SUI Group Holdings Ltd 10-Q, filed May 17, 2021
SUI Group Holdings Ltd. (SUIG)
About this 10-Q
SUI Group Holdings Ltd filed this 10-Q on May 17, 2021, covering the quarter ended March 31, 2021.
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 March 31, 2021 | |
| 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. ☒ 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). ☒ 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 x | 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 May 17, 2021, Mill City Ventures III, Ltd. had 10,786,913 shares of common stock, and no other classes of capital stock, outstanding.
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MILL CITY VENTURES III, LTD.
Index to Form 10-Q
for the Quarter Ended March 31, 2021
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| ITEM 1. | FINANCIAL STATEMENTS |
MILL CITY VENTURES III, LTD.
| March 31, 2021 (unaudited) | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Investments, at fair value: | $ | 13,462,403 | $ | 6,667,897 | ||||
| Non-control/non-affiliate investments (cost: $12,276,332 and $4,968,576 respectively) | ||||||||
| Cash | 499,157 | 5,440,579 | ||||||
| Note receivable | 250,000 | 250,000 | ||||||
| Prepaid expenses | 110,386 | 43,838 | ||||||
| Receivable for sale of investments | — | 19,313 | ||||||
| Interest and dividend receivables | 210,047 | 65,911 | ||||||
| Right-of-use lease asset | 18,840 | 23,345 | ||||||
| Total Assets | $ | 14,550,833 | $ | 12,510,883 | ||||
| LIABILITIES | ||||||||
| Accounts payable | $ | 59,696 | $ | 32,917 | ||||
| Dividend payable | — | 539,296 | ||||||
| Deferred interest income | 144,000 | — | ||||||
| Lease liability | 21,045 | 26,061 | ||||||
| Accrued tax expense | 593,413 | 13,722 | ||||||
| Long-term deferred taxes | 341,000 | 258,000 | ||||||
| Total Liabilities | 1,159,154 | 869,996 | ||||||
| Commitments and Contingencies | ||||||||
| SHAREHOLDERS EQUITY (NET ASSETS) | ||||||||
| Common stock, par value $0.001 per share (250,000,000 authorized; 10,786,913 and 10,785,913 outstanding) | 10,787 | 10,786 | ||||||
| Additional paid-in capital | 10,678,763 | 10,673,014 | ||||||
| Accumulated deficit | (1,159,665 | ) | (1,159,665 | ) | ||||
| Accumulated undistributed investment loss | (2,774,126 | ) | (2,124,419 | ) | ||||
| Accumulated undistributed net realized gains on investment transactions | 5,449,849 | 2,541,850 | ||||||
| Net unrealized appreciation in value of investments | 1,186,071 | 1,699,321 | ||||||
| Total Shareholders' Equity (net assets) | 13,391,679 | 11,640,887 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 14,550,833 | $ | 12,510,883 | ||||
| Net Asset Value Per Common Share | $ | 1.24 | $ | 1.08 | ||||
See accompanying Notes to Financial Statements
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MILL CITY VENTURES III, LTD.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended | ||||||||
| March 31, 2021 | March 31, 2020 | |||||||
| Investment Income | ||||||||
| Interest income | $ | 546,842 | $ | 178,245 | ||||
| Dividend income | — | 6,734 | ||||||
| Total Investment Income | 546,842 | 184,979 | ||||||
| Operating Expenses | ||||||||
| Professional fees | 142,808 | (16,232 | ) | |||||
| Payroll | 302,080 | 58,497 | ||||||
| Insurance | 24,279 | 20,453 | ||||||
| Occupancy | 16,689 | 16,562 | ||||||
| Director's fees | 30,000 | 22,500 | ||||||
| Depreciation and amortization | — | 643 | ||||||
| Other general and administrative | 18,002 | 2,969 | ||||||
| Total Operating Expenses | 533,858 | 105,392 | ||||||
| Net Investment Gain | 12,984 | 79,587 | ||||||
| Realized and Unrealized Gain (Loss) on Investments | ||||||||
| Net realized gain on investments | 2,907,999 | 24,502 | ||||||
| Net change in unrealized depreciation on investments | (513,250 | ) | (386,007 | ) | ||||
| Net Realized and Unrealized Gain (Loss) on Investments | 2,394,749 | (361,505 | ) | |||||
| Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes | $ | 2,407,733 | $ | (281,918 | ) | |||
| Provision for Income Taxes | 662,691 | — | ||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 1,745,042 | $ | (281,918 | ) | |||
| Net Increase (Decrease) in Net Assets Resulting from Operations per share: | ||||||||
| Basic and diluted | $ | 0.16 | $ | (0.03 | ) | |||
| Weighted-average number of common shares outstanding - basic and diluted | 10,785,913 | 11,067,402 | ||||||
See accompanying Notes to Financial Statements
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MILL CITY VENTURES III, LTD.
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
| Three Months Ended March 31, 2021 | 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, 2020 | 10,785,913 | $ | 10,786 | $ | 10,673,014 | $ | (1,159,665 | ) | $ | (2,124,419 | ) | $ | 2,541,850 | $ | 1,699,321 | $ | 11,640,887 | |||||||||||||||
| Issuance of shares | 1,000 | 1 | 5,749 | — | — | — | — | 5,750 | ||||||||||||||||||||||||
| Net investment loss, net of tax of $662,691 | — | — | — | (649,707 | ) | — | — | (649,707 | ) | |||||||||||||||||||||||
| Net realized gain on investment transactions | — | — | — | — | 2,907,999 | — | 2,907,999 | |||||||||||||||||||||||||
| Depreciation in value of investments | — | — | — | — | — | (513,250 | ) | (513,250 | ) | |||||||||||||||||||||||
| Balance as of March 31, 2021 | 10,786,913 | $ | 10,787 | $ | 10,678,763 | $ | (1,159,665 | ) | $ | (2,774,126 | ) | $ | 5,449,849 | $ | 1,186,071 | $ | 13,391,679 | |||||||||||||||
| Three Months Ended March 31, 2020 | Common
Shares | Par Value | Additional Paid In Capital | Accumulated
Deficit | Accumulated Undistributed Net Investment Loss | Accumulated Undistributed Net Realized Gain on Investments Transactions | Net
Unrealized Appreciation (Depreciation) in value of Investments | Total
Shareholders' Equity | ||||||||||||||||||||||||
| Balance as of December 31, 2019 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (2,397,865 | ) | $ | 3,075,816 | $ | (235,473 | ) | $ | 10,068,533 | ||||||||||||||
| Net investment gain | — | — | — | 79,587 | — | — | 79,587 | |||||||||||||||||||||||||
| Net realized gain on investment transactions | — | — | — | — | 24,502 | — | 24,502 | |||||||||||||||||||||||||
| Depreciation in value of investments | — | — | — | — | — | (386,007 | ) | (386,007 | ) | |||||||||||||||||||||||
| Balance as of March 31, 2020 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (2,318,278 | ) | $ | 3,100,318 | $ | (621,480 | ) | $ | 9,786,615 |
See accompanying Notes to Financial Statements
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MILL CITY VENTURES III, LTD.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended | ||||||||
| March 31, 2021 | March 31, 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net increase (decrease) in net assets resulting from operations | $ | 1,745,042 | $ | (281,918 | ) | |||
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided (used) in operating activities: | ||||||||
| Net change in unrealized depreciation on investments | 513,250 | 386,007 | ||||||
| Net realized gain on investments | (2,907,999 | ) | (24,502 | ) | ||||
| Purchases of investments | (9,430,664 | ) | (3,328,296 | ) | ||||
| Proceeds from sales of investments | 5,036,657 | 221,780 | ||||||
| Depreciation & amortization expense | — | 643 | ||||||
| Deferred income taxes | 662,691 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other assets | (62,043 | ) | 24,288 | |||||
| Interest and dividends receivable | (144,136 | ) | (42,972 | ) | ||||
| Receivable for investment sales | 19,313 | — | ||||||
| Payable for investment purchase | — | |||||||
| Accounts payable and other liabilities | 21,763 | 6,007 | ||||||
| Deferred interest income | 144,000 | — | ||||||
| Payable for investment purchase | — | — | ||||||
| Net cash used in operating activities | (4,402,126 | ) | (3,038,963 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments for common stock dividend | (539,296 | ) | — | |||||
| Net cash used by financing activities | (539,296 | ) | — | |||||
| Net decrease in cash | (4,941,422 | ) | (3,038,963 | ) | ||||
| Cash, beginning of period | 5,440,579 | 8,066,656 | ||||||
| Cash, end of period | $ | 499,157 | $ | 5,027,693 | ||||
| Non-cash financing activities: | ||||||||
| Common shares issued as consideration for investment | $ | 5,750 | — | |||||
See accompanying Notes to Financial Statements
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MILL CITY VENTURES III, LTD.
CONDENSED SCHEDULE OF INVESTMENTS
MARCH 31, 2021
| Investment / Industry | Cost | Fair Value | Percentage
of Net Assets | |||||||||
| Short-Term Non-banking Loans | ||||||||||||
| Consumer - 20% secured loans | $ | 400,000 | $ | 400,000 | 2.99 | % | ||||||
| Financial - 44% secured loans | ||||||||||||
| Benton Financial, LLC | 2,790,000 | 2,790,000 | 20.83 | % | ||||||||
| Financial - 36% secured loans | ||||||||||||
| Benton Financial, LLC | 1,010,000 | 1,010,000 | 7.54 | % | ||||||||
| Financial - 34% secured loans | 293,333 | 293,333 | 2.19 | % | ||||||||
| Financial - 12% secured loans | 300,000 | 300,000 | 2.24 | % | ||||||||
| Litigation Financing - 23% secured loans | ||||||||||||
| The Cross Law Firm, LLC | 1,805,750 | 1,800,000 | 13.44 | % | ||||||||
| Real Estate - 15% secured loans | ||||||||||||
| Alatus Development, LLC | 1,250,000 | 1,250,000 | 9.33 | % | ||||||||
| Real Estate - 12% secured loans | ||||||||||||
| Tailwinds, LLC | 3,000,000 | 3,000,000 | 22.40 | % | ||||||||
| Total Short-Term Non-Banking Loans | 10,849,083 | 10,843,333 | 80.96 | % | ||||||||
| Common Stock | ||||||||||||
| Consumer | ||||||||||||
| Ammo, Inc. | 437,500 | 1,480,000 | 11.05 | % | ||||||||
| Preferred Stock | ||||||||||||
| Information Technology | 150,000 | 300,000 | 2.24 | % | ||||||||
| Warrants | ||||||||||||
| Healthcare | 679 | — | 0.00 | % | ||||||||
| Other Equity | ||||||||||||
| Financial | 600,000 | 600,000 | 4.48 | % | ||||||||
| Leisure & Hospitality | 239,070 | 239,070 | 1.80 | % | ||||||||
| 839,070 | 839,070 | 6.28 | % | |||||||||
| Total Investments | $ | 12,276,332 | $ | 13,462,403 | 100.53 | % | ||||||
| Total Cash | 499,157 | 499,157 | 3.73 | % | ||||||||
| Total Investments and Cash | $ | 12,775,489 | $ | 13,961,560 | 104.26 | % | ||||||
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MILL CITY VENTURES III, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2020
| Investment / Industry | Cost | Fair Value | Percentage
of Net Assets | |||||||||
| Short-Term Non-banking Loans | ||||||||||||
| Consumer - 20% secured loans | $ | 400,000 | $ | 400,000 | 3.44 | % | ||||||
| Financial - 44% secured loans | 400,000 | 400,000 | 3.44 | % | ||||||||
| Financial - 36% secured loans | 500,000 | 500,000 | 4.30 | % | ||||||||
| Real Estate - 15% secured loans | ||||||||||||
| Alatus Development, LLC | 1,250,000 | 1,250,000 | 10.74 | % | ||||||||
| Other | 239,000 | 239,000 | 2.05 | % | ||||||||
| Total Short-Term Non-Banking Loans | 2,789,000 | 2,789,000 | 23.97 | % | ||||||||
| Common Stock | ||||||||||||
| Consumer | ||||||||||||
| Ammo, Inc. | 1,750,000 | 3,300,000 | 28.34 | % | ||||||||
| Preferred Stock | ||||||||||||
| Information Technology | 150,000 | 300,000 | 2.58 | % | ||||||||
| Warrants | ||||||||||||
| Healthcare | 679 | — | 0.00 | % | ||||||||
| Other Equity | ||||||||||||
| Leisure & Hospitality | 278,897 | 278,897 | 2.40 | % | ||||||||
| Total Investments | $ | 4,968,576 | $ | 6,667,897 | 57.30 | % | ||||||
| Total Cash | 5,440,579 | 5,440,579 | 46.74 | % | ||||||||
| Total Investments and Cash | $ | 10,409,155 | $ | 12,108,476 | 104.04 | % | ||||||
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
NOTE 1 – ORGANIZATION
In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.
We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election on December 27, 2019. As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC. We offer short-term specialty finance solutions primarily to private businesses, small-cap public companies and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “investment securities” for purposes of federal securities law, and we monitor our investments as a whole to ensure that no more than 40% of our total assets may consist of investment securities.
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 March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
The condensed balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our Board of Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below. The Company is an investment company following accounting and reporting guidance in ASC 946.
Cash deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.
Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by our Board of Directors, or 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.
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
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.
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.
The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by 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. The fair value for short-term non-banking loans is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent to those cash flows. The discount ranges from 14% to 44% and approximate rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk.
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
On a quarterly basis, our management provides members of our Board of Directors 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 board or 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 other than to have our entire Board of Directors involved in implementing and discharging those policies and procedures.
Income taxes:
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine we would be able to realize our deferred income tax assets in the future in excess of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
We file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, 2017 through 2020, which are the tax years that remain subject to examination by major tax jurisdictions as of March 31, 2021.
Revenue recognition: Realized gains or losses on the sale of investments are calculated using the specific investment method.
Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities purchased are accreted or amortized, as applicable, into interest income over the life of the related security using the effective-yield method. The amortized cost of investments represents the original cost, adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more, or when there is reasonable doubt that principal or interest will be collected in full. Loan origination fees are recognized when loans are issued. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and is in the process of collection.
Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
Certain investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal or stated value of the investment on the respective interest- or dividend-payment dates rather than being paid in cash, and generally becomes due at maturity or upon being repurchased by the issuer. PIK interest or dividends is recorded as interest or dividend income, as applicable. If at any point we believe that PIK interest or dividends is not expected be realized, the PIK-generating investment will be placed on non-accrual status. Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment in placed on non-accrual status.
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MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
Allocation of net gains and losses: All income, gains, losses, deductions and credits for any investment are allocated in a manner proportionate to the shares owned.
Recently adopted accounting pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is fiscal 2021 for us, with early adoption permitted. The adoption of the ASU effective January 1, 2021 did not have a material impact on the Company’s financial statements.
NOTE 3 – INVESTMENTS
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of March 31, 2021 (together with the corresponding percentage of the fair value of our total portfolio of investments):
| As of March 31, 2021 | ||||||||||||||||
| Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
| Short-term Non-banking Loans | $ | 10,849,083 | 88.4 | % | $ | 10,843,333 | 80.5 | % | ||||||||
| Preferred Stock | 150,000 | 1.2 | 300,000 | 2.2 | ||||||||||||
| Common Stock | 437,500 | 3.6 | 1,480,000 | 11.0 | ||||||||||||
| Warrants | 679 | — | — | — | ||||||||||||
| Other Equity | 839,070 | 6.8 | 839,070 | 6.3 | ||||||||||||
| Total | $ | 12,276,332 | 100.0 | % | $ | 13,462,403 | 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, 2020 (together with the corresponding percentage of the fair value of our total portfolio of investments):
| As of December 31, 2020 | ||||||||||||||||
| Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
| Short-term Non-banking Loans | $ | 2,789,000 | 56.2 | % | $ | 2,789,000 | 41.8 | % | ||||||||
| Preferred Stock | 150,000 | 3.0 | 300,000 | 4.5 | ||||||||||||
| Common Stock | 1,750,000 | 35.2 | 3,300,000 | 49.5 | ||||||||||||
| Warrants | 679 | — | — | — | ||||||||||||
| Other Equity | 278,897 | 5.6 | 278,897 | 4.2 | ||||||||||||
| Total | $ | 4,968,576 | 100.0 | % | $ | 6,667,897 | 100.0 | % | ||||||||
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of March 31, 2021:
| As of March 31, 2021 | ||||||||
| Investments at Fair Value | Percentage of Fair Value | |||||||
| Consumer | $ | 1,880,000 | 14.0 | % | ||||
| Financial | 6,793,333 | 50.4 | ||||||
| Information Technology | 300,000 | 2.2 | ||||||
| Leisure & Hospitality | 239,070 | 1.8 | ||||||
| Real Estate | 4,250,000 | 31.6 | ||||||
| — | — | |||||||
| Total | $ | 13,462,403 | 100.0 | % | ||||
- 13 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2020:
| As of December 31, 2020 | ||||||||
| Investments at Fair Value | Percentage of Fair Value | |||||||
| Consumer | $ | 3,700,000 | 55.5 | % | ||||
| Financial | 900,000 | 13.5 | ||||||
| Information Technology | 300,000 | 4.5 | ||||||
| Leisure & Hospitality | 278,897 | 4.2 | ||||||
| Real Estate | 1,489,000 | 22.3 | ||||||
| Total | $ | 6,667,897 | 100.0 | % | ||||
NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS
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 March 31, 2021 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 March 31, 2021, according to the fair value hierarchy:
| As of March 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Short-term Non-banking Loans | $ | — | $ | — | $ | 10,843,333 | $ | 10,843,333 | ||||||||
| Preferred Stock | 300,000 | 300,000 | ||||||||||||||
| Common Stock | 1,480,000 | — | — | 1,480,000 | ||||||||||||
| Warrants | — | — | — | — | ||||||||||||
| Other Equity | — | — | 839,070 | 839,070 | ||||||||||||
| Total | $ | 1,480,000 | $ | — | $ | 11,982,403 | $ | 13,462,403 | ||||||||
The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2020, according to the fair value hierarchy:
| As of December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Short-term Non-banking Loans | $ | — | $ | — | $ | 2,789,000 | $ | 2,789,000 | ||||||||
| Preferred Stock | — | — | 300,000 | 300,000 | ||||||||||||
| Common Stock | 3,300,000 | — | — | 3,300,000 | ||||||||||||
| Warrants | — | — | — | — | ||||||||||||
| Other Equity | — | — | 278,897 | 278,897 | ||||||||||||
| Total | $ | 3,300,000 | $ | — | $ | 3,367,897 | $ | 6,667,897 | ||||||||
- 14 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the three months ended March 31, 2021:
| For the three months ended March 31, 2021 | ||||||||||||||||||||
| ST Non-banking Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
| Balance as of January 1, 2021 | $ | 2,789,000 | $ | 300,000 | $ | — | $ | — | $ | 278,897 | ||||||||||
| Net change in unrealized appreciation | — | — | — | — | — | |||||||||||||||
| Purchases and other adjustments to cost | 8,693,333 | — | — | — | 600,000 | |||||||||||||||
| Sales and redemptions | (639,000 | ) | — | — | — | (39,827 | ) | |||||||||||||
| Net realized loss | — | — | — | — | — | |||||||||||||||
| Balance as of March 31, 2021 | $ | 10,843,333 | $ | 300,000 | $ | — | $ | — | $ | 839,070 | ||||||||||
The net change in unrealized depreciation for the three months ended March 31, 2021 attributable to Level 3 portfolio investments still held as of March 31, 2021 is $0.
The following table lists our level 3 investments held as of March 31, 2021 and the unobservable inputs used to determine their valuation:
| Security Type | 3/31/21 FMV | Valuation Technique | Unobservable Inputs | Range | ||||||
| ST Non-banking Loans | $ | 10,843,333 | discounted cash flow | determining private company credit rating | 12-44% | |||||
| Other Equity | 839,070 | last secured funding known by company | economic changes since last funding | |||||||
| Preferred Stock | 300,000 | last funding secured by company | economic changes since last funding | |||||||
| $ | 11,982,403 | |||||||||
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, 2020:
| For the year ended December 31, 2020 | ||||||||||||||||||||
| ST Non-banking Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
| Balance as of January 1, 2020 | $ | — | $ | 300,000 | $ | — | $ | — | $ | 534,200 | ||||||||||
| Net change in unrealized appreciation | — | — | — | — | 486,018 | |||||||||||||||
| Purchases and other adjustments to cost | 7,543,000 | — | — | — | — | |||||||||||||||
| Sales and redemptions | (4,754,000 | ) | — | — | — | (91,313 | ) | |||||||||||||
| Net realized loss | — | — | — | — | (650,008 | ) | ||||||||||||||
| Balance as of December 31, 2020 | $ | 2,789,000 | $ | 300,000 | $ | — | $ | — | $ | 278,897 | ||||||||||
The net change in unrealized depreciation for the year ended December 31, 2020 attributable to Level 3 portfolio investments still held as of December 31, 2020 is $0, 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, 2020 and the unobservable inputs used to determine their valuation:
| Security Type | 12/31/20 FMV | Valuation Technique | Unobservable Inputs | Range | ||||||
| ST Non-banking Loans | $ | 2,789,000 | discounted cash flow | determining private company credit rating | 14-44% | |||||
| Other Equity | 278,897 | last secured funding known by company | economic changes since purchase | |||||||
| Preferred Stock | 300,000 | last funding secured by company | economic changes since last funding | |||||||
| $ | 3,367,897 | |||||||||
- 15 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
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. 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 only related-party transaction requiring disclosure under this policy relates to an August 10, 2018 loan transaction we entered into with Elizabeth Zbikowski. Ms. Zbikowski, along with her husband Scott Zbikowski, owns approximately 1,765,000 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 was subsequently amended such that it matures in August 2021. The note bears interest payable monthly at the rate of 10% per annum and 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 – INCOME TAXES
As of December 27, 2019, we are a C-corporation for income tax purposes. Income taxes as of March 31, 2021 are described below.
As of March 31, 2021 and December 31, 2020 we had accrued income taxes of $593,000 and $13,000 respectively. The change in accrued income taxes results from large realized gains on investment sold off during quarter one of 2021. Due to the full valuation allowances in periods prior to December 31, 2020, our effective tax rate was expected to be near zero percent, therefore income tax accruals and expense were not material for those periods presented. The income tax expense associated with the tax accruals are for the periods March 31, 2021 and March 31, 2020 is $663,000 and $0, respectively.
As of December 31, 2020, we had a federal net operating loss carryforward (NOL) of approximately $371,000. The federal NOL is expected to be completely used and offset taxable income by March 31, 2021. The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code. Certain federal NOLs will expire in years 2036 and 2037 if not used. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely. The estimated federal NOL that does not expire included in the total above is $356,000. States may vary in their treatment of post-2017 NOLs. Certain state NOL carryforwards were lost in 2019 when several state tax returns were filed final as a result of changes to state nexus. The remaining state NOLs are expected to be completely used and offset taxable income by March 31, 2021. The remaining state NOL carryforwards may expire in 2021 and 2023 if not used.
NOTE 7 – SHAREHOLDERS’ EQUITY
At March 31, 2021, we had 10,786,913 shares of common stock issued and outstanding.
On December 8, 2020 we announced that our Board of Directors had approved a cash dividend of $0.05 per common share. The dividend was paid on January 4, 2021 to shareholders of record as of the close of business on December 21, 2020.
NOTE 8 – PER-SHARE INFORMATION
Basic net gain per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below:
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Numerator: Net increase (decrease) in net assets resulting from operations | $ | 1,745,042 | $ | (281,918 | ) | |||
| Denominator: Weighted-average number of common shares outstanding | 10,785,913 | 11,067,402 | ||||||
| Basic and diluted net gain (loss) per common share | $ | 0.16 | $ | (0.03 | ) | |||
- 16 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
NOTE 9 – OPERATING LEASES
We are subject to two non-cancelable operating leases for office space expiring March 31, 2022. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew.
Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted average discount rate as of December 31, 2020 was 4.5% and the weighted average remaining lease term is one year.
Under ASC 840, rent expense for office facilities for the three months ended March 31, 2021 and March 31, 2020 was $16,689 and $16,562, respectively.
The components of our operating lease were as follows for the three months ended March 31, 2021 and 2020:
| Three Months Ended | ||||||||
| March 31, 2021 | March 31, 2020 | |||||||
| Operating lease costs | $ | 4,779 | $ | 4,779 | ||||
| Variable lease cost | 4,478 | 4,351 | ||||||
| Short-term lease cost | 7,432 | 7,432 | ||||||
| Total | $ | 16,689 | $ | 16,562 | ||||
Supplemental balance sheet information consisted of the following at March 31, 2021:
| Operating Lease | ||||
| Right-of-use assets | $ | 18,840 | ||
| Operating Lease Liability | $ | 21,045 | ||
| Less: short term portion | (21,045 | ) | ||
| Long term portion | $ | — | ||
Maturity analysis under lease agreements consisted of the following as of March 31, 2021:
| Operating Leases | ||||
| 2021 | $ | 15,871 | ||
| 2022 | 5,449 | |||
| Total lease payments | 21,320 | |||
| Less: interest | (275 | ) | ||
| Present value of lease liabilities | $ | 21,045 | ||
- 17 -
MILL CITY VENTURES III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
NOTE 10 – FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the three months ended March 31, 2021 through 2017:
| Three Months Ended March 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
| Per Share Data (1) | ||||||||||||||||||||
| Net asset value at beginning of period | $ | 1.08 | 0.91 | 1.02 | 0.87 | 0.77 | ||||||||||||||
| Net investment income (loss) | 0.00 | 0.00 | (0.02 | ) | (0.01 | ) | (0.01 | ) | ||||||||||||
| Net realized and unrealized gains (losses) | 0.22 | (0.03 | ) | 0.12 | 0.06 | 0.01 | ||||||||||||||
| Provision for income taxes | (0.06 | ) | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||||
| Payment of common stock dividend | 0.00 | 0.00 | (0.05 | ) | 0.00 | 0.00 | ||||||||||||||
| Net asset value at end of period | $ | 1.24 | 0.88 | 1.07 | 0.92 | 0.77 | ||||||||||||||
| Ratio / Supplemental Data | ||||||||||||||||||||
| Per share market value of investments at end of period | $ | 1.25 | 0.41 | 0.78 | 0.76 | 0.46 | ||||||||||||||
| Shares outstanding at end of period | 10,786,913 | 11,067,402 | 11,067,402 | 11,067,402 | 12,151,493 | |||||||||||||||
| Average weighted shares outstanding for the period | 10,785,913 | 11,067,402 | 11,067,402 | 11,863,392 | 12,151,493 | |||||||||||||||
| Net assets at end of period | $ | 13,391,679 | 9,786,615 | 11,890,188 | 9,783,191 | 9,366,890 | ||||||||||||||
| Average net assets (2) | $ | 12,516,283 | 9,927,574 | 12,911,895 | 9,770,410 | 9,563,916 | ||||||||||||||
| Total investment return | 14.81 | % | (3.30 | )% | 4.90 | % | 5.75 | % | 0.00 | % | ||||||||||
| Portfolio turnover rate (3) | 40.24 | % | 0.75 | % | 0.93 | % | 0.80 | % | 7.26 | % | ||||||||||
| Ratio of operating expenses to average net assets (3) | (16.20 | )% | (7.82 | )% | (6.06 | )% | (7.52 | )% | (6.86 | )% | ||||||||||
| Ratio of net investment income (loss) to average net assets (3) | 0.42 | % | 0.87 | % | (4.87 | )% | (6.16 | )% | (5.38 | )% | ||||||||||
| Ratio of realized gains (losses) to average net assets (3) | 133.32 | % | 1.00 | % | 137.57 | % | 2.17 | % | 33.82 | % | ||||||||||
| (1) | Per-share data was derived using the ending number of shares outstanding for the period. |
| (2) | Based on the monthly average of net assets as of the beginning and end of each period presented. |
| (3) | Ratios are annualized. |
NOTE 11 – General Uncertainty
On March 11, 2020, the World Health Organization declared the outbreak of the coronavirus (COVID-19) a pandemic. As a result, economic uncertainties and market volatility have arisen which are likely to negatively impact our investment valuations and net increase or decrease in net assets resulting from operations. Other financial impacts could occur though such potential impact is unknown at this time.
NOTE 12 – Subsequent Events
On May 4, 2021, the company entered into a non-binding letter of intent with AMMO, Inc. The letter of intent contemplates the company providing a consumer financing option for consumer-purchasers at the GunBroker.com website, which AMMO, Inc. recently acquired through purchase. The letter of intent obligates the parties only to discuss and negotiate in good faith toward a definitive written agreement.
- 18 -
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in seven sections:
| · | Overview |
| · | Portfolio and Investment Activity |
| · | Results of Operations |
| · | Financial Condition |
| · | Critical Accounting Estimates |
| · | Off-Balance Sheet Arrangements |
| · | Forward Looking Statements |
OVERVIEW
Mill City Ventures III, Ltd. was incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “company.”
We provide non-bank lending and specialty finance to companies and individuals on both a secured and unsecured basis. The loans we provide typically have maturities that range from 9 to 12 months and may involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale; other real estate projects; title loans; cash inventory needs; inventory financing, or for other purposes. We intend to remain opportunistic, however, and may engage in transactions that involve other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make.
Our principal sources of income are interest, dividends and other fees associated with lending such as origination fees, closing fees or exit fees. We may also receive reimbursement of legal costs associated with loan documentation. Our statement of operations also reflect increases and decreases in the carrying value of our asset and investments (i.e. unrealized appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview.
PORTFOLIO AND INVESTMENT ACTIVITY
During the three months ended March 31, 2021, we made $9,430,664 of investments in portfolio companies and had $5,036,657 of redemptions and repayments, resulting in net investments at amortized cost of $12,276,332 as of March 31, 2021.
During the three months ended March 31, 2020, we made $3,328,963 of investments in portfolio companies and had $221,780 of redemptions and repayments, resulting in net investments at amortized cost of $5,107,388 as of March 31, 2020.
Our portfolio composition by major class, based on fair value at March 31, 2021, was as follows:
| Investments at Fair Value |
Percentage of Fair Value |
|||||||
| Short-term Non-banking Loans | $ | 10,843,333 | 80.5 | % | ||||
| Equity/Other | 2,619,070 | 19.5 | ||||||
| Total | $ | 13,462,403 | 100.0 | % | ||||
- 19 -
RESULTS OF OPERATIONS
Our operating results for the three months ended March 31, 2021 and March 31, 2020 were as follows:
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Investment Income: | $ | 546,842 | $ | 184,979 | ||||
| Operating Expenses: | (533,858 | ) | (105,392 | ) | ||||
| Net Investment Gain (Loss) | $ | 12,984 | $ | 79,587 | ||||
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 months ended March 31, 2021 and 2020, our total investment income was $546,842 and $184,979, respectively. The increase is due to the change in our business structure which now focuses on short-term non-bank lending. Our loan portfolio generates interest income, with an average rate on the loans of 25%.
Professional Fees
For the three months ended March 31, 2021 and 2020, we had $142,808 and ($16,232) of professional fees expense, respectively. The increase in 2021 is due to legal costs incurred to close on several new short-term banking loans. In 2020, we received a refund during the first quarter of $59,957 relating to certain audit expenses incurred during 2018 and 2019.
Net Realized Gain from Investments
For the three months ended March 31, 2021, we had $5,036,657 of proceeds from sale of investments, resulting in $2,907,999 of realized gains, due primarily to sales of our Ammo, Inc. holding. For the three months ended March 31, 2020, we had $221,780 of proceeds from sale of investments, resulting in $24,502 of realized gains.
Net Change in Unrealized Appreciation (Depreciation) on Investments
For the three months ended March 31, 2021, our investments included $513,250 of unrealized depreciation. For the three months ended March 31, 2020, our investments included $386,007 of unrealized depreciation.
Changes in Net Assets from Operations
For the three months ended March 31, 2021, we recorded a net increase in net assets from operations of $1,745,042. Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2021, our per-share net increase in net assets from operations was $0.16. For the three months ended March 31, 2020, we recorded a net decrease in net assets from operations of $281,918. Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2020, our per-share net decrease in net assets from operations was $0.03.
Cash Flows for the Three Months Ended March 31, 2021 and 2020
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 three months ended March 31, 2021, net cash used in operating activities was $4,402,126. Cash flows used in operating activities for the three months ended March 31, 2021 were primarily related to purchases of investments totaling $9,430,664, offset by repayments of investments of $5,036,657. For the three months ended March 31, 2020, net cash used in operating activities was $3,038,963. Cash flows provided in operating activities for the three months ended March 31, 2020 were primarily related to purchases of investments totaling $3,328,296, offset by repayments of investments totaling $221,780.
- 20 -
FINANCIAL CONDITION
As of March 31, 2021, we had cash of $499,157, a decrease of $4,941,422 from December 31, 2020. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies, cash distributions to our shareholders or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to collectively as “temporary investments.” As of the date of this filing, we expect that substantially all of our temporary investments will be redeployed into portfolio company investments by December 31, 2021.
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 engage in borrowing.
CRITICAL ACCOUNTING ESTIMATES
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.
In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition. For more information, refer to our Annual Report on Form 10-K for the year ended December 31, 2020.
OFF-BALANCE-SHEET ARRANGEMENTS
During the three months ended March 31, 2021, 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; |
| · | the success of our investments; |
| · | our relationships with third parties; |
| · | the dependence of our success on the general economy and its impact on the industries in which we invest; |
| · | the ability of our portfolio companies to achieve their objectives; |
| · | our expected financings and investments; |
| · | our regulatory structure and tax treatment; |
| · | the adequacy of our cash resources and working capital; and |
| · | the timing of cash flows, if any, we receive from our investments. |
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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 10, 2021 (related to our year ended December 31, 2020) and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.
| ITEM 4. | CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
As of March 31, 2021, 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 March 31, 2021.
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 |
| 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
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: May 17, 2021 | By: | /s/ Douglas M. Polinsky |
| Douglas M. Polinsky | ||
| Chief Executive Officer | ||
| Date: May 17, 2021 | By: | /s/ Joseph A. Geraci, II |
| Joseph A. Geraci, II | ||
| Chief Financial Officer | ||
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Douglas M. Polinsky, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Mill City Ventures III, Ltd.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 17, 2021 | /s/ Douglas M. Polinsky |
| Chief Executive Officer |
Exhibit 31.2
SECTION 302 CERTIFICATION
I, Joseph A. Geraci, II, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Mill City Ventures III, Ltd.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 17, 2021 | /s/ Joseph A. Geraci, II |
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Mill City Ventures III, Ltd. (the “Company”) on Form 10-Q for the quarter ended March 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas M. Polinsky, Chief Executive Officer of the Company, and I, Joseph A. Geraci, II, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Douglas M. Polinsky | |
| Douglas M. Polinsky | |
| Chief Executive Officer | |
| May 17, 2021 | |
| /s/ Joseph A. Geraci, II | |
| Joseph A. Geraci, II | |
| Chief Financial Officer | |
| May 17, 2021 |