of December 31, 2017 was $180,000, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.

 

   - 17 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

The following table lists our level 3 investments held as of December 31, 2017 and the unobservable inputs used to determine their valuation:

 

    Security Type   12/31/17 FMV     Unobservable Inputs
Mix 1 Life, Inc.   Loans (Secured)   $ —     company is in default on its debt to us
Bravo Financial LLC   Loans (Secured)     500,000     cost
Insite Software Solutions, Inc   Warrants     —     company is a going-concern
Tzfat Spirits of Israel, LLC   Other Equity     25,000     last funding secured by company
MAX 4G, Inc.   Preferred Stock     300,000     last funding secured by company
Bitesquad.com LLC   Preferred Stock     726,736     last funding secured by company
Bitesquad.com LLC   Common Stock     1,293,490     last funding secured by company
DBR Enclave US Investors, LLC   Other Equity     500,000     cost
Northern Capital Partners I, LP   Other Equity     488,629     last K-1 valuation received
Southern Plains Resources, Inc.   Common Stock     —     company in default on its balance sheet debt
        $ 3,833,855      

 

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.” 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 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., a company in which we made investments in common stock in each of March and July 2013.

 

· A former director of our company, Christopher Larson, had a direct interest in Mix 1 Life, Inc. and served as that company’s Chief Financial Officer at the time 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 basis 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.

 

· 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.

 

   - 18 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

We have 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 expense for the three and six months ended June 30, 2018 and 2017 was $11,345 and $22,689, respectively. The table below sets forth the required annual minimum lease payments:

 

Year   Amount  
2018   $ 21,358  
Total   $ 21,358  

 

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’ EQUITY

 

At June 30, 2018, we had 11,067,402 shares of common stock issued and outstanding.

 

NOTE 9 – PER-SHARE INFORMATION

 

Basic net gain (loss) per common share is computed by dividing net gain (loss) 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
June 30, 		 
    2018     2017  
Numerator: Net increase in net asset value resulting from operations   $ 202,603     $ 188,661  
Denominator: Weighted-average number of common shares outstanding     11,067,402       12,151,493  
Basic and diluted net gain per common share   $ .02     $ .02  

 

    For the Six Months Ended
June 30, 		 
    2018     2017  
Numerator: Net increase in net asset value resulting from operations   $ 742,193     $ 168,143  
Denominator: Weighted-average number of common shares outstanding     11,067,402       12,151,493  
Basic and diluted net gain per common share   $ .07     $ .01  

 

   - 19 -  

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

 

NOTE 10 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights for the six months ended June 30, 2018 through 2014:

 

    Six Months Ended  
    June 30,
2018 		    June 30,
2017 		    June 30,
2016 		    June 30,
2015 		    June 30,
2014 		 
Per Share Data (1)                              
Net asset value at beginning of period   $ 0.87       0.77       0.72       0.94       0.86  
Net investment income (loss)     (0.02 )     (0.02 )     (0.01 )     0.00       (0.01 )
Net realized and unrealized gains (losses)     0.09       0.04       (0.02 )     (0.03 )     0.06  
Net asset value at end of period   $ 0.94       0.79       0.69       0.91       0.91  
                                         
Ratio / Supplemental Data                                        
Per share market value of investments at end of period   $ 0.82       0.51       0.47       0.59       0.42  
Shares outstanding at end of period     11,067,402       12,151,493       12,151,493       12,151,493       12,169,422  
Average weighted shares outstanding for the period     11,067,402       12,151,493       12,151,493       12,151,493       12,169,422  
Net assets at end of period   $ 10,371,408       9,555,551       8,354,165       11,086,311       11,075,824  
Average net assets (2)   $ 9,955,674       9,504,851       8,670,320       11,525,839       10,959,396  
Total investment return     8.05 %     2.60 %     (4.17 )%     (3.19 )%     5.81 %
Portfolio turnover rate (3)     11.55 %     11.87 %     11.90 %     12.52 %     5.68 %
Ratio of operating expenses to average net assets (3)     (6.98 )%     (7.38 )%     (3.30 )%     (2.49 )%     (5.34 )%
Ratio of net investment income (loss) to average net assets (3)     (5.53 )%     (5.89 )%     (2.86 )%     0.07 %     (3.06 )%
Ratio of realized gains (losses) to average net assets (3)     (12.79 )%     16.51 %     (12.02 )%     5.07 %     3.73 %

  

(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 – SUBSEQUENT EVENTS

 

None  

 

   - 20 -  

 

 

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 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.”

 

We are an internally managed closed-end non-diversified management investment company. We have elected 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 available 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 accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. 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 investment objective is to generate both current income and capital appreciation that ultimately result in gains.

 

Our principal sources of income are interest and dividends we earn on our investments, and proceeds from the sale or redemption of our investments. Our statements of operations also reflect gain from increases in the carrying value of our investments (i.e., unrealized appreciation). 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 year ended December 31, 2017, 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.

 

   - 21 -  

 

 

PORTFOLIO AND INVESTMENT ACTIVITY

 

During the six months ended June 30, 2018, we made $2,024,644 of investments in portfolio companies and had $1,149,586 of redemptions and repayments, resulting in net investments at amortized cost of $7,222,366 for the period.

 

During the six months ended June 30, 2017, we made $1,128,365 of investments in portfolio companies and had $2,483,635 of redemptions and repayments, resulting in net investments at amortized cost of $6,790,708 for the period.

 

Our portfolio composition by major class, based on fair value at June 30, 2018, was as follows:

 

   

Investments at

Fair Value

   

Percentage of

Fair Value

 
Senior Secured Loans   $ -       - %
Unsecured Loans     -       -  
Equity/Other     9,135,268       100.0  
Total   $ 9,135,268       100.0 %

 

RESULTS OF OPERATIONS

 

Our operating results for the three and six months ended June 30, 2018 and June 30, 2017 were as follows:

 

   

For the three months ended

June 30,

   

For the six months ended
June 30,

 
    2018     2017     2018     2017  
Total investment income   $ 39,050     $ 36,509     $ 73,575     $ 73,073  
Total expenses     (164,151 )     (188,533 )     (350,732 )     (354,747 )
Net investment loss   $ (125,101 )   $ (152,024 )   $ (277,157 )   $ (281,674 )

 

Investment Income

 

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt securities 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 six months ended June 30, 2018, our total investment income was $39,050 and $73,575, and was attributable to interest income from two eligible portfolio companies, Bravo Financial, LLC and DBR Enclave LLC, and dividend payments received on account of investments in three eligible portfolio companies - OTC Markets Group Cl A, Simulations Plus, Inc., and Educational Development Corp., and dividends received on account of investments in four non-eligible portfolio companies. For the three and six months ended June 30, 2017, our total investment income was $36,509 and $73,073, respectively, and was attributable to interest income from two eligible portfolio companies, Bravo Financial, LLC and DBR Enclave LLC, and dividend payments received on account 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.

 

Operating Expenses

 

The composition of our operating expenses for the three and six months ended June 30, 2018 and June 30, 2017 was as follows:

 

   

For the three months ended

June 30,

   

For the six months ended

June 30,

 
Expense item     2018       2017       2018       2017  
Professional fees   $ 45,192     $ 59,814     $ 105,473     $ 126,550  
Payroll     56,272       67,429       117,325       108,787  
Occupancy     22,547       22,509       45,302       42,331  
Insurance     19,583       18,694       38,474       36,140  
Directors’ fees     15,000       15,000       30,000       30,000  
Depreciation and amortization     2,670       2,747       5,341       5,495  
Other general and administrative     2,887       2,340       8,817       5,444  
Total   $ 164,151     $ 188,533     $ 350,732     $ 354,747  

 

For the three and six months ended June 30, 2018, our professional fee expense was $45,192 and $105,473, respectively. For the three and six months ended June 30, 2017, our professional fee expense was $59,814 and $126,550, respectively. The decrease for the second quarter is due to the payment of legal fees in 2017 in connection with our collection efforts on bad debt, specifically relating to the Mix 1 Life Notes.

 

For the three and six months ended June 30, 2018, our payroll expense was $56,272 and $117,325, respectively. For the three and six months ended June 30, 2017, our payroll expense was $67,429 and $108,787, respectively. The decrease for the second quarter is due to an adjustment for the payment of the Officers’ health insurance benefits in the second quarter 2017.

 

Net Realized Gain(Loss) from Investments

 

For the three and six months ended June 30, 2018, we had $1,071,055 and $1,149,586, respectively, of principal repayments, resulting in ($705,189) and ($653,437), respectively, of realized losses. The losses in the second quarter were primarily from our $100,000 settlement of the Mix 1 litigation. For the three and six months ended June 30, 2017, we had $162,522 and $2,483,635, respectively, of principal repayments, resulting in $35,799 and $748,070, respectively, of realized gains.

 

Net Change in Unrealized Appreciation (Depreciation) on Investments

 

For the three and six months ended June 30, 2018, our investments had $1,032,893 and $1,672,787 of unrealized appreciation, respectively. For the three and six months ended June 30, 2017, our investments had $304,886 and ($298,253) of unrealized appreciation (depreciation), respectively.

 

Changes in Net Assets from Operations

 

For the three and six months ended June 30, 2018, we recorded a net increase in net assets from operations of $202,603 and $742,193, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2018, our per-share net increase in net assets from operations was $0.02 and $0.07, respectively. For the three and six months ended June 30, 2017, we recorded a net increase in net assets from operations of $188,661 and $168,143, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2017, our per-share net increase in net assets from operations was $0.02 and $0.01, respectively.

 

Cash Flows for the Six Months Ended June 30, 2018 and 2017

 

The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions and repayments of portfolio investments, among other factors. For the six months ended June 30, 2018, net cash used in operating activities was $1,031,089. Cash flows used in operating activities for the six months ended June 30, 2018 were primarily related to purchases of investments of $2,024,644, offset mostly by redemptions and repayments of investments totaling $1,149,586. For the six months ended June 30, 2017, net cash provided in operating activities was $1,141,756. Cash flows provided in operating activities for the six months ended June 30, 2017 were related to redemptions and repayments of $2,483,635, offset mostly by purchases of investments totaling $1,128,365.

 

FINANCIAL CONDITION

 

As of June 30, 2018, we had cash of $1,127,225, a decrease of $1,031,089 from December 31, 2017. 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, which we refer to collectively as “temporary investments.” As of the date of this filing, we expect that substantially all of our temporary investments will be redeployed into portfolio company investments by December 31, 2018.

 

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, subject to the limitations on borrowing applicable to BDCs.

 

   - 22 -  

 

 

RELATED-PARTY TRANSACTIONS

 

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.”

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

During the six months ended June 30, 2018, 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 on 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, from the operations of our portfolio companies.

 

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, 2018 (related to our year ended December 31, 2017) 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.

 

   - 23 -  

 

 

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 June 30, 2018, 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 June 30, 2018.

 

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.

 

   - 24 -  

 

 

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: August 10, 2018 By: /s/ Douglas M. Polinsky
    Douglas M. Polinsky
    Chief Executive Officer
     
     
Date: August 10, 2018 By: /s/ Joseph A. Geraci, II
    Joseph A. Geraci, II
    Chief Financial Officer

 

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