UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended June 30, 2017
   
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.)
     
328 Barry Avenue South #210, Wayzata, Minnesota   55391
(Address of principal executive offices)   (Zip Code)

 

(952) 479-1923

(Registrant’s telephone number, including area code)

 

 

 

N/A

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

 

 

 

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

 

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

 

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

 

  Large accelerated filer ¨ Accelerated filer ¨
  Non-accelerated filer ¨ Smaller reporting company x
    Emerging growth company ¨

 

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

 

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

 

As of August 9, 2017, Mill City Ventures III, Ltd. had 12,151,493 shares of common stock, and no other classes of capital stock, outstanding.

 

 

 

 

 

 

MILL CITY VENTURES III, LTD.

 

Index to Form 10-Q

for the Quarter Ended June 30, 2017

 

    Page No.
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Balance Sheets – June 30, 2017 and December 31, 2016 3
     
  Statements of Operations – Three and six months ended June 30, 2017 and June 30, 2016 4
     
  Statements of Changes in Net Assets – Six months ended June 30, 2017 and June 30, 2016 5
     
  Statements of Cash Flows – Six months ended June 30, 2017 and June 30, 2016 6
     
  Schedule of Investments – June 30, 2017 and December 31, 2016 7
     
  Notes to Financial Statements – June 30, 2017 13
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 4. Controls and Procedures 25
     
PART II. OTHER INFORMATION  
     
Item 6. Exhibits 26
     
SIGNATURES 26

 

 - 2 - 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

MILL CITY VENTURES III, LTD.

BALANCE SHEETS

 

   June 30,
2017
(unaudited)
   December 31,
2016
(audited)
 
ASSETS          
Investments at fair value:          
Non-control/non-affiliate investments (cost of $6,876,644 and $7,397,908, respectively)  $6,168,749   $6,987,002 
Cash   3,486,507    2,344,751 
Prepaid expenses   88,210    61,661 
Interest and dividends receivable   19,234    4,853 
Leasehold improvements, net   11,611    15,665 
Property and equipment, net   8,505    9,946 
Total Assets  $9,782,816   $9,423,878 
           
LIABILITIES          
Current Liabilities:          
Investments sold short at fair value (proceeds: $85,936 and $0, respectively)  $87,200   $- 
Accounts payable   22,719    25,097 
Payable for purchases of investments   106,288    - 
Deferred rent   11,058    11,373 
Total Current Liabilities   227,265    36,470 
Total Liabilities   227,265    36,470 
Commitments and Contingencies (Note 4)          
           
SHAREHOLDERS’ EQUITY (NET ASSETS)          
Common stock, par value $0.001 per share (250,000,000 authorized; 12,151,493 and 12,151,493 issued and outstanding)   12,151    12,151 
Additional paid-in capital   11,857,660    11,857,660 
Accumulated deficit   (1,159,665)   (1,159,665)
Accumulated undistributed investment loss   (1,611,879)   (1,330,205)
Accumulated undistributed net realized gains on investment transactions   1,166,443    418,373 
Net unrealized depreciation in value of investments   (709,159)   (410,906)
Total Shareholders’ Equity (net assets)   9,555,551    9,387,408 
           
Total Liabilities and Shareholders’ Equity  $9,782,816   $9,423,878 
           
Net Asset Value Per Common Share  $0.79   $0.77 

 

See accompanying Notes to Financial Statements

 

 - 3 - 

 

 

MILL CITY VENTURES III, LTD.

STATEMENTS OF OPERATIONS (UNAUDITED)

 

   Three Months Ended   Six Months Ended 
   June 30, 2017   June 30, 2016   June 30, 2017   June 30, 2016 
Investment Income                    
Interest income  $27,854   $56,119   $51,051   $126,160 
Dividend income   8,655    23,609    22,022    39,891 
Total Investment Income   36,509    79,728    73,073    166,051 
                     
Operating Expenses                    
Professional fees   59,814    45,477    126,550    85,484 
Payroll   67,429    40,549    108,787    81,958 
Insurance   18,694    18,730    36,140    40,087 
Occupancy   22,509    14,428    42,331    38,604 
Directors’ fees   15,000    15,000    30,000    28,956 
Depreciation and amortization   2,747    3,212    5,495    6,424 
Other general and administrative   2,340    5,700    5,444    8,301 
Total Operating Expenses   188,533    143,096    354,747    289,814 
Net Investment Loss  $(152,024)  $(63,368)  $(281,674)  $(123,763)
                     
Realized and Unrealized Gain (Loss) on Investments                    
Net realized gain (loss) on investments  $35,799   $8,814   $748,070   $(533,281)
Net change in unrealized appreciation (depreciation) on investments   304,886    (300,729)   (298,253)   280,921 
Net Realized and Unrealized Gain (Loss) on Investments   340,685    (291,915)   449,817    (252,360)
Net Increase (Decrease) in Net Assets Resulting from Operations  $188,661   $(355,283)  $168,143   $(376,123)
                     
Net Increase (Decrease) in Net Assets Resulting from Operations per share:                    
Basic and diluted  $0.02   $(0.03)  $0.01   $(0.03)
                     
Weighted-average number of common shares outstanding   12,151,493    12,151,493    12,151,493    12,151,493 

 

See accompanying Notes to Financial Statements

 

 - 4 - 

 

 

MILL CITY VENTURES III, LTD.

STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)

 

   Six Months Ended   Six Months Ended 
   June 30, 2017   June 30, 2016 
Net Assets at Beginning of Period  $9,387,408   $8,741,288 
Net investment loss   (281,674)   (123,763)
Net realized gain (loss) on investments   748,070    (533,281)
Net increase (decrease) in unrealized appreciation on investments   (298,253)   280,921 
Net increase (decrease) in net assets resulting from operations   168,143    (376,123)
Total  net increase (decrease) in net assets resulting from operations   168,143    (376,123)
Net Assets at End of Period  $9,555,551   $8,365,165 
           
Accumulated undistributed net investment loss  $(1,611,879)  $(1,223,690)

 

See accompanying Notes to Financial Statements

 

 - 5 - 

 

 

MILL CITY VENTURES III, LTD.

STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   Six Months Ended 
   June 30, 2017   June 30, 2016 
Cash flows from operating activities:          
Net increase (decrease) in net asset value resulting from operations  $168,143   $(376,123)
           
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided (used) in operating activities:          
Net change in unrealized (appreciation) depreciation on investments   298,253    (280,921)
Net realized (gain) loss on investments   (748,070)   533,281 
Payments for purchases of investments   (1,128,365)   (1,221,666)
Proceeds from sales of investments   2,397,699    1,031,379 
Proceeds from sales of investments sold short   85,936    - 
Depreciation and amortization expense   5,495    6,425 
           
Changes in operating assets and liabilities:          
Prepaid expenses   (26,549)   (33,523)
Interest and dividends receivable   (14,381)   10,451 
Accounts payable   (2,378)   507 
Deferred interest income   -    (5,645)
Deferred rent   (315)   164 
Payable for investment purchase   106,288    (65,622)
Net cash provided (used) in operating activities   1,141,756    (401,293)
           
           
Net increase (decrease) in cash   1,141,756    (401,293)
           
Cash, beginning of period   2,344,751    2,980,659 
Cash, end of period  $3,486,507   $2,579,366 

 

See accompanying Notes to Financial Statements

 

 - 6 - 

 

 

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS (Unaudited)

June 30, 2017

 

Investments (1)  Investment Type  Interest
Rate (2)
   Maturity
Date
  Principal
Amount
   Cost   Fair Value   Percentage
 of Net
 Assets
   Gross
Unrealized
Appreciation
   Gross
Unrealized
Depreciation
   Net Unrealized
Appreciation
(Depreciation)
 
Debt Investments                                              
Consumer                                              
Mix 1 Life, Inc.  Secured Loan (4)    12%  2/6/2016  $500,000   500,000                500,000   (500,000)
Mix 1 Life, Inc.  Secured Loan   12%  3/13/2016  $250,000    250,000                 250,000    (250,000)
                    750,000        0.00%       750,000    (750,000)
Financial                                              
Bravo Financial LLC  Secured Loan   12%  8/31/2018  $500,000    500,000    500,000    5.23%            
Oil & Gas                                              
Dala Petroleum, Inc.  Secured Loan   12%  12/31/2015  $25,000    25,000                 25,000    (25,000)
Dala Petroleum, Inc.  Secured Loan   12%  12/22/2016  $35,195    35,195                 35,195    (35,195)
Dala Petroleum, Inc.  Secured Loan   12%  12/16/2017  $22,500    22,500                 22,500    (22,500)
Dala Petroleum, Inc.  Secured Loan   12%  1/30/2017  $10,000    10,000                 10,000    (10,000)
                    92,695        0.00%       92,695    (92,695)
Leisure & Hospitality                                              
DBR Enclave US Investors, LLC  Secured Loan   15%  1/31/2020  $333,333    333,333    333,333    3.49%            
                                               
Total Debt Investments                  $1,676,028   $833,333    8.72%      $842,695   $(842,695)

 

Investments (1)  Investment Type (5)  Interest
Rate (6)
  Expiration
Date (7)
  Shares/Units   Cost   Fair Value   Percentage of Net
 Assets
   Gross
Unrealized
Appreciation
   Gross
Unrealized
Depreciation
   Net Unrealized
Appreciation
(Depreciation)
 
Equity Investments                                            
Advertising                                            
Creative Realities, Inc.  Warrants (8)  n/a  12/28/2020   1,071,429   $   96,429    1.01%  $96,429       96,429 
Bio-technology                                            
Bio Life Solutions, Inc.  Warrants (8)  n/a  3/20/2021   100,000                          
Combimatrix Corporation  Warrants (8)  n/a  5/6/2019   5,464                          
Combimatrix Corporation  Warrants (8)  n/a  6/28/2019   5,464                          
Combimatrix Corporation  Warrants (8)  n/a  12/19/2018   16,666                          
                          0.00%            

 

 - 7 - 

 

 

Consumer                                                
Escalade Inc.  Common Stock   n/a    n/a    7,929    93,975    103,870         9,895        9,895 
Famous Daves of America, Inc.  Common Stock   n/a    n/a    38,614    164,584    139,010             25,574    (25,574)
Forward Industries, Inc.  Common Stock (8)   n/a    n/a    100    147    105             42    (42)
Mix 1 Life, Inc.  Common Stock (8)   n/a    n/a    789,596        4,817         4,817        4,817 
Mix 1 Life, Inc.  Common Stock (10)   n/a    n/a    100,000    46,160    488             45,672    (45,672)
Stanley Furniture Co., Inc.  Common Stock (8)   n/a    n/a    93,288    96,496    106,348         12,849    2,997    9,852 
Tzfat Spirits of Israel, LLC  LLC Membership Units (8)   n/a    n/a    55,000    101,019    25,000             76,019    (76,019)
                      502,381    379,638    3.97%   27,561    150,304    (122,743)
Education                                                
Nat'l Amer. Univ. Holdings, Inc.  Common Stock   n/a    n/a    59,839    119,027    149,598    1.57%   30,571        30,571 
Financial                                                
OTC Markets Group Cl A  Common Stock   n/a    n/a    20,000    317,287    500,000         182,713        182,713 
QC Holdings, Inc.  Common Stock (8)   n/a    n/a    15,000    10,655    9,298             1,357    (1,357)
                      327,942    509,298    5.33%   182,713    1,357    181,356 
Information Technology                                                
Insite Software Solutions, Inc  Warrants (8)   n/a    12/30/2023    108,960                          
MAX 4G, Inc.  Preferred Stock (8)   n/a    n/a    300,000    150,000    300,000         150,000        150,000 
Mitek Systems Inc.  Common Stock (8)   n/a    n/a    1,500    9,754    12,600         2,846        2,846 
Simulations Plus, Inc.  Common Stock   n/a    n/a    25,001    246,710    308,757         62,047        62,047 
Travelzoo, Inc.  Common Stock   n/a    n/a    30,000    324,848    328,500         23,028    19,376    3,652 
                      731,312    949,857    9.94%   237,921    19,376    218,545 
Leisure & Hospitality                                                
Bitesquad.com LLC  Preferred LLC Units (4) (8)   n/a    n/a    73,543    1,014,893    2,020,226         1,005,333        1,005,333 
GrubHub, Inc.  Common Stock (8) (9)   n/a    n/a    (2,000)   (85,936)   (87,200)            1,264    (1,264)
                      928,957    1,933,026    20.23%   1,005,333    1,264    1,004,069 
Oil & Gas                                                
Dala Petroleum, Inc.  Preferred Stock (8)   n/a    n/a    500    500,000                 500,000    (500,000)
Dala Petroleum, Inc.  Warrants (8)   n/a    6/3/2017    714,286                          
Northern Capital Partners I, LP  Limited Partnership Units (8)   n/a    n/a    550,000    550,000    488,629             61,371    (61,371)
Southern Plains Resources, Inc.  Common Stock (8)   n/a    n/a    600,000    730,000                 730,000    (730,000)
                      1,780,000    488,629    5.11%       1,291,371    (1,291,371)
Publishing                                                
Educational Development Corp.  Common Stock   n/a    n/a    63,702    641,971    675,241    7.07%   64,382    31,111    33,271 
                                                 
Telecommunications                                                
Tessco Technologies Inc.  Common Stock   n/a    n/a    5,000    83,089    66,500    0.69%       16,589    (16,589)
                                                 
Total Equity Investments                    $5,114,679   $5,248,216    54.92%  $1,644,909   $1,511,372   $133,537 
                                                 
Total Cash and Cash Equivalents                    $3,486,507   $3,486,507    36.49%  $   $   $ 
                                                 
Total Investments, Cash and Cash Equivalents                    $10,277,214   $9,568,056    100.13%  $1,644,909   $2,354,067   $(709,159)

 

 

 - 8 - 

 

 

(1) All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.
   
(2) Interest is presented on a per annum basis.
   
(3) Investment is secured but payment and collateral are subordinated to the debt of another creditor by contract.
   
(4) Investment is convertible into common equity of the issuer.
   
(5) In the case of warrants, warrants provide for the right to purchase common equity of the issuer.
   
(6) In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis.
   
(7) In the case of warrants, purchase rights under the warrants will expire at the close of business on this date.
   
(8) Investment is not an income-producing investment.
   
(9) Investment is held short and is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security. At June 30, 2017, aggregate non-qualifying assets represented approximately 0.1% of our total assets.
 
(10) Value reflects 20% discount for restricted nature of securities

 

 - 9 - 

 

 

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2016

 

Investments (1)   Investment Type   Interest
Rate (2)
    Maturity
Date
  Principal
Amount
    Cost     Fair Value     Percentage
 of Net
 Assets
    Gross
Unrealized
Appreciation
    Gross
Unrealized
Depreciation
    Net Unrealized
Appreciation
(Depreciation)
 
Debt Investments                                                                        
Consumer                                                                        
Mix 1 Life, Inc.   Secured Loan (4)     12 %   2/6/2016   $ 500,000     $ 500,000     $ 180,000                   $ 320,000     $ (320,000 )
Mix 1 Life, Inc.   Secured Loan     12 %   3/13/2016   $ 250,000       250,000                           250,000       (250,000 )
                              750,000       180,000       1.92 %           570,000       (570,000 )
Financial                                                                        
Bravo Financial LLC   Secured Loan     12 %   8/31/2018   $ 500,000       500,000       500,000       5.33 %                  
Oil & Gas                                                                        
Dala Petroleum, Inc.   Secured Loan     12 %   12/31/2015   $ 25,000       25,000                           25,000       (25,000 )
Dala Petroleum, Inc.   Secured Loan     12 %   12/22/2016   $ 35,195       35,195                           35,195       (35,195 )
Dala Petroleum, Inc.   Secured Loan     12 %   12/16/2017   $ 22,500       22,500                           22,500       (22,500 )
                              82,695             0.00 %           82,695       (82,695 )
                                                                         
Total Debt Investments                           $ 1,332,695     $ 680,000       7.24 %         $ 652,695     $ (652,695 )

 

 - 10 - 

 

 

Investments (1)  Investment Type (5)  Interest
Rate (6)
  Expiration
Date (7)
  Shares/Units   Cost   Fair Value   Percentage of Net
 Assets
   Gross
Unrealized
Appreciation
   Gross
Unrealized
Depreciation
   Net Unrealized
Appreciation
(Depreciation)
 
Equity Investments Advertising                                            
Creative Realities, Inc.  Warrants (8)  n/a  12/28/2020   1,071,429        32,143    0.34%   32,143        32,143 
Bio-technology                                            
Bio Life Solutions, Inc.  Warrants (8)  n/a  3/20/2021   100,000                          
Combimatrix Corporation  Warrants (8)  n/a  5/6/2019   5,464                          
Combimatrix Corporation  Warrants (8)  n/a  6/28/2019   5,464                          
Combimatrix Corporation  Warrants (8)  n/a  12/19/2018   16,666                          
                          0.00%            
Consumer                                            
Escalade Inc.  Common Stock  n/a  n/a   7,929    93,975    104,663         10,688        10,688 
Mix 1 Life, Inc.  Common Stock (8)  n/a  n/a   40,051        15,219         15,219        15,219 
Mix 1 Life, Inc.  Common Stock (10)  n/a  n/a   100,000    46,160    30,000             16,160    (16,160)
Tzfat Spirits of Israel, LLC  LLC Membership Units (8)  n/a  n/a   55,000    101,019    25,000             76,019    (76,019)
                  241,154    174,882    1.86%   25,907    92,179    (66,272)
Education                                            
Nat'l Amer. Univ. Holdings, Inc.  Common Stock  n/a  n/a   59,839    119,027    116,686    1.24%   992    3,333    (2,341)
Financial                                            
Comm. Sales & Leasing  Common Stock (9)  n/a  n/a   2,000    65,620    50,820             14,800    (14,800)
OTC Markets Group Cl A  Common Stock  n/a  n/a   19,074    297,381    438,702         141,321        141,321 
QC Holdings, Inc.  Common Stock (8)  n/a  n/a   15,000    10,655    11,100         445        445 
                  373,656    500,622    5.33%   141,766    14,800    126,966 
Healthcare                                            
WaferGen Bio-Systems, Inc.  Common Stock (8)  n/a  n/a   85,210    369,800    420,085         50,285        50,285 
WaferGen Bio-Systems, Inc.  Warrants (8)  n/a  10/21/2020   40,000                          
                  369,800    420,085    4.48%   50,285        50,285 
Information Technology                                            
Insite Software Solutions, Inc  Warrants (8)  n/a  12/30/2023   108,960                          
MAX 4G, Inc.  Preferred Stock (8)  n/a  n/a   300,000    150,000    300,000         150,000        150,000 
Mitek Systems Inc.  Common Stock (8)  n/a  n/a   7,772    50,540    47,798             2,742    (2,742)
Simulations Plus, Inc.  Common Stock  n/a  n/a   18,639    173,310    179,862         10,659    4,107    6,552 
Travelzoo, Inc.  Common Stock  n/a  n/a   15,100    177,459    141,940             35,519    (35,519)
                  551,309    669,600    7.13%   160,659    42,368    118,291 
Investment Fund                                            
Calamos Conv. & High Inc. Fund  Common Stock (9)  n/a  n/a   10,000    128,357    105,500             22,857    (22,857)
Solar Senior Capital Ltd  Common Stock (9)  n/a  n/a   6,047    91,983    99,412         7,429        7,429 
                  220,340    204,912    2.18%   7,429    22,857    (15,428)
Leisure & Hospitality                                            
Bitesquad.com LLC  Preferred LLC Units (4) (8)  n/a  n/a   100,000    1,380,000    2,747,011    29.26%   1,367,011        1,367,011 
Media                                            
Discovery Communications Inc.  Common Stock (9)  n/a  n/a   5,000    149,609    137,050    1.46%       12,559    (12,559)
Oil & Gas                                            
Dala Petroleum, Inc.  Preferred Stock (8)  n/a  n/a   500    500,000                 500,000    (500,000)
Dala Petroleum, Inc.  Warrants (8)  n/a  6/3/2017   714,286                          
Northern Capital Partners I, LP  Limited Partnership Units (8)  n/a  n/a   550,000    550,000    488,629             61,371    (61,371)
Southern Plains Resources, Inc.  Common Stock (8)  n/a  n/a   600,000    730,000                 730,000    (730,000)
                  1,780,000    488,629    5.21%       1,291,371    (1,291,371)
Publishing                                            
Educational Development Corp.  Common Stock  n/a  n/a   36,905    409,380    367,205    3.91%   3,141    45,316    (42,175)
                                             
Telecommunications                                            
AT&T  Common Stock (9)  n/a  n/a   5,000    175,260    212,650         37,390        37,390 
CenturyLink, Inc.  Common Stock (9)  n/a  n/a   5,000    157,360    118,900             38,460    (38,460)
MagicJack VocalTek Ltd.  Common Stock (8) (9)  n/a  n/a   5,754    34,141    39,415         5,274        5,274 
Tessco Technologies Inc.  Common Stock  n/a  n/a   5,000    83,090    65,000             18,090    (18,090)
Windstream Holdings Inc.  Common Stock (9)  n/a  n/a   1,666    21,087    12,212             8,875    (8,875)
                  470,938    448,177    4.8%   42,664    65,425    (22,761)
                                             
Total Equity Investments                $6,065,213   $6,307,002    67.18%  $1,799,854   $1,590,208   $241,789 
                                             
Total Cash and Cash Equivalents                $2,344,751   $2,344,751    24.98%  $   $   $ 
                                             
Total Investments, Cash and Cash Equivalents                $9,742,659   $9,331,753    99.4%  $1,831,997   $2,242,903   $(410,906)

 

 - 11 - 

 

 

(1) All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.
   
(2) Interest is presented on a per annum basis.
   
(3) Investment is secured but payment and collateral are subordinated to the debt of another creditor by contract.
   
(4) Investment is convertible into common equity of the issuer.
   
(5) In the case of warrants, warrants provide for the right to purchase common equity of the issuer.
   
(6) In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis.
   
(7) In the case of warrants, purchase rights under the warrants will expire at the close of business on this date.
   
(8) Investment is not an income-producing investment.
   
(9) Investment is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.
  At December 31, 2016, aggregate non-qualifying assets represented approximately 8.3% of our total assets.
   
(10) Value reflects 20% discount for restricted nature of securities

 

 

 - 12 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

NOTE 1 – ORGANIZATION

 

Mill City Ventures III, Ltd. is an investment company incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “company.”

 

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 become gains.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation: The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

The condensed balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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.

 

 - 13 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

NOTE 3 – INVESTMENTS

 

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

 

   As of June 30, 2017 
   Investments at
Amortized Cost
   Percentage of
Amortized Cost
   Investments at
Fair Value
   Percentage of
Fair Value
 
Senior Secured Loans  $1,676,028    24.7%  $833,333    13.7%
Preferred Stock   1,664,893    24.5    2,320,226    38.2 
Common Stock - Long   2,884,704    42.5    2,405,132    39.5 
Common Stock - Short   (85,936)   (1.3)   (87,200)   (1.4)
Warrants   -    -    96,429    1.6 
Other Equity   651,019    9.6    513,629    8.4 
Total  $6,790,708    100.0%  $6,081,549    100.0%

 

 - 14 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

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

 

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

 

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

 

   As of June 30, 2017 
   Investments at
Fair Value
   Percentage of
Fair Value
 
Advertising  $96,429    1.6%
Consumer   379,638    6.2 
Education   149,598    2.5 
Financial   1,009,298    16.6 
Information Technology   949,857    15.6 
Leisure & Hospitality   2,266,359    37.3 
Oil & Gas   488,629    8.0 
Publishing   675,241    11.1 
Telecommunications   66,500    1.1 
Total  $6,081,549    100.0%

 

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

 

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

 

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

 

 - 15 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

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 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 at their weighted-average yield to maturity.

 

The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by the Valuation Committee of our Board of Directors, pursuant to our written Valuation 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 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 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) bank and other statements pertaining to our cash and cash equivalents; and (iii) quarter- or period-end statements from our custodial firms holding any of our portfolio investments. The committee then discusses these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation of our portfolio investments.

 

 - 16 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

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

 

Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investment portfolio as of June 30, 2017 may differ materially from values that would have been used had a readily available market for the securities existed.

 

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

 

   As of June 30, 2017 
   Level 1   Level 2   Level 3   Total 
Senior Secured Loans  $-   $-   $833,333   $833,333 
Preferred Stock   -    -    2,320,226    2,320,226 
Common Stock - Long   2,404,644    488    -    2,405,132 
Common Stock - Short   (87,200)   -    -    (87,200)
Warrants   -    96,429    -    96,429 
Other Equity   -    -    513,629    513,629 
Total  $2,317,444   $96,917   $3,667,188   $6,081,549 

 

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

 

   As of December 31, 2016 
   Level 1   Level 2   Level 3   Total 
Senior Secured Loans  $-   $-   $680,000   $680,000 
Preferred Stock   -    -    3,047,011    3,047,011 
Common Stock   2,684,219    30,000    -    2,714,219 
Warrants   -    32,143    -    32,143 
Other Equity   -    -    513,629    513,629 
Total  $2,684,219   $62,143   $4,240,640   $6,987,002 

 

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

 

   Senior Secured 
Loans
   Preferred Stock   Common Stock   Warrants   Other Equity 
Balance as of December 31, 2016  $680,000   $3,047,011   $-   $-   $513,629 
Net change in unrealized appreciation (depreciation)   (190,000)   (361,679)   -    -    - 
Purchases and other adjustments to cost   343,333    -    -    -    - 
Sales and redemptions   (90,000)   (726,785)   -    -    - 
Net realized gain   90,000    361,679    -    -    - 
Balance as of March 31, 2017  $833,333   $2,320,226   $-   $-   $513,629 

 

The net change in unrealized depreciation for the six months ended June 30, 2017 attributable to Level 3 portfolio investments still held at June 30, 2017 is $551,679, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.

 

 - 17 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

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, 2016:

 

   Senior Secured
Loans
   Preferred Stock   Common Stock   Warrants   Other Equity 
Balance as of December 31, 2015  $1,850,000   $1,080,000   $-   $-   $1,230,258 
Net change in unrealized appreciation   (122,500)   1,367,011    -    -    (5,579)
Purchases and other adjustments to cost   64,500    600,000    -    -    50,000 
Sales and redemptions   (724,000)   -    -    -    (761,050)
Net realized gain   (388,000)   -    -    -    - 
Balance as of December 31, 2016  $680,000   $3,047,011   $-   $-   $513,629 

 

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

 

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 as follows:

 

·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 an investment we made in secured convertible debt of Mix 1 Life (together with common stock purchase warrants) in February 2014. In June 2014, Mr. Larson became a director of Mix 1 Life. In August 2014, we exercised our common stock purchase warrant on a cashless basis for the purchase of Mix 1 Life common stock. In March 2015, we invested in additional secured debt of Mix 1 Life. Mr. Larson resigned from his position as a director of Mill City Ventures in November 2015.

 

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

 

 - 18 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

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 rent expense for the three and six-month periods ended June 30, 2017 was $11,345 and $22,689, respectively. The table below sets forth the required annual minimum lease payments:

 

Year  Amount 
2017  $25,207 
2018   46,988 
Total  $72,195 

 

NOTE 7 – INCOME TAXES

 

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

 

NOTE 8 – SHAREHOLDERS’ EQUITY

 

At June 30, 2017, we had 12,151,493 shares of common stock issued and outstanding.

 

NOTE 9 – PER-SHARE INFORMATION

 

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below:

 

   For the Three Months Ended
June 30,
 
   2017   2016 
Numerator:  Net increase (decrease) in net asset value resulting from operations  $188,661   $(355,283)
Denominator:  Weighted-average number of common shares outstanding   12,151,493    12,151,493 
Basic and diluted net gain (loss) per common share  $0.02   $(0.03)

 

   For the Six Months Ended
June 30,
 
   2017   2016 
Numerator:  Net increase (decrease) in net asset value resulting from operations  $168,143   $(376,123)
Denominator:  Weighted-average number of common shares outstanding   12,151,493    12,151,493 
Basic and diluted net gain (loss) per common share  $0.01   $(0.03)

 

 - 19 - 

 

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2017

 

NOTE 10 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended June 30,
2017
   Six Months Ended June 30,
2016
 
Per-share data (1):          
Net asset value at beginning of period  $0.77   $0.72 
Net investment loss   (0.02)   (0.01)
Net realized and unrealized gains (losses)   0.04    (0.02)
           
Net asset value at end of period  $0.79   $0.69 
           
Ratio/supplemental data:          
Per-share market value of investments at end of period  $0.51   $0.47 
Shares outstanding at end of period   12,151,493    12,151,493 
Weighted-average shares outstanding for period   12,151,493    12,151,493 
Net assets at end of period  $9,555,551   $8,365,165 
Average net assets (2)  $9,504,851   $8,670,320 
Portfolio turnover rate (3)   11.87%   11.90%
Ratio of operating expenses to average net assets (3)   (7.38)%   (3.30)%
Ratio of net investment loss to average net assets (3)   (5.89)%   (2.86)%
Ratio of realized gains (losses) to average net assets (3)   16.51%   (12.02)%

 

(1)Per-share data was derived using the weighted-average 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

 

On July 19, 2017, we received $106,216.94 on our secured loans held with Dala Petroleum, Inc, representing complete payment of our $92,695 principal plus accrued interest thereon. We also received $19,439.71 in payment for our shares of preferred stock which had a $500,000 cost value, resulting in a $480,560.29 realized loss.

 

 - 20 - 

 

 

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

 

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

 

·Overview
·Portfolio and Investment Activity
·Results of Operations
·Financial Condition
·Critical Accounting Estimates
·Off-Balance Sheet Arrangements
·Forward Looking Statements

 

OVERVIEW

 

Mill City Ventures III, Ltd. is an investment company incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “company.”

 

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

 

We primarily focus on investing in or lending to privately held and small-cap publicly traded U.S. companies, and making managerial assistance available to such companies. These investments are typically structured as purchases of preferred or common stock, investment contracts, or loans evidenced by promissory notes that may be convertible into stock by their terms or that may be accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. Our revenues relate to the gain we realize from the sale of securities we purchase, and to dividends and interest we derive from those securities. Our investment objective is to generate both current income and capital appreciation that ultimately become gains.

 

Our principal sources of income are interest and dividends we earn on our investments, and proceeds from the sale or redemption of our investments. Our statements of operations also reflect gain from increases in the carrying value of our investments (i.e., unrealized appreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses. Our statements of operations also reflect loss from decreases in the carrying value of our investments (i.e., unrealized depreciation).

 

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

 

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

 

 - 21 - 

 

 

PORTFOLIO AND INVESTMENT ACTIVITY

 

During the six months ended June 30, 2017, we made $1,128,365 of investments in portfolio companies and had $2,483,635 of sales of investments including short positions, resulting in net investments at amortized cost of $6,790,708 for the period. During the six months ended June 30, 2016, we made $1,221,666 of investments in portfolio companies and had $1,031,379 of sales of investments including short positions resulting in net investments at amortized cost of $6,875,137 for the period.

 

Our portfolio composition by major class, based on fair value at June 30, 2017, was as follows:

 

  

Investments at

Fair Value

  

Percentage of

Fair Value

 
Senior Secured Loans  $833,333    13.7%
Unsecured Loans   -    - 
Equity/Other   5,248,216    86.3 
Total  $6,081,549    100.0%

 

RESULTS OF OPERATIONS

 

Our operating results for the three and six months ended June 30, 2017 and June 30, 2016 were as follows:

 

  

For the three months ended

June 30,

  

For the six months ended

June 30,

 
   2017   2016   2017   2016 
Total investment income  $36,509   $79,728   $73,073   $166,051 
Total expenses   (188,533)   (143,096)   (354,747)   (289,814)
Net investment loss  $(152,024)  $(63,368)  $(281,674)  $(123,763)

 

Investment Income

 

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt securities we own. We may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire. In some cases, the interest on our investments may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. We may also generate revenue in the form of commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned.

 

For the three and six months ended June 30, 2017, our total investment income was $36,509 and $73,073, respectively, and was attributable to interest income from two eligible portfolio companies, Bravo Financial, LLC and DBR Enclave LLC, dividend payments received on account of investments in five eligible portfolio companies—OTC Markets Group Cl A, Simulations Plus, Inc., Tessco Technologies, Inc., Escalade Inc., and National American University Holdings, Inc.—and dividend payments received on account of investments in three non-eligible portfolio companies.

 

For the three and six months ended June 30, 2016, our total investment income was $79,728 and $166,051, respectively, and was attributable to interest income from four eligible portfolio companies—Bravo Financial, LLC, Mix 1 Life, Inc., Creative Realities, Inc. and DBR Phase III US Investors, LLC—dividend payments received on account of investments in four eligible portfolio companies—Educational Development Corp., OTC Markets Group Cl A, Tessco Technologies, Inc., and Simulations Plus, Inc.—and on account of investments in six non-eligible portfolio companies.

 

 - 22 - 

 

 

 

Operating Expenses

 

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

 

  

For the three months ended

June 30,

  

For the six months ended

June 30,

 
Expense item  2017   2016   2017   2016 
Professional fees  $59,814   $45,477   $126,550   $85,484 
Payroll   67,429    40,549    108,787    81,958 
Occupancy   22,509    14,428    42,331    38,604 
Insurance   18,694    18,730    36,140    40,087 
Directors’ fees   15,000    15,000    30,000    28,956 
Depreciation and amortization   2,747    3,212    5,495    6,424 
Other general and administrative   2,340    5,700    5,444    8,301 
Total  $188,533   $143,096   $354,747   $289,814 

 

 

For the three and six months ended June 30, 2017, our professional fee expense was $59,814 and $126,550, respectively. For the three and six months ended June 30, 2016, our professional fee expense was $45,477 and $85,484, respectively. The increase for the second quarter is due to the payment of legal fees incurred in connection with our collection efforts on bad debt we hold that was issued by Mix 1 Life, Inc.

 

For the three and six months ended June 30, 2017, our payroll expense was $67,429 and $108,787, respectively. For the three and six months ended June 30, 2016, our payroll expense was $40,549 and $81,958, respectively. The increase for the second quarter is due to the payment of health insurance benefits beginning in 2017.

 

Net Realized Gain from Investments

 

For the three and six months ended June 30, 2017, we had $162,522 and $2,483,635, respectively, of principal repayments, resulting in $35,799 and $748,070, respectively, of realized gains. For the three and six months ended June 30, 2016, we had $58,814 and $1,031,379, respectively, of principal repayments, resulting in $8,814 and ($533,281), respectively, of realized gain and losses.

 

Net Change in Unrealized Appreciation (Depreciation) on Investments

 

For the three and six months ended June 30, 2017, our investments had $304,886 and ($298,253) of unrealized appreciation (depreciation), respectively. For the three and six months ended June 30, 2016, our investments had ($300,729) and $280,921 of unrealized appreciation (depreciation), respectively.

 

Changes in Net Assets from Operations

 

For the three and six months ended June 30, 2017, we recorded a net increase in net assets from operations of $188,661 and $168,143, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2017, our per-share net increase in net assets from operations was $0.02 and $0.01, respectively. For the three and six months ended June 30, 2016, we recorded a net decrease in net assets from operations of $355,283 and $376,123, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2016, our per-share net decrease in net assets from operations was $0.03 and $0.03, respectively.

 

Cash Flows for the Six Months Ended June 30, 2017 and 2016

 

The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions and repayments of portfolio investments, among other factors. For the six months ended June 30, 2017, net cash provided in operating activities was $1,141,756. Cash flows provided in operating activities for the six months ended June 30, 2017 were primarily related to sales of investments of $2,483,635, offset mostly by purchases of investments totaling $1,128,365. For the six months ended June 30, 2016, net cash used in operating activities was $401,293. Cash flows used in operating activities for the six months ended June 30, 2016 were primarily related to sales of investments of $1,031,379 offset mostly by purchases of investments totaling $1,221,666.

 

FINANCIAL CONDITION

 

As of June 30, 2017, we had cash of $3,486,507, an increase of $1,141,756 from December 31, 2016. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies, cash distributions to our shareholders or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to collectively as “temporary investments.” As of the date of this filing, we expect that substantially all of our temporary investments will be redeployed into portfolio company investments by June 30, 2018.

 

To the extent our Board of Directors determines in the future, based on our financial condition and capital market conditions, that additional capital would allow us to take advantage of additional investment opportunities, we may seek to raise additional equity capital or to engage in borrowing, subject to the limitations on borrowing applicable to BDCs.

 

 - 23 - 

 

 

RELATED-PARTY TRANSACTIONS

 

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

 

CRITICAL ACCOUNTING ESTIMATES

 

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

 

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

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

·our future operating results;
·our business prospects and the prospects of our portfolio companies;
·the outcome of compliance inspections conducted from time to time by the SEC’s Office of Compliance and Inspections;
·the success of our investments;
·our relationships with third parties;
·the dependence of our success on the general economy and its impact on the industries in which we invest;
·the ability of our portfolio companies to achieve their objectives;
·our expected financings and investments;
·our regulatory structure and tax treatment;
·our ability to operate as a BDC and to be taxed as a RIC;
·the adequacy of our cash resources and working capital; and
·the timing of cash flows, if any, from the operations of our portfolio companies.

 

The foregoing list is not exhaustive. For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on March 28, 2017 (related to our year ended December 31, 2016) 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.

 

 - 24 - 

 

 

ITEM 4.         CONTROLS AND PROCEDURES

 

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

 

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

 

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.

 

 - 25 - 

 

 

PART II. OTHER INFORMATION

 

ITEM 6.         EXHIBITS

 

Exhibit
Number
  Description
3.1   Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 23, 2013)
3.2   Amended and Restated Bylaws of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10-SB filed on January 29, 2008)
31.1*   Section 302 Certification of the Chief Executive Officer
31.2*   Section 302 Certification of the Chief Financial Officer
32.1*   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

* Filed herewith

 

SIGNATURES

 

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

 

    MILL CITY VENTURES III, LTD.
     
Date:  August 11, 2017 By:   /s/ Douglas M. Polinsky
    Douglas M. Polinsky
    Chief Executive Officer
     
Date:  August 11, 2017 By:   /s/ Joseph A. Geraci, II
    Joseph A. Geraci, II
    Chief Financial Officer

 

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