10-K
1
tm211205d1_10k.htm
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark
One)
For the fiscal year ended December 31, 2020 or
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)
(State of incorporation) (I.R.S. Employer Identification No.)
(Address of principal executive offices) (Zip Code)
Former name, former address and former fiscal
year, if changed since last report
Registrant’s telephone number, including
area code: (952) 479-1923
Securities registered pursuant to Section 12(b) of
the Act:
Title of Each Class Name of Each Exchange on which Registered
None
Securities registered pursuant to Section 12(g) of
the Act:
Common stock, $0.001 par value per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
̈ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ̈ No x
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 the 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 website, 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, or a
smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,”
“non accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
̈ Yes x No
The aggregate
market value of the voting stock held by persons other than officers, directors and more than 5% shareholders of the registrant
as of June 30, 2020 was approximately $1,512,115 based on the closing sales price of $0.60 per share as reported on the OTCPK.
As of March 10, 2021, there were 10,785,913 shares of the registrant’s common stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
None.
Mill City Ventures III, Ltd.
Form 10-K
Table of Contents
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 2
Item 2. Properties 3
Item 3. Legal Proceedings 3
PART II 4
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 9
ITEM 9A CONTROLS AND PROCEDURES 28
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 30
ITEM 11 EXECUTIVE AND DIRECTOR COMPENSATION 33
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 35
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 36
SIGNATURES 37
PART I
ITEM 1
BUSINESS
Overview
Mill City
Ventures III, Ltd, (the “Company” or “we”), is a Minnesota corporation that was incorporated in January 2006.
From our inception until December 13, 2012, we were a development-stage company 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 “19440 Act”). We operated as a BDC until
we withdrew our BDC election by filing a Form N-54C with SEC on December 27, 2019. Presently, we are engaged in the business
of providing short-term specialty finance on an opportunistic basis. Nevertheless, we manage our investments to ensure that no
more than 40% of our total assets consist of investment securities so as to avoid the regulatory requirements of the 1940 Act.
Business
as a BDC
As a BDC,
we primarily focused on investing in or lending to private and small-capitalization public companies and making managerial assistance
available to such companies. Our investments included stock of or membership interests (typically referred to as units) in private
companies, small-cap public company stocks, and promissory notes. In some cases the stock or membership interests we acquired was
preferred stock or units, and in other cases the stock or membership interests acquired was common stock or units. In connection
with our investments in promissory notes, we also obtained warrants to purchase common stock.
Revenues
from our operations as a BDC relate to the earnings we received from our portfolio investmenst.
Our
2020 Portfolio
At
December 31, 2020, we held investments in eight portfolio companies, which had an aggregate amortized cost of $4,968,576 and
a fair value of $6,667,897. At December 31, 2019, we held investments in eight eligible portfolio investments, which
had an aggregate amortized cost of $1,976,370 and a fair value of $1,740,897. Our portfolio investments at December 31, 2020
were as follows:
1
Dispositions of Investments
In 2019, we disposed of a substantial
portion of the investments we had earlier made as a BDC. These dispositions were effected by management in an orderly fashion,
at prices management believed to be fair, and at times management believed to advantageous. In all, we disposed of $9,110,237 in
investments (measured at fair value) in 2019.
Management
Currently,
Mr. Douglas M. Polinsky, the Chief Executive Officer and Chairman of our Board of Directors, and Joseph A. Geraci, II,
our Chief Financial Officer and a director of the Company, serve as our senior management team.
Strategic
Direction
As of
the time of this filing, we remain a public reporting company and file periodic reports with the SEC. Since the withdrawal of our
BDC election, we have focused our business on the provision of short-term specialty financing to small business, small-cap public
companies and high-net-worth individuals. We structure these investments carefully so as to avoid them, to the extent possible,
from being characterized as “investment securities” under federal securities laws. In this regard, we generally seek
to provide financing solutions that mature in nine months or less. Because of the short-term nature of our investments, and our
ability to manage the due-diligence process swiftly and efficiently, our finance solutions typically involve high rates of interest
and premiums, as well as other terms advantageous to us. In addition, to avoid becoming subject to the regulatory requirements
of the 1940 Act, we monitor our investment holdings as a whole to ensure that investments and other holdings which may be considered
“investment securities” do not comprise more than 40% of our total assets.
Pending
the consummation of investments, we intend to keep the majority of our assets in cash, cash equivalents such as money-market investments,
U.S. government securities or high quality debt securities maturing in one year or less from the time of investment.
ITEM 1A
RISK FACTORS
You should
consider the following risk factors, in addition to the other information presented or incorporated by reference into this Annual
Report on Form 10-K, in evaluating our business and any investment decision relating to our securities.
Risks
Related to our Business
We
have little operating history upon which to evaluate our business.
We only
recently – within the past 13 months - withdrew our election to be treated as a BDC under the 1940 Act, and during that same
short span of time have refocused our business on providing short-term specialty finance to private businesses, small-cap public
companies and high-net-worth individuals. The financial results included in this report relate to our business operations as a
BDC during 2019 (a business in which we are no longer engaged) and our new short-term specialty finance business operations during
2020. Given that our current business has been developed and pursued over the prior 13 months, and the comparative prior-year financials
included in this report reflect the results of operations for a different business, investors have little means to evaluate the
likelihood of our future success.
We
may need to raise additional capital in the near future to fund operations, and such capital may not be available to us in sufficient
amounts or on acceptable terms.
For the
time being, management believes that our current cash is sufficient to continue operations for the foreseeable future, and has
no potential or actual plans to seek additional financing. Nevertheless, various future developments may cause us to seek or require
additional financing.
Additional
financing could be sought from a number of sources, including but not limited to additional sales of equity or debt securities,
or loans from banks, other financial institutions or affiliates of the Company. We cannot, however, be certain that any such financing
will be available on terms favorable or acceptable to us if at all. If additional funds are raised by the issuance of our equity
securities, such as through the issuance of stock, convertible securities, or the issuance and exercise of warrants, then the ownership
interest of our existing shareholders will be diluted. If additional funds are raised by the issuance of debt or other equity instruments,
we may become subject to certain operational limitations, and such securities may have rights senior to the rights of our common
shareholders. If adequate funds are not available on acceptable terms, we may be unable to consummate acquisitions or investments
desired by our management and board.
2
Our
ability to identify and consummate investment opportunities, and any need we may have for additional capital, will almost certainly
be affected by general economic conditions.
General
economic conditions will almost certainly impact our ability to (i) identify and pursue and consummate investment opportunities,
and (ii) if necessary, seek and obtain additional financing on terms acceptable or favorable to us, if at all. Therefore,
a deterioration in general economic conditions may slow the development of our business.
We
are highly dependent on the services provided by certain executives and key personnel.
Our success
depends in significant part upon the continued service of our senior management personnel. In particular, the Company is materially
dependent upon the services of Douglas M. Polinsky, our Chief Executive Officer and Chairman, and Joseph A. Geraci, II, our
Chief Financial Officer and a director of the Company. Although we currently have employment agreements with these individuals,
these agreements will not necessarily prevent the departure of these executives, whether due to death, disability, retirement or
otherwise. Any loss of services provided by these executives would likely have a material and adverse effect on our operations
and ability to execute our business plans.
Our
articles of incorporation grant our board of directors the power to designate and issue additional shares and classes of common
and preferred stock.
Our authorized
capital consists of 250,000,000 shares of capital stock. Pursuant to authority granted by our articles of incorporation, our board
of directors, without any action by our shareholders, may designate and issue shares in such classes or series (including other
classes or series of preferred stock) as it deems appropriate, and may establish the rights, preferences and privileges of such
shares, including dividends, liquidation and voting rights. The rights of holders of new classes or series of stock that may be
so designated and issued could be superior to the rights of holders of our common shares. The designation and issuance of shares
of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore,
any issuances of additional stock—common or preferred—will dilute the ownership interest of then-current holders of
our capital stock and may dilute our book value per share.
Our
stock is thinly traded, which may make it difficult to sell shares of our common stock.
Our common
stock is thinly traded and may remain thinly traded for the foreseeable future. A low trading volume will generally make it difficult
for our shareholders to sell their shares as and when they choose. Furthermore, low trading volumes are generally understood to
depress market prices. As a result, our shareholders may not always be able to resell shares of our common stock publicly at the
time and prices that they feel are fair or appropriate.
We
may not pay dividends on our common stock.
We may
not pay cash dividends on our common stock and have only a limited history of paying dividends. Accordingly, investors in our common
stock may only obtain a return on their investment, if any, upon a subsequent sale of their shares.
ITEM 2
PROPERTIES
The Company
is subject to two 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.
ITEM 3
LEGAL PROCEEDINGS
None.
3
PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our common
stock is listed for trading on the OTCQB under the symbol “MCVT”. The transfer agent and registrar for our common stock
is Pacific Stock Transfer Company, 6725 Via Austi Parkway, Suite 300, Las Vegas, NV 89119. The following table sets forth
the high and low bid prices for our common stock as reported by the OTCPK in 2019 through September, and the OTCQB from October through
present. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual
transactions. Trading in our common stock during the period represented was infrequent, exemplified by low trading volume and many
days during which no trades occurred.
Market Price Market Price
(High/Low) (High/Low)
Holders
As of
the date of this filing, we had approximately 253 holders of record of our common stock.
Dividends
On
February 15, 2019, our Board of Directors declared a cash dividend of $0.05 per share to our shareholders of record
as of March 8, 2019. The dividend was paid on March 15, 2019.
On
December 8, 2020, our Board of Directors declared a cash dividend of $0.05 per share to our shareholders of record
as of December 21, 2020. The dividend was paid on January 4, 2021.
Securities
Authorized for Issuance Under Equity Compensation Plans
As
of December 31, 2020, we had no outstanding options, warrants or other rights to purchase any equity securities of the
Company
under any equity compensation plan or “individual compensation arrangement,” as defined in Item 201 of Regulation S-K.
Furthermore, as of the date of this filing, we are not a party to any equity compensation plan, nor are we obligated under any
“individual compensation arrangement” to issue any options, warrants, rights or other securities. We are not required
by applicable state law or the listing standards of any self-regulatory agency (e.g., the OTCQX, NASD, AMEX or NYSE) to obtain the
approval of our security holders prior to issuing any such compensatory options, warrants or other rights to purchase securities
of the Company.
4
In August 2020,
the Compensation Committee approved, and the Company issued, 50,000 shares of restricted stock to each of Mr. Douglas M. Polinsky
and Joseph A. Geraci, II. The shares vest upon the one-year anniversary of their issuance and until such time are subject
to forfeiture.
Recent Sales of Unregistered Securities
None.
Recent Purchases of Securities
During
the course of 2020, the Company engaged in the following repurchases of its common stock, all of which were consummated in private
transactions:
ITEM 7
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 set forth below should be read in conjunction with our
audited financial statements, and notes thereto, filed together with this Form 10-K.
Cautionary
Note Regarding Forward-Looking Statements
Some of
the statements made in this section of our report are forward-looking statements. These forward-looking statements generally relate
to and are based upon our current plans, expectations, assumptions and projections about future events. Our management currently
believes that the various plans, expectations, and assumptions reflected in or suggested by these forward-looking statements are
reasonable. Nevertheless, all forward-looking statements involve risks and uncertainties and our actual actions or future results
may be materially different from the plans, objectives or expectations, or our assumptions and projections underlying our present
plans, objectives and expectations, which are expressed in this report. An example of specific factors that might cause our actual
results to differ from our current expectations include but are not limited to:
• The risks surrounding the new types of financing solutions we provide.
The foregoing list is not exhaustive, and
readers are urged to read carefully and consider the risk factors described elsewhere in this report. In light of the foregoing,
prospective investors are cautioned that the forward-looking statements included in this filing may ultimately prove to be inaccurate—even
materially inaccurate. Because of the significant uncertainties inherent in such forward-looking statements, the inclusion of such
information should not be regarded as a representation or warranty by the Company 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.
5
Results of Operations
For the Year Ended December 31,
Investment Income:
Operating Expenses:
For the year ended December 31, 2020, we earned
$44,026 in interest payments from one investment— DBR Enclave US Investors, LLC;— an aggregate of $993,795 from
six promissory note investments; an aggregate of $26,994 in bank interest on cash balances and note receivable; an aggregate
of $217,360 in origination fees; and an aggregate of $15,462 in dividend payments from four
investments—Manning & Napier, Inc., Educational Development Corp., Manhattan Bridge Capital, Inc.;
and Windstream Holdings, Inc.
For the year ended December 31, 2019, we earned
$78,264 in interest payments from one eligible portfolio company— DBR Enclave US Investors, LLC — an additional
$33,925 in bank interest on cash balances and note receivable; an aggregate of $46,293 in dividend payments from five
eligible portfolio companies—Manning & Napier, Inc., Simulations Plus, Inc., Tessco
Technologies, Inc., Educational Development Corp., and Taitron Components, Inc.; and $3,180 in dividends received
from non-eligible portfolio companies.
As the
table above indicates, we incurred operating expenses aggregating $735,790 for the year ended December 31, 2020, and $834,430
for the year ended December 31, 2019. A discussion of the various components of our operating expenses for these periods is
set forth below.
General Operating Expenses. Our
general operating expenses were $83,447 for the year ended December 31, 2020 and $111,757 for the year ended December 31,
2019. The decrease in the current period is primarily related to expenses incurred in 2019 for an off-site board meeting as well
as a decrease in our office lease premiums for the year 2020.
Legal and Accounting Expenses.
Our legal and accounting expenses were $175,612 for the year ended December 31, 2020 and $209,897 for the year ended December 31,
2019. The decrease in the current period is primarily related to costs we incurred during 2019 related to the process of planning
for, seeking, and obtaining authority for, the withdrawal of our BDC election.
Executive Management Compensation.
Our executive management compensation was $301,494 for the year ended December 31, 2020 and $340,003 for the year ended December 31,
2019. The decrease in the current period is primarily related to a one-time bonus payment made during the year 2019.
For the
year ended December 31, 2020 our net investment gain was $561,847. For the year ended December 31, 2019, our net investment
loss was $672,768. The increased net investment gain during 2020 was primarily the result of higher interest income earned during
2020 from the short-term specialty finance solutions we provided in the form of short-term promissory notes bearing higher rates
of interest and return, including related origination fees, than we were able to obtain when operating as a BDC.
6
Financial
Condition
For the
year ended December 31, 2020, we had an increase in net assets of $1,572,354. This increase in net assets was primarily due
to the appreciation of our portfolio holdings. Our net assets decreased by $1,210,356 for the year ended December 31, 2019,
primarily due to our payment of a dividend during 2019.
Liquidity
and Capital Resources
Summary
cash flow data is as follows:
Cash flows provided (used) by:
We are
not a party to any credit facilities or other sources of liquidity, and we have no present plans to become party to any credit
facility. As a result, our $5,440,579 of cash at the end fiscal 2020 and our $8,066,656 of cash at the end of fiscal 2019 constituted
our sole source of liquidity. Management believes cash on hand is sufficient to fund our anticipated operational and financing
activities through fiscal 2021.
Capital
Expenditures
We did
not have any material commitments for capital expenditures in fiscal 2020 and we do not anticipate any such capital expenditures
for fiscal 2021.
Off-Balance
Sheet Arrangements
We do
not have any off-balance sheet arrangements, nor are we a party to any contract or other obligation not included on its balance
sheet that has, or is reasonably likely to have, a current or future effect on our financial condition.
Critical
Accounting Policies
Critical
accounting policies are policies that are both most important to the portrayal of the Company’s financial condition and results,
and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Our critical accounting policies relate to investment valuation and
interest and dividend income as an investment company.
Investment Valuation
Investment
transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from
the repayment or sale and the amortized cost basis of the investment without regard to unrealized gains or losses previously recognized,
and include investments charged off during the period, net of recoveries. Unrealized gains or losses primarily reflect the change
in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized.
Investments
for which market quotations are readily available are typically valued at such market quotations. In order to validate market
quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the
source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not
readily available are valued at fair value as determined in good faith by our Board of Directors or, during our time as BDC,
by the Valuation Committee of our Board of Directors, based on, among other things, the input of our executive management,
Audit Committee and independent third party valuation expert that may be engaged by management to assist in the valuation of
our portfolio investments. Valuation determinations are in all cases made in conformity with the written valuation policies
and procedures respecting the valuation of Company investments.
7
Use
of Estimates
Our financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The
application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly
from these estimates.
8
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item Page
Reports of Independent Registered Public Accounting Firm 10
Statements of Cash Flows — Years ended December 31, 2020 December 31, 2019 15
Notes to Financial Statements 18
9
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Shareholders’ of Mill City Ventures III, Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance
sheets of Mill City Ventures III, Ltd. (the Company) as of December 31, 2020 and 2019, including the investment schedules
and the related statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period
ended December 31, 2020 and 2019, and the related notes (collectively referred to as the financial statements). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Emphasis of Matter – Investment
Valuation
As explained in Note 7 to the financial
statements, the accompanying financial statements include investments valued at $3,367,897 and $834,200 for 2020 and 2019, respectively,
whose fair values have been estimated by the valuation committee and management in absence of readily determinable fair values.
Such estimates are based on financial and other information provided by management in absence of readily determinable fair values.
Such estimates are based on financial and other information provided by management of its portfolio companies and pertinent market
and industry data. These investments are valued in accordance with FASB ASC 820, “Fair Value Measurement”, which requires
the Company to assume that the portfolio investments are sold in a principal market to market participants. The Company has considered
its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to these valuation techniques are observable
or unobservable. The investments are valued based on unobservable inputs as of December 31, 2020 and 2019 of $3,367,897 and
$834,200, respectively. Because such valuations, and particularly valuations of private investments and private companies, are
inherently uncertain, they may fluctuate significantly over short periods of time. These determinations of fair value could differ
materially from the values that would have been utilized had a ready market for these investments existed.
Critical Audit Matters
The critical audit matters communicated
below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved
our especially, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
10
Valuation of investments which utilize
significant unobservable inputs
Boulay PLLP
We have served as the Company’s auditor
since 2019
Minneapolis, Minnesota
March 10, 2021
11
Mill City
Ventures III, Ltd.
Balance
Sheets
ASSETS
Receivable for sale of investments 19,313 —
Interest and dividend receivables 65,911 6,500
Property and equipment, net — 2,071
LIABILITIES
Accrued tax expense 13,722 —
Long-term deferred taxes 258,000 —
Commitments and Contingencies
SHAREHOLDERS EQUITY (NET ASSETS)
Net Asset Value Per Common Share $ 1.08 $ 0.91
The accompanying notes are an integral part
of these financial statements.
12
Mill City
Ventures III, Ltd.
Statements
of Operations
Year Ended
Investment Income
Operating Expenses
Depreciation and amortization 2,071 2,574
Realized and Unrealized Gain (Loss) on Investments
Net Realized and Unrealized Gain (Loss) on Investments 1,940,124 15,782
Provision for Income Taxes 288,401 —
Net Increase (Decrease) in Net Assets Resulting from Operations per share:
Basic and diluted $ 0.20 $ (0.06 )
The accompanying
notes are an integral part of these financial statements.
13
Mill City Ventures III, Ltd.
Statements of Shareholders’ Equity
For
the years ended December 31, 2020 and 2019
Net realized gain on investment transactions — — — — 5,330 — 5,330
Net realized gain on investment transactions — — — — 3,252,620 — 3,252,620
Depreciation in value of investments — — — — — (3,236,838 ) (3,236,838 )
The accompanying notes are an integral part
of these financial statements.
14
Mill
City Ventures III, Ltd.
Statements of Cash Flows
Year Ended
Cash flows from operating activities:
Proceeds from sales of investments sold short — 30,119
Stock-based compensation 61,000 —
Depreciation & amortization expense 2,071 2,574
Deferred income taxes 271,722 —
Changes in operating assets and liabilities:
Prepaid expenses and other assets 5,197 32,299
Payable for investment purchase —
Accounts payable and other liabilities (10,993 ) (28,677 )
Net cash provided (used) in operating activities (2,463,157 ) 7,653,905
Cash flows from financing activities:
Payments for repurchase of common stock (162,920 ) —
Payments for common stock dividend — (553,370 )
Supplemental disclosure of cash flow information:
Non-cash financing activities:
Dividend to common stock shareholders $ 539,296 $ —
The accompanying notes are an integral part
of these financial statements.
15
Mill City Ventures III, Ltd.
Investment Schedule
As of December 31, 2020
Investment / Industry Cost Fair Value Percentage of Net Assets
Short-Term Non-banking Loans
Real Estate - 15% secured loans
Common Stock
Consumer
Preferred Stock
Warrants
Other Equity
16
Investment Schedule
As of December 31,
2019
Equity Investments
Advertising
Consumer
Financial
Healthcare
Information Technology
Leisure & Hospitality
Oil & Gas
Publishing
(2) Interest is presented on a per annum basis.
(8) Investment is not an income-producing investment.
The accompanying notes are an integral part
of these financial statements.
17
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 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.
Because
we operated as a BDC or investment company from 2013 through December 27, 2019, the 2019 financial statements in this report
reflect our operations as a BDC subject to the 1940 Act including our December 31, 2019 balance sheet. During that time, we
were primarily focused on investing in or lending to privately held and small capitalization publicly traded U.S. companies, and
making managerial assistance available to such companies. A majority of our investments by dollar amount were structured as purchases
of preferred or common stock or loans evidenced by promissory notes that may have been convertible into stock by their terms or
that may have been accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investment objective
is to generate income and capital appreciation that ultimately became realized gains.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 7 – Fair Value of Financial Instruments” below. The Company presents
its financial statements as 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, during our time as BDC, 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.
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