At September 30, 2018, aggregate non-qualifying assets
represented approximately 10.0% of our total assets.
At September 30, 2018, the estimated net unrealized
gain for federal tax purposes was $2,681,771, based on a tax cost basis of $6,887,679.
At September 30, 2018, the estimated aggregate gross
unrealized gain for federal income tax purposes was $3,866,571 and the estimated aggregate gross unrealized loss for federal income
tax purposes was $1,184,800.
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 aggregate gross unrealized loss for federal income
tax purposes was $1,823,281
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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 nine months ended September 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.
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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
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 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.
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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 September 30, 2018 (together with the corresponding percentage
of the fair value of our total portfolio of investments):
|
|
As of September 30, 2018
|
|
|
|
Investments at
Amortized Cost
|
|
|
Percentage of
Amortized Cost
|
|
|
Investments at
Fair Value
|
|
|
Percentage of
Fair Value
|
|
Secured Loans
|
|
$
|
250,000
|
|
|
|
3.4
|
%
|
|
$
|
250,000
|
|
|
|
2.6
|
%
|
Preferred Stock
|
|
|
1,032,057
|
|
|
|
14.1
|
|
|
|
1,165,403
|
|
|
|
11.9
|
|
Common Stock
|
|
|
4,905,357
|
|
|
|
66.8
|
|
|
|
7,368,989
|
|
|
|
75.0
|
|
Warrants
|
|
|
679
|
|
|
|
—
|
|
|
|
21,429
|
|
|
|
0.2
|
|
Other Equity
|
|
|
1,151,019
|
|
|
|
15.7
|
|
|
|
1,013,629
|
|
|
|
10.3
|
|
Total
|
|
$
|
7,339,112
|
|
|
|
100.0
|
%
|
|
$
|
9,819,450
|
|
|
|
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 September 30, 2018:
|
|
As of September 30, 2018
|
|
|
|
Investments at
Fair Value
|
|
|
Percentage of
Fair Value
|
|
Advertising
|
|
$
|
21,429
|
|
|
|
0.22
|
%
|
Business Services
|
|
|
196,032
|
|
|
|
2.00
|
|
Consumer
|
|
|
849,622
|
|
|
|
8.65
|
|
Education
|
|
|
105,642
|
|
|
|
1.07
|
|
Financial
|
|
|
365,000
|
|
|
|
3.72
|
|
Healthcare
|
|
|
1,755,031
|
|
|
|
17.87
|
|
Industrial Goods
|
|
|
245,108
|
|
|
|
2.50
|
|
Information Technology
|
|
|
1,556,005
|
|
|
|
15.85
|
|
Leisure & Hospitality
|
|
|
2,520,226
|
|
|
|
25.66
|
|
Oil & Gas
|
|
|
735,129
|
|
|
|
7.49
|
|
Publishing
|
|
|
1,470,226
|
|
|
|
14.97
|
|
Total
|
|
$
|
9,819,450
|
|
|
|
100.00
|
%
|
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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 September 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.
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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 September
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 September 30, 2018, according to the fair value hierarchy:
|
|
As of September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Secured Loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Preferred Stock
|
|
|
-
|
|
|
|
138,667
|
|
|
|
1,026,736
|
|
|
|
1,165,403
|
|
Common Stock
|
|
|
6,075,499
|
|
|
|
-
|
|
|
|
1,293,490
|
|
|
|
7,368,989
|
|
Warrants
|
|
|
-
|
|
|
|
21,429
|
|
|
|
-
|
|
|
|
21,429
|
|
Other Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
1,013,629
|
|
|
|
1,013,629
|
|
Total
|
|
$
|
6,075,499
|
|
|
$
|
160,096
|
|
|
$
|
3,583,855
|
|
|
$
|
9,819,450
|
|
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2018
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
|
|
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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 nine months ended September
30, 2018:
|
|
Senior Secured
Loans
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Warrants
|
|
|
Other Equity
|
|
Balance as of January 1, 2018
|
|
$
|
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
|
|
|
250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sales and redemptions
|
|
|
(550,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net realized loss
|
|
|
(700,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of September 30, 2018
|
|
$
|
250,000
|
|
|
$
|
1,026,736
|
|
|
$
|
1,293,490
|
|
|
$
|
-
|
|
|
$
|
1,013,629
|
|
The net change in unrealized depreciation
for the nine months ended September 30, 2018 attributable to Level 3 portfolio investments still held as of September 30, 2018
is $0.
The following table lists our level 3
investments held as of September 30, 2018 and the unobservable inputs used to determine their valuation:
|
|
Security Type
|
|
12/31/18 FMV
|
|
|
Unobservable Inputs
|
Individual Debtor
|
|
Secured Loan
|
|
|
250,000
|
|
|
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
|
|
|
company is generating substantial revenue and allocated income
|
Southern Plains Resources, Inc.
|
|
Common Stock
|
|
|
—
|
|
|
company has substantially ceased operations
|
|
|
|
|
$
|
3,583,855
|
|
|
|
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 (loss)
|
|
|
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.
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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.
|
|
·
|
On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski,
owns 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.
|
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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 nine months ended September 30, 2018
and 2017 was $11,345 and $34,034, respectively. The table below sets forth the required annual minimum lease payments:
Year
|
|
Amount
|
|
2018
|
|
$
|
8,543
|
|
Total
|
|
$
|
8,543
|
|
NOTE 7 – 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 September 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
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator: Net increase in net asset value resulting from operations
|
|
$
|
524,792
|
|
|
$
|
86,673
|
|
Denominator: Weighted-average number of common shares outstanding
|
|
|
11,067,402
|
|
|
|
12,092,575
|
|
Basic and diluted net gain per common share
|
|
$
|
.05
|
|
|
$
|
.01
|
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator: Net increase in net asset value resulting from operations
|
|
$
|
1,266,985
|
|
|
$
|
254,816
|
|
Denominator: Weighted-average number of common shares outstanding
|
|
|
11,067,402
|
|
|
|
12,131,638
|
|
Basic and diluted net gain per common share
|
|
$
|
.11
|
|
|
$
|
.02
|
|
MILL CITY VENTURES III, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2018
NOTE 10 – FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the
nine months ended September 30, 2018 through 2014:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
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)
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
Net realized and unrealized gains (losses)
|
|
|
0.15
|
|
|
|
0.06
|
|
|
|
(0.01
|
)
|
|
|
(0.25
|
)
|
|
|
0.19
|
|
Repurchase of common stock
|
|
|
0.00
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net asset value at end of period
|
|
$
|
0.98
|
|
|
|
0.83
|
|
|
|
0.70
|
|
|
|
0.69
|
|
|
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio / Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value of investments at end of period
|
|
$
|
0.89
|
|
|
|
0.59
|
|
|
|
0.52
|
|
|
|
0.48
|
|
|
|
0.59
|
|
Shares outstanding at end of period
|
|
|
11,067,402
|
|
|
|
11,067,402
|
|
|
|
12,151,493
|
|
|
|
12,151,493
|
|
|
|
12,161,939
|
|
Average weighted shares outstanding for the period
|
|
|
11,067,402
|
|
|
|
12,131,638
|
|
|
|
12,151,493
|
|
|
|
12,151,493
|
|
|
|
12,168,627
|
|
Net assets at end of period
|
|
$
|
10,896,200
|
|
|
|
9,208,588
|
|
|
|
8,507,419
|
|
|
|
8,450,669
|
|
|
|
12,596,752
|
|
Average net assets
(2)
|
|
$
|
10,134,256
|
|
|
|
9,446,407
|
|
|
|
8,601,680
|
|
|
|
11,131,655
|
|
|
|
11,166,666
|
|
Total investment return
|
|
|
12.64
|
%
|
|
|
2.60
|
%
|
|
|
(2.78
|
)%
|
|
|
(26.60
|
)%
|
|
|
19.77
|
%
|
Portfolio turnover rate (3)
|
|
|
23.86
|
%
|
|
|
21.01
|
%
|
|
|
16.07
|
%
|
|
|
13.15
|
%
|
|
|
9.56
|
%
|
Ratio of operating expenses to average net assets
(3)
|
|
|
(6.54
|
)%
|
|
|
(7.21
|
)%
|
|
|
(6.51
|
)%
|
|
|
(5.16
|
)%
|
|
|
(5.14
|
)%
|
Ratio of net investment income (loss) to average net assets
(3)
|
|
|
(5.17
|
)%
|
|
|
(5.47
|
)%
|
|
|
(2.52
|
)%
|
|
|
(0.57
|
)%
|
|
|
(2.56
|
)%
|
Ratio of realized gains (losses) to average net assets
(3)
|
|
|
(7.56
|
)%
|
|
|
4.89
|
%
|
|
|
(5.35
|
)%
|
|
|
3.70
|
%
|
|
|
3.52
|
%
|
|
(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
The Company’s current office
lease expires November 30, 2018. The Company has entered into two new office leases, one for each of its executive officers.
The lease for Joe Geraci has a 1-year term beginning December 1, 2018 and expiring on November 30, 2019. The lease rate will
be $2,407.50 per month. The lease for Doug Polinsky has a 39-month term beginning December 1, 2018 and expiring on February
28, 2022. The base lease rate for the first year is $1,663 per month. Security deposits to secure the leases were made in
October 2018 in the amount of $6,609.