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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-Q
__________________________
| (Mark One) | |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 2019 | |
| or | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _______________________ to ___________________ | |
Commission File Number 814-00991
__________________________
MILL CITY
VENTURES III, LTD.
(Exact name of registrant as specified in its charter)
__________________________
| Minnesota | 90-0316651 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1907 Wayzata Blvd, #205, Wayzata, Minnesota | 55391 | |
| (Address of principal executive offices) | (Zip Code) |
(952) 479-1923
(Registrant’s telephone number, including area code)
__________________________
N/A
(Former name, former address and former fiscal year, if changed since last report)
__________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically 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 November 14, 2019, 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 September 30, 2019
- 2 -
| ITEM 1. | FINANCIAL STATEMENTS |
CONDENSED BALANCE SHEETS
|
September
30,
2019 (unaudited) |
December
31,
2018 |
|||||||
| ASSETS | ||||||||
| Investments, at fair value: | $ | 4,047,007 | $ | 9,960,192 | ||||
| Non-control/non-affiliate investments (cost: $5,465,056 and $6,958,827 respectively) | ||||||||
| Cash | 5,843,969 | 966,121 | ||||||
| Note receivable | 250,000 | 250,000 | ||||||
| Prepaid expenses | 54,145 | 47,156 | ||||||
| Receivable for sale of investments | 31,947 | 18,999 | ||||||
| Interest and dividend receivables | 81,000 | 72,901 | ||||||
| Right-of-use lease asset | 45,063 | — | ||||||
| Property and equipment, net | 2,715 | 4,645 | ||||||
| Total Assets | $ | 10,355,846 | $ | 11,320,014 | ||||
| LIABILITIES | ||||||||
| Investments held short, at fair value (proceeds: $30,119 and $0, respectively) | $ | 25,700 | $ | — | ||||
| Accounts payable | 37,320 | 41,125 | ||||||
| Lease liability | 49,423 | — | ||||||
| Total Liabilities | 112,443 | 41,125 | ||||||
| Commitments and Contingencies | ||||||||
| 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 | (2,268,715 | ) | (1,725,097 | ) | ||||
| Accumulated undistributed net realized gains on investment transactions | 4,299,693 | 376,566 | ||||||
| Net unrealized appreciation (depreciation) in value of investments | (1,413,630 | ) | 3,001,365 | |||||
| Total Shareholders' Equity (net assets) | 10,243,403 | 11,278,889 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 10,355,846 | $ | 11,320,014 | ||||
| Net Asset Value Per Common Share | $ | 0.93 | $ | 1.02 | ||||
See accompanying Notes to Financial Statements
- 3 -
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
|
September
30,
2019 |
September
30,
2018 |
September
30,
2019 |
September
30,
2018 |
|||||||||||||
| Investment Income | ||||||||||||||||
| Interest income | $ | 28,241 | $ | 21,856 | $ | 83,917 | $ | 81,508 | ||||||||
| Dividend income | 14,766 | 10,144 | 41,458 | 24,067 | ||||||||||||
| Total Investment Income | 43,007 | 32,000 | 125,375 | 105,575 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Professional fees | 69,503 | 33,317 | 168,342 | 138,790 | ||||||||||||
| Payroll | 56,768 | 51,814 | 283,359 | 169,139 | ||||||||||||
| Insurance | 20,487 | 21,226 | 62,119 | 59,700 | ||||||||||||
| Occupancy | 16,384 | 22,660 | 57,250 | 67,962 | ||||||||||||
| Director's fees | 22,500 | 15,000 | 67,500 | 45,000 | ||||||||||||
| Depreciation and amortization | 643 | 2,671 | 1,930 | 8,012 | ||||||||||||
| Other general and administrative | 3,421 | 2,652 | 28,493 | 11,469 | ||||||||||||
| Total Operating Expenses | 189,706 | 149,340 | 668,993 | 500,072 | ||||||||||||
| Net Investment Loss | $ | (146,699 | ) | $ | (117,340 | ) | $ | (543,618 | ) | $ | (394,497 | ) | ||||
| Realized and Unrealized Gain (Loss) on Investments | ||||||||||||||||
| Net realized gain (loss) on investments | 1,374,287 | 74,696 | 4,476,497 | (578,741 | ) | |||||||||||
| Net change in unrealized appreciation (depreciation) on investments | (1,572,874 | ) | 567,436 | (4,414,995 | ) | 2,240,223 | ||||||||||
| Net Realized and Unrealized Gain (Loss) on Investments | (198,587 | ) | 642,132 | 61,502 | 1,661,482 | |||||||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (345,286 | ) | $ | 524,792 | $ | (482,116 | ) | $ | 1,266,985 | ||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations per share: | ||||||||||||||||
| Basic and diluted | $ | (0.03 | ) | $ | 0.05 | $ | (0.04 | ) | $ | 0.11 | ||||||
| Weighted-average number of common shares outstanding | 11,067,402 | 11,067,402 | 11,067,402 | 11,067,402 | ||||||||||||
See accompanying Notes to Financial Statements
- 4 -
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
| Three Months Ended September 30, 2019 |
Common
Shares |
Par Value |
Additional
Paid In Capital |
Accumulated
Deficit |
Accumulated
Undistributed Net Investment Loss |
Accumulated
Undistributed Net Realized Gain on Investments Transactions |
Net
Unrealized Appreciation (Depreciaton) in value of Investments |
Total
Shareholders' Equity |
||||||||||||||||||||||||
| Balance as of June 30, 2019 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (2,122,016 | ) | $ | 2,925,406 | $ | 159,244 | $ | 10,588,689 | |||||||||||||||
| Dividend Distribution | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| Undistributed net investment loss | — | — | — | (146,699 | ) | — | — | (146,699 | ) | |||||||||||||||||||||||
| Undistributed net realized gain on investment transactions | — | — | — | — | 1,374,287 | — | 1,374,287 | |||||||||||||||||||||||||
| Depreciation in value of investments | — | — | — | — | — | (1,572,874 | ) | (1,572,874 | ) | |||||||||||||||||||||||
| Balance as of September 30, 2019 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (2,268,715 | ) | $ | 4,299,693 | $ | (1,413,630 | ) | $ | 10,243,403 | ||||||||||||||
| Three Months Ended September 30, 2018 |
Common
Shares |
Par Value |
Additional
Paid In Capital |
Accumulated
Deficit |
Accumulated
Undistributed Net Investment Loss |
Accumulated
Undistributed Net Realized Gain on Investments Transactions |
Net
Unrealized Appreciation in value of Investments |
Total
Shareholders' Equity |
||||||||||||||||||||||||
| Balance as of June 30, 2018 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,471,930 | ) | $ | 304,381 | $ | 1,912,902 | $ | 10,371,408 | |||||||||||||||
| Undistributed net investment loss | — | — | — | (117,340 | ) | — | — | (117,340 | ) | |||||||||||||||||||||||
| Undistributed net realized gain on investment transactions | — | — | — | — | 74,696 | — | 74,696 | |||||||||||||||||||||||||
| Appreciation in value of investments | — | — | — | — | — | 567,436 | 567,436 | |||||||||||||||||||||||||
| Balance as of September 30, 2018 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,589,270 | ) | $ | 379,077 | $ | 2,480,338 | $ | 10,896,200 | |||||||||||||||
| Nine Months Ended September 30, 2019 |
Common
Shares |
Par Value |
Additional
Paid In Capital |
Accumulated
Deficit |
Accumulated
Undistributed Net Investment Loss |
Accumulated
Undistributed Net Realized Gain on Investments Transactions |
Net
Unrealized Appreciation (Depreciation) in value of Investments |
Total
Shareholders' Equity |
||||||||||||||||||||||||
| Balance as of December 31, 2018 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,725,097 | ) | $ | 376,566 | $ | 3,001,365 | $ | 11,278,889 | |||||||||||||||
| Dividend Distribution | — | — | — | — | (553,370 | ) | — | (553,370 | ) | |||||||||||||||||||||||
| Undistributed net investment loss | — | — | — | (543,618 | ) | — | — | (543,618 | ) | |||||||||||||||||||||||
| Undistributed net realized gain on investment transactions | — | — | — | — | 4,476,497 | — | 4,476,497 | |||||||||||||||||||||||||
| Depreciation in value of investments | — | — | — | — | — | (4,414,995 | ) | (4,414,995 | ) | |||||||||||||||||||||||
| Balance as of September 30, 2019 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (2,268,715 | ) | $ | 4,299,693 | $ | (1,413,630 | ) | $ | 10,243,403 | ||||||||||||||
| Nine Months Ended September 30, 2018 |
Common
Shares |
Par Value |
Additional
Paid In Capital |
Accumulated
Deficit |
Accumulated
Undistributed Net Investment Loss |
Accumulated
Undistributed Net Realized Gain on Investments Transactions |
Net
Unrealized Appreciation in value of Investments |
Total
Shareholders' Equity |
||||||||||||||||||||||||
| Balance as of December 31, 2017 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,194,773 | ) | $ | 957,818 | $ | 240,115 | $ | 9,629,215 | |||||||||||||||
| Undistributed net investment loss | — | — | — | (394,497 | ) | — | — | (394,497 | ) | |||||||||||||||||||||||
| Undistributed net realized loss on investment transactions | — | — | — | — | (578,741 | ) | — | (578,741 | ) | |||||||||||||||||||||||
| Appreciation in value of investments | — | — | — | — | — | 2,240,223 | 2,240,223 | |||||||||||||||||||||||||
| Balance as of September 30, 2018 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,589,270 | ) | $ | 379,077 | $ | 2,480,338 | $ | 10,896,200 | |||||||||||||||
See accompanying Notes to Financial Statements
- 5 -
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended | ||||||||
|
September 30,
2019 |
September 30,
2018 |
|||||||
| Cash flows from operating activities: | ||||||||
| Net increase (decrease) in net assets resulting from operations | $ | (482,116 | ) | $ | 1,266,985 | |||
| 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 | 4,414,995 | (2,240,223 | ) | |||||
| Net realized gain or loss on investments | (4,476,497 | ) | 578,741 | |||||
| Payments for purchases of investments | (875,160 | ) | (2,955,675 | ) | ||||
| Payments for purchases of investments sold short | — | (379,781 | ) | |||||
| Proceeds from sales of investments | 6,845,428 | 2,059,187 | ||||||
| Proceeds from sales of investments sold short | 30,119 | 359,161 | ||||||
| Depreciation & amortization expense | 1,930 | 8,012 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other assets | 5,471 | (7,626 | ) | |||||
| Interest and dividends receivable | (8,099 | ) | (23,486 | ) | ||||
| Receivable for investment sales | (12,948 | ) | 267,119 | |||||
| Accounts payable and other liabilities | (11,905 | ) | (9,106 | ) | ||||
| Deferred rent | — | (1,190 | ) | |||||
| Payable for investment purchase | — | (106,222 | ) | |||||
| Net cash provided (used) in operating activities | 5,431,218 | (1,184,104 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Payments for common stock dividend | (553,370 | ) | — | |||||
| Net cash used by financing activities | (553,370 | ) | — | |||||
| Net increase (decrease) in cash | 4,877,848 | (1,184,104 | ) | |||||
| Cash, beginning of period | 966,121 | 2,158,314 | ||||||
| Cash, end of period | $ | 5,843,969 | $ | 974,210 | ||||
See accompanying Notes to Financial Statements
- 6 -
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2019
| Investments (1) |
Investment
Type (5) |
Interest
Rate (2)(6) |
Expiration
Date (7) |
Shares/Units | Cost | Fair Value |
Percentage
of Net Assets |
Gross
Unrealized Appreciation |
Gross
Unrealized Depreciation |
Net
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||||
| Equity Investments | ||||||||||||||||||||||||||||||||||
| Advertising | ||||||||||||||||||||||||||||||||||
| Creative Realities, Inc. | Warrants (8) | n/a | 12/28/2020 | 35,714 | $ | — | $ | — | 0.00 | % | $ | — | $ | — | $ | — | ||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||
| BBQ Holdings, Inc. | Common Stock | n/a | n/a | 4,999 | 17,496 | 24,445 | 6,949 | — | 6,949 | |||||||||||||||||||||||||
| HG Holdings, Inc. | Common Stock (8) | n/a | n/a | 200,000 | 199,118 | 110,000 | — | 89,118 | (89,118 | ) | ||||||||||||||||||||||||
| NTN Buzztime Inc. | Common Stock | n/a | n/a | 3,000 | 8,915 | 10,080 | 1,165 | — | 1,165 | |||||||||||||||||||||||||
| Tzfat Spirits of Israel, LLC | LLC Membership Units (8) | n/a | n/a | 55,000 | 101,019 | 15,000 | — | 86,019 | (86,019 | ) | ||||||||||||||||||||||||
| 326,548 | 159,525 | 1.56 | % | 8,114 | 175,137 | (167,023 | ) | |||||||||||||||||||||||||||
| Financial | ||||||||||||||||||||||||||||||||||
| Ladenburg Thalmann | Common Stock (9) | n/a | n/a | 40,000 | 115,973 | 94,800 | — | 21,173 | (21,173 | ) | ||||||||||||||||||||||||
| Manning & Napier, Inc. | Common Stock | n/a | n/a | 86,700 | 188,970 | 162,996 | — | 25,974 | (25,974 | ) | ||||||||||||||||||||||||
| MoneyGram International, Inc. | Common Stock (8) | n/a | n/a | 30,000 | 61,984 | 119,400 | 57,416 | — | 57,416 | |||||||||||||||||||||||||
| 366,927 | 377,196 | 3.68 | % | 57,416 | 47,147 | 10,269 | ||||||||||||||||||||||||||||
| Healthcare | ||||||||||||||||||||||||||||||||||
| HemaCare Corp. | Common Stock (8) | n/a | n/a | 60,000 | 180,975 | 1,092,000 | 911,025 | — | 911,025 | |||||||||||||||||||||||||
| Reshape Life Sciences Inc. | Warrants (8) | n/a | 8/16/2024 | 67,860 | 679 | — | — | 679 | (679 | ) | ||||||||||||||||||||||||
| 181,654 | 1,092,000 | 10.66 | % | 911,025 | 679 | 910,346 | ||||||||||||||||||||||||||||
| Industrial Goods | ||||||||||||||||||||||||||||||||||
| CPI Aerostructures Inc. | Common Stock | n/a | n/a | 4,922 | 41,709 | 40,459 | — | 1,250 | (1,250 | ) | ||||||||||||||||||||||||
| Optex Systems Holdings, Inc. | Common Stock | n/a | n/a | 21,642 | 39,531 | 34,627 | — | 4,904 | (4,904 | ) | ||||||||||||||||||||||||
| 81,240 | 75,086 | 0.73 | % | — | 6,154 | (6,154 | ) | |||||||||||||||||||||||||||
| Information Technology | ||||||||||||||||||||||||||||||||||
| Franklin Wireless Corp. | Common Stock | n/a | n/a | 9,934 | 18,582 | 22,152 | 3,570 | — | 3,570 | |||||||||||||||||||||||||
| Insite Software Solutions, Inc | Warrants (8) | n/a | 12/30/2023 | 108,960 | — | 75,000 | 75,000 | — | 75,000 | |||||||||||||||||||||||||
| Kwikbit Inc. (fka MAX 4G) | Preferred Stock (8) | n/a | n/a | 300,000 | 150,000 | 300,000 | 150,000 | — | 150,000 | |||||||||||||||||||||||||
| Taitron Components Inc. | Common Stock | n/a | n/a | 20,000 | 41,295 | 56,600 | 15,305 | — | 15,305 | |||||||||||||||||||||||||
| 209,877 | 453,752 | 4.43 | % | 243,875 | — | 243,875 | ||||||||||||||||||||||||||||
| Leisure & Hospitality | ||||||||||||||||||||||||||||||||||
| Waitr Holdings | Common Stock | n/a | n/a | 166,118 | 1,870,489 | 213,462 | — | 1,657,027 | (1,657,027 | ) | ||||||||||||||||||||||||
| Waitr Holdings | Common Stock | n/a | n/a | (20,000 | ) | (30,119 | ) | (25,700 | ) | 4,419 | — | 4,419 | ||||||||||||||||||||||
| DBR Enclave US Investors, LLC | LLC Units Units | n/a | n/a | 500,000 | 500,000 | 500,000 | — | — | — | |||||||||||||||||||||||||
| 2,340,370 | 687,762 | 6.72 | % | 4,419 | 1,657,027 | (1,652,608 | ) | |||||||||||||||||||||||||||
| Oil & Gas | ||||||||||||||||||||||||||||||||||
| Northern Capital Partners I, LP | Limited Partnership Units (8) | n/a | n/a | 550,000 | 550,000 | 388,629 | — | 161,371 | (161,371 | ) | ||||||||||||||||||||||||
| Southern Plains Resources, Inc. | Common Stock (8) | n/a | n/a | 600,000 | 730,000 | — | — | 730,000 | (730,000 | ) | ||||||||||||||||||||||||
| 1,280,000 | 388,629 | 3.79 | % | — | 891,371 | (891,371 | ) | |||||||||||||||||||||||||||
| Publishing | ||||||||||||||||||||||||||||||||||
| Educational Development Corp. | Common Stock | n/a | n/a | 127,404 | 648,321 | 787,357 | 7.69 | % | 152,604 | 13,568 | 139,036 | |||||||||||||||||||||||
| Total Equity Investments | 5,434,937 | 4,021,307 | 39.26 | % | 1,377,453 | 2,791,083 | (1,413,630 | ) | ||||||||||||||||||||||||||
| Total Cash | 5,843,969 | 5,843,969 | 57.05 | % | — | — | — | |||||||||||||||||||||||||||
| Total Investments and Cash | $ | 11,278,906 | $ | 9,865,276 | 96.31 | % | $ | 1,377,453 | $ | 2,791,083 | $ | ( 1,413,630 | ) | |||||||||||||||||||||
| (1) | All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote. |
| (2) | Interest is presented on a per annum basis. |
| (5) | In the case of warrants, warrants provide for the right to purchase common equity of the issuer. |
| (6) | In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis. |
| (7) | In the case of warrants, purchase rights under the warrants will expire at the close of business on this date. |
| (8) | Investment is not an income-producing investment. |
| (9) | Investment is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security. |
| At September 30, 2019, aggregate non-qualifying assets represented approximately 0.9% of our total assets. | |
| (10) | At September 30, 2019, the estimated net unrealized loss for federal tax purposes was $1,239,503, based on a tax cost basis of $5,260,810. |
| At September 30, 2019, the estimated aggregate gross unrealized gain for federal income tax purposes was $1,339,648 and the estimated aggregate gross unrealized loss for federal income tax purposes was $2,579,151. |
- 7 -
MILL CITY VENTURES III, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2018
| 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) |
||||||||||||||||||||||||
| Equity Investments | ||||||||||||||||||||||||||||||||||
| Advertising | ||||||||||||||||||||||||||||||||||
| Creative Realities, Inc. | Warrants (8) | n/a | 12/28/2020 | 35,714 | $ | — | $ | — | 0.00 | % | $ | — | $ | — | $ | — | ||||||||||||||||||
| Business Services | ||||||||||||||||||||||||||||||||||
| Park City Group Inc. | Common Stock | n/a | n/a | 10,000 | 68,222 | 59,700 | — | 8,522 | (8,522 | ) | ||||||||||||||||||||||||
| Qualstar Corp. | Common Stock | n/a | n/a | 11,299 | 61,455 | 59,320 | — | 2,135 | (2,135 | ) | ||||||||||||||||||||||||
| Spar Group Inc. | Common Stock (8) | n/a | n/a | 200,012 | 284,592 | 107,206 | — | 177,386 | (177,386 | ) | ||||||||||||||||||||||||
| 414,269 | 226,226 | 2.01 | % | — | 188,043 | (188,043 | ) | |||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||
| Famous Daves of America, Inc. | Common Stock | n/a | n/a | 38,963 | 154,409 | 178,840 | 24,431 | — | 24,431 | |||||||||||||||||||||||||
| Gaia, Inc. | Common Stock | n/a | n/a | 10,000 | 157,047 | 103,600 | — | 53,447 | (53,447 | ) | ||||||||||||||||||||||||
| HG Holdings, Inc. | Common Stock (8) | n/a | n/a | 200,000 | 199,118 | 87,000 | — | 112,118 | (112,118 | ) | ||||||||||||||||||||||||
| NTN Buzztime Inc. | Common Stock | n/a | n/a | 16,370 | 46,437 | 31,921 | — | 14,516 | (14,516 | ) | ||||||||||||||||||||||||
| Tzfat Spirits of Israel, LLC | LLC Membership Units (8) | n/a | n/a | 55,000 | 101,019 | 25,000 | — | 76,019 | (76,019 | ) | ||||||||||||||||||||||||
| 658,030 | 426,361 | 3.78 | % | 24,431 | 256,100 | (231,669 | ) | |||||||||||||||||||||||||||
| Education | ||||||||||||||||||||||||||||||||||
| Nat'l Amer. Univ. Holdings, Inc. | Common Stock | n/a | n/a | 52,053 | 59,123 | 9,370 | 0.08 | % | — | 49,753 | (49,753 | ) | ||||||||||||||||||||||
| Financial | ||||||||||||||||||||||||||||||||||
| OTC Markets Group Cl A | Common Stock | n/a | n/a | 7,000 | 118,889 | 203,280 | 84,391 | — | 84,391 | |||||||||||||||||||||||||
| Ladenburg Thalmann | Common Stock (9) | n/a | n/a | 50,000 | 145,364 | 116,500 | — | 28,864 | (28,864 | ) | ||||||||||||||||||||||||
| 264,253 | 319,780 | 2.84 | % | 84,391 | 28,864 | 55,527 | ||||||||||||||||||||||||||||
| Healthcare | ||||||||||||||||||||||||||||||||||
| Reshape Life Sciences Inc Pfd Conv Ser B | Preferred LLC Units (4) (8) | n/a | n/a | 156 | 155,321 | 32,448 | — | 122,873 | (122,873 | ) | ||||||||||||||||||||||||
| 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 | 134,697 | 416,222 | 1,306,561 | 890,339 | — | 890,339 | |||||||||||||||||||||||||
| 572,222 | 1,339,009 | 11.87 | % | 890,339 | 123,552 | 766,787 | ||||||||||||||||||||||||||||
| Industrial Goods | ||||||||||||||||||||||||||||||||||
| CPI Aerostructures Inc. | Common Stock | n/a | n/a | 25,000 | 229,832 | 159,250 | — | 70,582 | (70,582 | ) | ||||||||||||||||||||||||
| Optex Systems Holdings, Inc. | Common Stock | n/a | n/a | 21,642 | 39,531 | 28,351 | — | 11,180 | (11,180 | ) | ||||||||||||||||||||||||
| 269,363 | 187,601 | 1.66 | % | — | 81,762 | (81,762 | ) | |||||||||||||||||||||||||||
| Information Technology | ||||||||||||||||||||||||||||||||||
| Franklin Wireless Corp. | Common Stock | n/a | n/a | 38,189 | 71,435 | 86,689 | 15,254 | — | 15,254 | |||||||||||||||||||||||||
| Gogo Inc. | Common Stock | n/a | n/a | 10,000 | 57,640 | 29,900 | — | 27,740 | (27,740 | ) | ||||||||||||||||||||||||
| Insite Software Solutions, Inc | Warrants (8) | n/a | 12/30/2023 | 108,960 | — | — | — | — | — | |||||||||||||||||||||||||
| Intelligent Systems Corp. | Common Stock | n/a | n/a | 9,671 | 130,269 | 124,949 | — | 5,320 | (5,320 | ) | ||||||||||||||||||||||||
| Kwikbit Inc. (fka MAX 4G) | 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 | 5,000 | 6,250 | 3,020 | — | 3,230 | (3,230 | ) | ||||||||||||||||||||||||
| Points International, Inc. | Common Stock | n/a | n/a | 8,000 | 98,932 | 79,680 | — | 19,252 | (19,252 | ) | ||||||||||||||||||||||||
| Simulations Plus, Inc. | Common Stock | n/a | n/a | 24,001 | 237,363 | 477,611 | 240,248 | — | 240,248 | |||||||||||||||||||||||||
| Taitron Components Inc. | Common Stock | n/a | n/a | 20,000 | 41,295 | 34,600 | 470 | 7,165 | (6,695 | ) | ||||||||||||||||||||||||
| TESSCO Technologies Inc. | Common Stock | n/a | n/a | 20,074 | 346,203 | 240,888 | — | 105,315 | (105,315 | ) | ||||||||||||||||||||||||
| Travelzoo, Inc. | Common Stock | n/a | n/a | 15,100 | 138,966 | 148,433 | 11,159 | 1,692 | 9,467 | |||||||||||||||||||||||||
| 1,278,353 | 1,525,770 | 13.53 | % | 417,131 | 169,714 | 247,417 | ||||||||||||||||||||||||||||
| Leisure & Hospitality | ||||||||||||||||||||||||||||||||||
| Bitesquad.com LLC | Preferred LLC Units (4) (8) | n/a | n/a | 13,227 | 726,736 | 714,258 | — | 12,478 | (12,478 | ) | ||||||||||||||||||||||||
| Bitesquad.com LLC | Common Stock (8) | n/a | n/a | 60,316 | 288,157 | 3,136,432 | 2,848,275 | — | 2,848,275 | |||||||||||||||||||||||||
| DBR Enclave US Investors, LLC | LLC Units Units | n/a | n/a | 500,000 | 500,000 | 500,000 | — | — | — | |||||||||||||||||||||||||
| 1,514,893 | 4,350,690 | 38.57 | % | 2,848,275 | 12,478 | 2,835,797 | ||||||||||||||||||||||||||||
| Oil & Gas | ||||||||||||||||||||||||||||||||||
| Northern Capital Partners I, LP | LP 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 | 4.33 | % | — | 791,371 | (791,371 | ) | |||||||||||||||||||||||||||
| Publishing | ||||||||||||||||||||||||||||||||||
| Educational Development Corp. | Common Stock | n/a | n/a | 127,404 | 648,321 | 1,086,756 | 9.64 | % | 438,435 | — | 438,435 | |||||||||||||||||||||||
| Total Equity Investments | $ | 6,958,827 | $ | 9,960,192 | 88.31 | % | $ | 4,703,002 | $ | 1,701,637 | $ | 3,001,365 | ||||||||||||||||||||||
| Total Cash | 966,121 | 966,121 | 8.57 | % | — | — | — | |||||||||||||||||||||||||||
| Total Investments and Cash | $ | 7,924,948 | $ | 10,926,313 | 96.87 | % | $ | 4,703,002 | $ | 1,701,637 | $ | 3,001,365 | ||||||||||||||||||||||
| (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. | |
| (4) | Investment is secured by 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, 2018, aggregate non-qualifying assets represented approximately 6.0% of our total assets. | ||
| At December 31, 2018, the estimated net unrealized gain for federal tax purposes was $3,202,798, based on a tax cost basis of $6,757,394. | ||
| At December 31, 2018, the estimated aggregate gross unrealized gain for federal income tax purposes was $4,789,742 and the estimated aggregate gross unrealized loss for federal income tax purposes was $1,586,944. |
- 8 -
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
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. We are in the process of exploring a new business pursuit for the Company and expect to seek shareholder approval for us to withdraw our election to be treated as a BDC.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation : The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The condensed balance sheet as of December 31, 2018 has been derived from the audited 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, 2018.
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.
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.
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
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 FASB 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.
Effective January 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company elected the package of practical expedients, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company has also elected the practical expedient allowing us to not separate the lease and non-lease components for all classes of underlying assets. The Company elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualified, the Company did not recognize right-of-use assets or lease liabilities, and this included not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities of $57,523 each, as of January 1, 2019, with no impact on accumulated deficit. Financial position for reporting periods beginning on or after January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.
Additional information and disclosures required by this new standard are contained in Note 10, '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.
- 10 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
Management and service fees : We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities.
NOTE 3 – INVESTMENTS
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of September 30, 2019 (together with the corresponding percentage of the fair value of our total portfolio of investments):
| As of September 30, 2019 | ||||||||||||||||
| Investments at | Percentage of | Investments at | Percentage of | |||||||||||||
| Amortized Cost | Amortized Cost | Fair Value | Fair Value | |||||||||||||
| Senior Secured Loans | $ | — | — | % | $ | — | — | % | ||||||||
| Preferred Stock | 150,000 | 2.8 | 300,000 | 7.5 | ||||||||||||
| Common Stock | 4,163,358 | 76.6 | 2,768,378 | 68.8 | ||||||||||||
| Common Stock, held short | (30,119 | ) | (0.6 | ) | (25,700 | ) | (0.6 | ) | ||||||||
| Warrants | 679 | — | 75,000 | 1.8 | ||||||||||||
| Other Equity | 1,151,019 | 21.2 | 903,629 | 22.5 | ||||||||||||
| Total | $ | 5,434,937 | 100.0 | % | $ | 4,021,307 | 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, 2018 (together with the corresponding percentage of the fair value of our total portfolio of investments):
| As of December 31, 2018 | ||||||||||||||||
| Investments at | Percentage of | Investments at | Percentage of | |||||||||||||
| Amortized Cost | Amortized Cost | Fair Value | Fair Value | |||||||||||||
| Preferred Stock | $ | 1,032,057 | 14.8 | % | $ | 1,046,706 | 10.5 | % | ||||||||
| Common Stock | 4,775,072 | 68.6 | 7,899,857 | 79.3 | ||||||||||||
| Warrants | 679 | — | — | — | ||||||||||||
| Other Equity | 1,151,019 | 16.6 | 1,013,629 | 10.2 | ||||||||||||
| Total | $ | 6,958,827 | 100.0 | % | $ | 9,960,192 | 100.0 | % | ||||||||
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of September 30, 2019:
| As of September 30, 2019 | ||||||||
| Investments at | Percentage of | |||||||
| Fair Value | Fair Value | |||||||
| Advertising | $ | — | — | % | ||||
| Consumer | 159,525 | 4.0 | ||||||
| Financial | 377,196 | 9.4 | ||||||
| Healthcare | 1,092,000 | 27.1 | ||||||
| Industrial Goods | 75,086 | 1.9 | ||||||
| Information Technology | 453,752 | 11.3 | ||||||
| Leisure & Hospitality | 687,762 | 17.1 | ||||||
| Oil & Gas | 388,629 | 9.6 | ||||||
| Publishing | 787,357 | 19.6 | ||||||
| Total | $ | 4,021,307 | 100.0 | % | ||||
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2018:
| As of December 31, 2018 | ||||||||
| Investments at | Percentage of | |||||||
| Fair Value | Fair Value | |||||||
| Advertising | $ | — | — | % | ||||
| Business Services | 226,226 | 2.3 | ||||||
| Consumer | 426,361 | 4.3 | ||||||
| Education | 9,370 | 0.1 | ||||||
| Financial | 319,780 | 3.2 | ||||||
| Healthcare | 1,339,009 | 13.4 | ||||||
| Industrial Goods | 187,601 | 1.9 | ||||||
| Information Technology | 1,525,770 | 15.3 | ||||||
| Leisure & Hospitality | 4,350,690 | 43.7 | ||||||
| Oil & Gas | 488,629 | 4.9 | ||||||
| Publishing | 1,086,756 | 10.9 | ||||||
| Total | $ | 9,960,192 | 100.0 | % | ||||
We do not “control,” and we are not an “affiliate” of (as each of those terms is defined in the 1940 Act), any of our portfolio companies as of September 30, 2019. 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.
- 12 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
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, 2019 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, 2019, according to the fair value hierarchy:
| As of September 30, 2019 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Preferred Stock | $ | — | $ | — | $ | 300,000 | $ | 300,000 | ||||||||
| Common Stock | 2,768,378 | — | — | 2,768,378 | ||||||||||||
| Common Stock, held short | (25,700 | ) | — | — | (25,700 | ) | ||||||||||
| Warrants | — | — | 75,000 | 75,000 | ||||||||||||
| Other Equity | — | — | 903,629 | 903,629 | ||||||||||||
| Total | $ | 2,742,678 | $ | — | $ | 1,278,629 | $ | 4,021,307 | ||||||||
- 13 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2018, according to the fair value hierarchy:
| As of December 31, 2018 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Preferred Stock | $ | — | $ | 32,448 | $ | 1,014,258 | $ | 1,046,706 | ||||||||
| Common Stock | 4,763,425 | — | 3,136,432 | 7,899,857 | ||||||||||||
| Warrants | — | — | — | — | ||||||||||||
| Other Equity | — | — | 1,013,629 | 1,013,629 | ||||||||||||
| Total | $ | 4,763,425 | $ | 32,448 | $ | 5,164,319 | $ | 9,960,192 | ||||||||
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, 2019:
| For the nine months ended September 30, 2019 | ||||||||||||||||||||
| Secured Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
| Balance as of January 1, 2019 | $ | — | $ | 1,014,258 | $ | 3,136,432 | $ | — | $ | 1,013,629 | ||||||||||
| Net change in unrealized appreciation (depreciation) | — | 12,478 | (2,848,275 | ) | 75,000 | (110,000 | ) | |||||||||||||
| Purchases and other adjustments to cost | — | — | — | — | — | |||||||||||||||
| Sales and redemptions | — | (726,691 | ) | (3,341,639 | ) | — | — | |||||||||||||
| Net realized gain (loss) | — | (45 | ) | 3,053,482 | — | — | ||||||||||||||
| Balance as of September 30, 2019 | $ | — | $ | 300,000 | $ | — | $ | 75,000 | $ | 903,629 | ||||||||||
The net change in unrealized depreciation for the nine months ended September 30, 2019 attributable to Level 3 portfolio investments still held as of September 30, 2019 is $35,000.
The following table lists our Level 3 investments held as of September 30, 2019 and the unobservable inputs used to determine their valuation:
| Security Type | 9/30/19 FMV | Unobservable Inputs | ||||||
| Insite Software Solutions, Inc | Warrants | $ | 75,000 | proposed acquisition transaction | ||||
| Tzfat Spirits of Israel, LLC | Other Equity | 15,000 | last funding secured by company | |||||
| Kwikbit, Inc. (fka MAX 4G, Inc.) | Preferred Stock | 300,000 | last funding secured by company | |||||
| DBR Enclave US Investors, LLC | Other Equity | 500,000 | cost | |||||
| Northern Capital Partners I, LP | Other Equity | 388,629 | analysis of issuer provided financials and management commentary | |||||
| Southern Plains Resources, Inc. | Common Stock | — | company has ceased operations | |||||
| $ | 1,278,629 | |||||||
- 14 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31, 2018:
| For the year ended December 31, 2018 | ||||||||||||||||||||
| 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 | (12,478 | ) | 1,842,942 | — | — | ||||||||||||||
| Purchases and other adjustments to cost | — | — | — | — | — | |||||||||||||||
| Sales and redemptions | (550,000 | ) | — | — | — | — | ||||||||||||||
| Net realized gain (loss) | (700,000 | ) | — | — | — | — | ||||||||||||||
| Balance as of December 31, 2018 | $ | — | $ | 1,014,258 | $ | 3,136,432 | $ | — | $ | 1,013,629 | ||||||||||
The net change in unrealized appreciation for the year ended December 31, 2018 attributable to Level 3 portfolio investments still held as of December 31, 2018 was $1,830,464, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.
The following table lists our Level 3 investments held as of December 31, 2018 and the unobservable inputs used to determine their valuation:
| Security Type | 12/31/18 FMV | Unobservable Inputs | ||||||
| Insite Software Solutions, Inc | Warrants | $ | — | warrants are not in the money | ||||
| Tzfat Spirits of Israel, LLC | Other Equity | 25,000 | last funding secured by company | |||||
| Kwikbit, Inc. (fka MAX 4G, Inc.) | Preferred Stock | 300,000 | last funding secured by company | |||||
| Bitesquad.com LLC | Preferred Stock | 714,258 | announced merger of company | |||||
| Bitesquad.com LLC | Common Stock | 3,136,432 | announced merger of company | |||||
| DBR Enclave US Investors, LLC | Other Equity | 500,000 | cost | |||||
| Northern Capital Partners I, LP | Other Equity | 488,629 | issuer provided financials | |||||
| Southern Plains Resources, Inc. | Common Stock | — | company has substantially ceased operations | |||||
| $ | 5,164,319 | |||||||
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. |
| · | 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. |
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
| · | On August 10, 2018, we entered into a loan transaction with a shareholder and her husband who own approximately 1,500,000 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory note bears interest payable monthly at the rate of 10% per annum. The note is secured by the debtors’ pledge to us of 625,000 shares of our common stock. The pledged shares are held in physical custody for us by our custodial agent Millennium Trust Company. |
NOTE 6 – RETIREMENT SAVINGS PLANS
Our two employees, Messrs. Geraci and Polinsky, are eligible to participate in a qualified defined contribution 401(k) plan whereby they may elect to have a specified portion of their salary contributed to the plan. We will make a safe harbor match equal to 100% of their elective deferrals up to 5% of eligible earnings in addition to our option to make discretionary contributions to the plan. We made contributions totaling $1,875 and $10,625 to the plans for the three and nine months ended September 30, 2019, respectively, and $1,875 and $5,625 to the plans for the three and nine months ended September 30, 2018, respectively.
NOTE 7 – INCOME TAXES
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 September 30, 2019, we had 11,067,402 shares of common stock issued and outstanding.
On February 15, 2019 we announced that our board of directors had approved a special cash dividend of $0.05 per common share. The dividend was paid on March 15, 2019 to stockholders of record as of the close of business on March 8, 2019.
NOTE 9 – PER-SHARE INFORMATION
Basic net gain per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below:
| For the Three Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Numerator: Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (345,286 | ) | $ | 524,792 | |||
| Denominator: Weighted-average number of common shares outstanding | 11,067,402 | 11,067,402 | ||||||
| Basic and diluted net gain (loss) per common share | $ | (0.03 | ) | $ | 0.05 | |||
| For the Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Numerator: Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (482,116 | ) | $ | 1,266,985 | |||
| Denominator: Weighted-average number of common shares outstanding | 11,067,402 | 11,067,402 | ||||||
| Basic and diluted net gain (loss) per common share | $ | (0.04 | ) | $ | 0.11 | |||
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
NOTE 10 – OPERATING LEASES
On January 1, 2019 we adopted ASU No. 2016-2, Leases (Topic 842), and its amendments and elected the effective date transition method.
The Company is subject to two non-cancelable operating leases for office space expiring March 31, 2022. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew.
Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted average discount rate as of September 30, 2019 was 4.5% and the weighted average remaining lease term is 3 years.
Under ASC 840, rent expense for office facilities for the three and nine months ended September 30, 2018 was $22,689 and $45,364, respectively.
The components of our operating lease were as follows for the three and nine months ended September 30, 2019:
| Three-Month | Nine-Month | |||||||
| Ended | Ended | |||||||
| September 30, 2019 | September 30, 2019 | |||||||
| Operating lease costs | $ | 4,779 | $ | 14,229 | ||||
| Variable lease cost | 4,173 | 12,430 | ||||||
| Short-term lease cost | 7,432 | 22,228 | ||||||
| Total | $ | 16,384 | $ | 48,887 | ||||
Variable lease costs consist primarily of property taxes, insurance and common area or other maintenance costs for our leased facility.
| Long-term Lease Maturity Schedule | ||||
| 2019 | $ | 9,803 | ||
| 2020 | 20,551 | |||
| 2021 | 21,161 | |||
| 2022 | 5,449 | |||
| Total lease payments | 56,964 | |||
| Less: interest | (7,541 | ) | ||
| Present value of lease liabilities | $ | 49,423 | ||
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
NOTE 11 – FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the nine months ended September 30, 2019 through 2015:
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Per Share Data (1) | ||||||||||||||||||||
| Net asset value at beginning of period | $ | 1.02 | 0.87 | 0.77 | 0.72 | 0.94 | ||||||||||||||
| Net investment income (loss) | (0.05 | ) | (0.04 | ) | (0.04 | ) | (0.01 | ) | 0.00 | |||||||||||
| Net realized and unrealized gains (losses) | 0.01 | 0.15 | 0.06 | (0.01 | ) | (0.25 | ) | |||||||||||||
| Repurchase of common stock | — | — | 0.04 | — | — | |||||||||||||||
| Payment of common stock dividend | (0.05 | ) | — | — | — | — | ||||||||||||||
| Net asset value at end of period | $ | 0.93 | 0.98 | 0.83 | 0.70 | 0.69 | ||||||||||||||
| Ratio / Supplemental Data | ||||||||||||||||||||
| Per share market value of investments at end of period | $ | 0.36 | 0.89 | 0.59 | 0.52 | 0.48 | ||||||||||||||
| Shares outstanding at end of period | 11,067,402 | 11,067,402 | 11,067,402 | 12,151,493 | 12,151,493 | |||||||||||||||
| Average weighted shares outstanding for the period | 11,067,402 | 11,067,402 | 12,131,638 | 12,151,493 | 12,151,493 | |||||||||||||||
| Net assets at end of period | $ | 10,243,403 | 10,896,200 | 9,208,588 | 8,507,419 | 8,450,669 | ||||||||||||||
| Average net assets (2) | $ | 11,888,744 | 10,134,256 | 9,446,407 | 8,601,680 | 11,131,655 | ||||||||||||||
| Total investment return | (3.92 | )% | 12.64 | % | 2.60 | % | (2.78 | )% | (26.60 | )% | ||||||||||
| Portfolio turnover rate (3) | 7.36 | % | 23.86 | % | 21.01 | % | 16.07 | % | 13.15 | % | ||||||||||
| Ratio of operating expenses to average net assets (3) | (7.45 | )% | (6.54 | )% | (7.21 | )% | (6.51 | )% | (5.16 | )% | ||||||||||
| Ratio of net investment income (loss) to average net assets (3) | (6.07 | )% | (5.17 | )% | (5.47 | )% | (2.52 | )% | (0.57 | )% | ||||||||||
| Ratio of realized gains (losses) to average net assets (3) | 53.31 | % | (7.56 | )% | 4.89 | % | (5.35 | )% | 3.70 | % | ||||||||||
| (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 12 – SUBSEQUENT EVENTS
None
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| 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.
The Company’s Board of Directors has approved a general plan to seek the approval of the Company’s shareholders for the Company’s de-registration as a BDC. Management presently anticipates that, shortly after the filing of this report, the Company will file a preliminary proxy statement for a special meeting at which such approval, together with approval of other items relating to the de-registration, will be sought.
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, 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.
- 19 -
PORTFOLIO AND INVESTMENT ACTIVITY
During the nine months ended September 30, 2019, we made $875,160 of investments in portfolio companies and had $6,875,547 of redemptions and repayments, resulting in net investments at amortized cost of $5,434,937 at the end of the period.
During the nine months ended September 30, 2018, we made $3,335,456 of investments in portfolio companies and had $2,418,348 of redemptions and repayments, resulting in net investments at amortized cost of $7,339,112 at the end of the period.
Our portfolio composition by major class, based on fair value at September 30, 2019, was as follows:
|
Investments at Fair Value |
Percentage of Fair Value |
|||||||
| Senior Secured Loans | $ | - | - | % | ||||
| Unsecured Loans | - | - | ||||||
| Equity/Other | 4,021,307 | 100.0 | ||||||
| Total | $ | 4,021,307 | 100.0 | % | ||||
RESULTS OF OPERATIONS
Our operating results for the three and nine months ended September 30, 2019 and September 30, 2018 were as follows:
|
For the three months ended September 30, |
For the nine months ended September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Total investment income | $ | 43,007 | $ | 32,000 | $ | 125,375 | $ | 105,575 | ||||||||
| Total expenses | (189,706 | ) | (149,340 | ) | (668,993 | ) | (500,072 | ) | ||||||||
| Net investment loss | $ | (146,699 | ) | $ | (117,340 | ) | $ | (543,618 | ) | $ | (394,497 | ) | ||||
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 nine months ended September 30, 2019, our total investment income was $43,007 and $125,375, and was attributable to interest income from one eligible portfolio company, DBR Enclave LLC, and our note receivable, and dividend payments received on account of investments in four eligible portfolio companies - Educational Development Corp., Simulations Plus, Inc, Taitron Components, Inc., and TESSCO Technologies, Inc, and dividends received on account of investments in two non-eligible portfolio companies. For the three and nine months ended September 30, 2018, our total investment income was $32,000 and $105,575, and was attributable to interest income from two eligible portfolio companies, Bravo Financial, LLC and DBR Enclave LLC, and one non-eligible portfolio company, 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 five non-eligible portfolio companies.
Operating Expenses
The composition of our operating expenses for the three and nine months ended September 30, 2019 and September 30, 2018 was as follows:
|
For the three months ended September 30, |
For the nine months ended September 30, |
|||||||||||||||
| Expense item | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Professional fees | $ | 69,503 | $ | 33,317 | $ | 168,342 | $ | 138,790 | ||||||||
| Payroll | 56,768 | 51,814 | 283,359 | 169,139 | ||||||||||||
| Occupancy | 16,384 | 22,660 | 57,250 | 67,962 | ||||||||||||
| Insurance | 20,487 | 21,226 | 62,119 | 59,700 | ||||||||||||
| Directors’ fees | 22,500 | 15,000 | 67,500 | 45,000 | ||||||||||||
| Depreciation and amortization | 643 | 2,671 | 1,930 | 8,012 | ||||||||||||
| Other general and administrative | 3,421 | 2,652 | 28,493 | 11,469 | ||||||||||||
| Total | $ | 189,706 | $ | 149,340 | $ | 668,993 | $ | 500,072 | ||||||||
- 20 -
For the three and nine months ended September 30, 2019, our payroll expense was $56,768 and $283,359, respectively. For the three and nine months ended September 30, 2018, our payroll expense was $51,814 and $169,139, respectively. The increase for the nine-month period is due to a bonus payment made during 2019 to management.
For the three and nine months ended September 30, 2019, our occupancy expense was $16,384 and $57,250, respectively. For the three and nine months ended September 30, 2018, our occupancy expense was $22,660 and $67,962, respectively. The decrease for the nine-month period is due to the new lease agreements which became effective in 2019.
Net Realized Gain from Investments
For the three and nine months ended September 30, 2019, we had $3,495,125 and $6,875,547, respectively, of principal repayments, resulting in $1,374,287 and $4,476,49 , respectively, of realized gains, due primarily to the acquisition of our holding in BiteSquad LLC by Waitr Holdings. For the three and nine months ended September 30, 2018, we had $1,268,762 and $2,418,348, respectively, of principal repayments, resulting in $74,696 and ($578,741), respectively, of realized gains (losses). The losses in the nine-month period of 2018 were primarily from our $100,000 settlement of the Mix 1 litigation.
Net Change in Unrealized Appreciation (Depreciation) on Investments
For the three and nine months ended September 30, 2019, our investments had $1,572,874 and $4,414,995, of unrealized depreciation, respectively. For the three and nine months ended September 30, 2018, our investments had $567,436 and $2,240,223 of unrealized appreciation, respectively. The decrease during the third quarter is primarily due to our holding in Waitr Holdings, which has experienced an 88% decline in value during 2019.
Changes in Net Assets from Operations
For the three and nine months ended September 30, 2019, we recorded a net decrease in net assets from operations of $345,286 and $482,116, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2019, our per-share net decrease in net assets from operations was $0.03 and $0.04, respectively. For the three and nine months ended September 30, 2018, we recorded a net increase in net assets from operations of $524,792 and $1,266,985, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2018, our per-share net increase in net assets from operations was $0.05 and $0.11, respectively.
Cash Flows for the Nine Months Ended September 30, 2019 and 2018
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 nine months ended September 30, 2019, net cash provided in operating activities was $5,431,218. Cash flows provided in operating activities for the nine months ended September 30, 2019 were primarily related to redemptions and repayments of investments of $6,875,547, offset mostly by purchases of investments totaling $875,160. For the nine months ended September 30, 2018, net cash used in operating activities was $1,184,104. Cash flows used in operating activities for the nine months ended September 30, 2018 were primarily related to purchases of investments of $3,335,456, offset mostly by redemptions and repayments of investments totaling $2,418,348.
FINANCIAL CONDITION
As of September 30, 2019, we had cash of $5,843,969, an increase of $4,877,848 from December 31, 2018. 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.”
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.
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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 nine months ended September 30, 2019, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.
FORWARD-LOOKING STATEMENTS
Some of the statements made in this section of our report are forward-looking statements based on our management’s current expectations for our company. These expectations involve assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance, and can ordinarily be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to identify and consummate new investments, achieve certain margins and levels of profitability, the availability of any needed additional capital, and the ability to maintain compliance with regulations applicable to us. Some of the forward-looking statements contained in this report relate to, and are based our current assumptions regarding, the following:
| · | our future operating results; |
| · | our business prospects and the prospects of our portfolio companies; |
| · | the outcome of compliance inspections conducted from time to time by the SEC’s Office of Compliance and Inspections; |
| · | the success of our investments; |
| · | our relationships with third parties; |
| · | the dependence of our success on the general economy and its impact on the industries in which we invest; |
| · | the ability of our portfolio companies to achieve their objectives; |
| · | our expected financings and investments; |
| · | our regulatory structure and tax treatment; |
| · | the adequacy of our cash resources and working capital; |
| · | the timing of, and ultimately our ability to, withdraw our election to be treated as a BDC; 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 June 19, 2019 (related to our year ended December 31, 2018) 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.
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| ITEM 4. | CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
As of September 30, 2019, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of September 30, 2019.
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.
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| ITEM 6. | EXHIBITS |
* Filed herewith
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MILL CITY VENTURES III, LTD. | ||
| Date: November 14, 2019 | By: | /s/ Douglas M. Polinsky |
| Douglas M. Polinsky | ||
| Chief Executive Officer | ||
| Date: November 14, 2019 | By: | /s/ Joseph A. Geraci, II |
| Joseph A. Geraci, II | ||
| Chief Financial Officer | ||
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