UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20162019 or
¨ | 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 of incorporation) | (I.R.S. Employer Identification No.) |
Wayzata, Minnesota | 55391 |
(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 |
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-knownwell known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Nox
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¨ Nox
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-TST (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,“smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer¨ | Accelerated filer¨ | Smaller reporting companyx | |
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 Act).¨ Yesx 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, 20162019 was approximately $1,644,442$1,131,578 based on the closing sales price of $0.65$0.59 per share as reported on the OTCQX.OTCPK. As of March 17, 2017,30, 2020, there were 12,151,49311,067,402 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
Overview
Mill City Ventures III, Ltd., formerly known as Poker Magic, Inc. (the “Company” or “we”), is a Minnesota corporation that was incorporated in January 2006. Until December 13, 2012, we were a development-stagedevelopmentstage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. On December 13, 2012, we filed a Form N-8A with the Securities and Exchange Commission (“SEC”), notifying the SEC of our intent to register as an internally managed, non-diversified, closed-end investment company under the Investment Company Act of 1940 (the “1940 Act”). On February 7, 2013, we filed Form N-54A to become a business development company (“BDC”) under the 1940 Act. Presently, we are regulatedWe operated as a BDC and intenduntil we withdrew our election to be taxedtreated as a regulatedBDC by filing a Form N-54C with SEC on December 27, 2019. As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC, and we are seeking opportunities to invest in or acquire one or more businesses. Nevertheless, any investment company.we make in business will be limited and structured in such a way as to ensure that no more than 40% of our total assets consist of investment securities to avoid inadvertent regulatory requirements under the 1940 Act.
Business Model and Strategyas a BDC
As a BDC, we primarily focusfocused on investing in or lending to private and small-capitalizationsmallcapitalization 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, smallcap 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.
A BDC generally provides shareholders with the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits of investing in emerging-growthemerginggrowth or expansion-stage companies that are privately or publicly owned. As permitted byRevenues from our operations as a BDC regulations, we may acquire securities directly from private and small-cap public issuers, their affiliates, or from third parties, and may acquire securities issued by small-cap public issuers in open-market purchases effected through public exchanges and automated quotation systems.
Our revenues relate to the earnings we receivereceived from our portfolio investments. Our objective is to obtain superior returns from investments in securities and other investment opportunities available to BDCs under the 1940 Act. We intend to invest capital in portfolio companies for purposes of financing acquisitions, organic growth, recapitalizations, buyouts and working capital. In this regard, buyouts generally include transactions that involve the acquisition of a controlling interest in an entity, either by management or other investors. Organic growth refers to growth through the internal operations of the company, whether through investments in marketing initiatives, capital expenditures or other internal growth initiatives, rather than growth by means of acquisitions.
We plan to identify potential investments through multiple sources, including without limitation private equity sponsors, investment bankers, brokers, professional contacts, and owners and operators of businesses. We expect to base our investment decisions on our analyses of actual and potential business operations, asset valuations and viable exit strategies to establish appropriate pricing and maximize our return on investment. Subject to regulations applicable to BDCs, we plan to invest in private companies, small-cap public stocks, notes and other forms of debt, investment contracts, and other investments commonly referred to as securities.
Competition
As a BDC, we compete with strategic buyers, private equity funds, subordinated debt funds and other buyers and financing sources, including traditional financial services companies such as finance companies, commercial banks, investment banks and other equity and non-equity based investment funds. Some of our competitors will be substantially larger and have considerably greater financial resources than we do. Competitors may have a lower cost of funds and many have access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. Competitive pressures may have a material adverse effect on our results of operations. In addition, as a result of this competition, we may be unable to take advantage of attractive investment opportunities and meet our investment goals.
Competitive Advantages
We believe that we are well positioned to secure appropriate investments in target companies for the following reasons:
Investment Process
Prospective Portfolio Company Characteristics
We have identified several criteria that we believe will prove important in achieving our investment objectives with respect to target portfolio companies. These criteria will provide general guidelines for our investment decisions. Nevertheless, not all of these criteria will be met by each prospective portfolio company in which we choose to invest.
Due Diligence
If we believe a target portfolio company generally meets the characteristics described above or if we believe that certain of the most important characteristics for that particular target portfolio company or the industry in which it operates are met, or if we have other reasons to believe in the potential profitability of an investment in a target portfolio company, we may perform initial due diligence on that company. Our due-diligence examination for each target portfolio company will differ based on a number of factors but is generally likely to include our:
The assessments delineated above provide our general approach for our investment decisions, although not all of such activities will be followed in each instance, or some may be stressed moreso than others depending on facts and circumstances. Upon successful completion of this preliminary evaluation, we will decide whether to move forward towards negotiating a letter of intent and, thereafter, definitive documentation for our investment. Depending on timing, we may not use a letter of intent and will instead proceed directly to definitive documentation.
Types of Investments
We expect to engage in various investment strategies in order to achieve our overall investment objectives. The particular type of investment strategy we select will depend, among other things, upon market opportunities, the skills and experience of our management and Board of Directors and our overall portfolio composition. Our strategies generally seek to provide (i) in the case of debt, current cash yields and favorable loan-to-value ratios, or other financial guarantees or credit enhancements with respect to loan collateral, and (ii) in the case of equity, favorable long-term growth and income potential together with viable exit or liquidity strategies.
Debt Investments
We intend to tailor the terms of each debt investment we make to the facts and circumstances of the transaction and prospective portfolio company, negotiating a structure that seeks to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan. Our expected primary source of return on debt investments is the monthly cash interest we collect on those investments. The particular types of debt investments we may make include, but are not limited to, the following:
Equity Investments
Like debt investments, we intend to tailor the terms of each equity investment we make to the facts and circumstances of the transaction and prospective portfolio company, negotiating a structure that seeks to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan. As an equity holder, the rights we will generally seek to protect or obtain include minority rights, event-driven rights to “put” or sell our equity back to the portfolio company or certain affiliates or sponsors, and registration rights such as “demand” or “piggyback” registration rights. We may invest in common stock and preferred stock, and may receive warrants in connection with our investments. When we make a debt investment, we may also be granted equity participation in the form of warrants to purchase common equity in the company in the same class of security that the owners or equity sponsors receive upon funding. In addition to purchasing equity securities from the issuer or its affiliates, we may choose to purchase publicly traded equity securities of the issuer, if any, on the open market (i.e., the particular stock exchange or automated quotation system on which the issuer’s equity primarily trades).
Ongoing Relationships with Portfolio Companies
Monitoring
We monitor our portfolio companies in order to determine whether they are meeting our financing criteria and their respective business plans. We may decline to make additional investments in portfolio companies that do not continue to meet our financing criteria or that fail to successfully execute their business plans. Of course, we may choose to make additional investments in portfolio companies that do not do so, but that we believe will nevertheless perform well in the future.
We expect to monitor the financial trends of each portfolio company and their respective industries to assess the appropriate course of action for each company and to evaluate our overall portfolio quality. In this regard, our management team will monitor the status and performance of each individual company on at least a quarterly and, in some cases, a monthly basis.
We have several methods of evaluating and monitoring the performance and fair value of our debt and equity positions. By way of example, we may:
We expect that current and annual financial statements of portfolio companies will often be available to us to assist us in our fair value reporting obligations under the 1940 Act.
Managerial Assistance
As a BDC, we offer, and in some cases may provide, significant managerial assistance to those of our portfolio companies intended to qualify as “eligible portfolio companies” under the 1940 Act. We expect that this assistance, if any, will typically involve monitoring the operations of our portfolio companies, participating in their board and management meetings, consulting with and advising their officers and providing other organizational, financial, strategic and transactional guidance.
Our 20162019 Portfolio
At December 31, 2016,2019, we held investments in 22eight portfolio companies, which had an aggregate amortized cost of $1,976,370 and a fair value of $1,740,897.At December 31, 2018, we held 24 eligible portfolio investments, which had an aggregate amortized cost of $6,574,490$6,193,461 and a fair value of $6,211,043, and our non-eligible portfolio holdings had an aggregate cost of $823,418 and a fair market value of $775,959. At December 31, 2015, we held 18 eligible portfolio investments, which had an aggregate amortized cost of $6,175,345 and a fair value of $4,863,249.$9,354,622. Our eligible portfolio investments at December 31, 20162019 were as follows:
BDC Regulation
The following discussion is a general summary of some of the material prohibitions and restrictions governing BDCs generally. It does not purport to be a complete description of all the laws and regulations affecting BDCs.
The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their directors and officers and principal underwriters and certain other related persons, and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of (i) 67% or more of such company’s shares present at a meeting or represented by proxy if more than 50% of the outstanding shares of such company are present or represented by proxy or (ii) more than 50% of the outstanding shares of such company.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than “qualifying assets” listed in Section 55(a) of the 1940 Act unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s total assets. The principal categories of qualifying assets relevant to our business are the following:
Dispositions of an “ eligible portfolio company ” purchased from the issuerInvestments
In 2019, we disposed of such securities, from any person who is, or who was within the 13 months prior to the date of purchase, an affiliatea substantial portion of the issuer, or from any other person (subjectinvestments we had earlier made as a BDC. These dispositions were effected by management in an orderly fashion, at prices management believed to limitation by SEC rules),be fair, and at times management believed to advantageous. In all, we disposed of $9,110,237 in any case in transactions not involving any public offering. The 1940 Act defines an “eligible portfolio company”investments, nearly all of which remains as any issuer which:
Significant Managerial Assistance
A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described above. However, to count portfolio securities as qualifying assets for the purpose of the foregoing 70% test, the BDC must either control the issuer of the securities or offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, whether through its directors, officers or employees, offers to provide, and, if accepted, does in fact so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.
Temporary Investments
Pending investment in other types of qualifying assets, as described above, 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, so that at least 70% of our assets are qualifying assets. We plan to invest in U.S. treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests imposed on us by the Internal Revenue Code to qualify for tax treatment as a “regulated investment company” (“RIC”) for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Senior Securities; Coverage Ratio
We will be permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock, but only if our “asset coverage,” as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must not make any dividend distribution to our shareholders or repurchase securities unless we meet the applicable asset-coverage ratios at the time of the dividend distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes.
Other
We will be periodically examined by the SEC for compliance with the 1940 Act, the rules and regulations thereunder, and good governance practices. We will not “concentrate” our investments (i.e., invest 25% or more of our assets in any particular industry, determined at the time of investment). We will be required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from indemnifying any director or officer against any liability to our shareholders arising from willful malfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, and review these policies and procedures annually for their adequacy and the effectiveness of their implementation.report.
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, both serve as our senior management team. Our ability
Strategic Direction
As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC. Although we are no longer a BDC and are no longer governed by the 1940 Act, we have yet to achieve our investment objective will depend on our senior management team’s abilityacquire a new operating business or decide upon a new business plan. In general, while we are presently seeking opportunities to identify, evaluate, finance and invest in suitable companiesor acquire one or more businesses, we have determined that meetany investment we make to acquire or begin operating a new business will be limited and structured in such a way as to ensure that we will not again become subject to the 1940 Act.
Pending our investment goals. Accomplishing this result inacquisition of a cost-effective manner will largely be a function of managing the due-diligence and investment process, efficiently monitoringbusiness or investments we may make, and,we intend to keep the majority of assets in some cases, accessing financing sources on acceptable terms.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, which we refer to, collectively.
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
Our management team has no prior experience managingBecause we have not definitively settled on a BDC.particular line of business as of the date of this filing, investors in our common stock risk investing in a business or model in which they presently cannot identify and evaluate business risks.
On December 13, 2012,27, 2019, we changedwithdrew our election to be treated as a business development company (BDC) after having received approval for such action from our shareholders. As a result of that action and the gradual disposition of investments we made earlier, fewer than 40% of our total assets are presently composed of investment securities. Accordingly, we are no longer subject to the provisions of the Investment Company Act of 1940.
After the date of the withdrawal of our BDC election and through the date on which this report was filed, we consummated one additional investment in a short-term promissory note issued by a real estate concern. We structured that investment, however, in such a way that it would not constitute an “investment security” for purposes of the Investment Company Act. For the time being, we expect to continue availing ourselves of suitable investment opportunities as they arise and structuring any such investments we do make so as to prevent the Company from being subject to the Investment Company Act. In this regard, we are presently industry agnostic and seeking to avoid concentrations of investments in any one company that would exceed 40% of our total assets. At the same time, we are seeking and considering one or more new lines of business, which we may pursue through acquisition or organic development. In sum, we are seeking new business opportunities that may involve an acquisition or our own development of a new business; but pending identifying and executing on any such opportunity, we intend to remain opportunistic with our cash assets in hopes of consummating investments that earn a return for the Company and our investors, while being careful to structure such investments in ways that avoid causing the Company to become an internally managed, closed-end“investment company” regulated under the Investment Company Act of 1940.
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Regardless of the strategic course our management and board eventually determine to take, for the time being our opportunistic approach to investment companyopportunities presents unique risks to investors in our common stock that are extremely difficult to quantify. As such, investors are practically unable to identify specific or general risks and subsequently electedevaluate those risks in light of their own risk tolerances. This makes an investment in our common stock particularly risky inasmuch as the strategic direction we eventually take may be inconsistent with an investor’s risk tolerance or interest as an investor. This fact, combined with the general illiquidity of our common stock (discussed below), presents significant and meaningful risk that an investor in our common stock may disagree or otherwise be uncomfortable with our strategic direction, and may have difficulty selling our stock at times and at prices they believe are desirable or appropriate. This could cause investors to experience significant losses in any investment in our common stock.
We have no relevant operating history upon which to evaluate our business.
Given the recent withdrawal of our election to be treated as a BDC under the Investment Company Act of 1940, Act. We have no prior experience managing a BDC, which may affectand our abilitydetermination to successfully manage and grow our business.
The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets in specified types of securities, primarily in private companies or small-cap traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Our management team’s lack of experience in managing a portfolio of assets under such regulatory constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. Furthermore, our failure to comply with the complex BDC requirements could cause the SEC to bring an enforcement action against us, expose us to private claims and/or cause us to lose our status as a BDC.
We operate in a highly competitive market for portfolio investment opportunities.
We expect that many entities will compete with us to make the types of investments we plan to make in prospective portfolio companies. We will compete with private equity firms as well as other BDCs, investment funds, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources not available to us. These resources may enable our competitors to offer terms that we cannot match. We may lose prospective portfolio investments if we do not match our competitors’ pricing, terms and structure. If, on the other hand, we do match our competitors’ pricing, terms or structure, we may experience decreased net interest income and increased risk of credit losses. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. Importantly, many of our potential competitors have greater experience operating under, or are notagain become subject to the regulatory restrictions thatInvestment Company Act of 1940, the 1940 Act does impose on us as a BDC. Iffinancial results included in this report relate to business operations in which we are no longer engaged. Given that fact, and that we have not abledefinitively settled upon a particular line of business, investors have little means to compete effectively,evaluate the likelihood of our business and financial condition and results of operations will be adversely affected.future success.
We may be unable to make distributions, which failure could materially and adversely affect your investment.
Although we intend to make periodic distributions to our shareholders, we may be unable to achieve operating results that will allow us to make such distributions. For example, the BDC asset-coverage requirements may limit our ability to make distributions. In addition, restrictions and provisions in any future credit facilities may limit our ability to make distributions. Although we intend to elect RIC taxation under the Internal Revenue Code, if we fail to meet certain annual income-distribution requirements, we could lose our RIC status and be subject to corporate-level income tax. Any failure to make distributions or any loss of our RIC status could materially and adversely affect your investment.
Any unrealized losses we experience may be an indication of future realized losses, which could reduce our income available for distribution.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith by our Board of Directors and consistent with our Company’s valuation policy. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation on our statement of operations. Any unrealized losses in our portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us (if a loan), or of its diminishing value (if equity). This could result in future realized losses and, ultimately, income available for distribution in future periods.
Many of our portfolio investments will be recorded at fair value as determined in good faith by our Board of Directors. As a result, there may be uncertainty as to the ultimate value of our investments.
Our investments are expected to consist in material part of securities issued by privately held companies, the fair value of which is not readily determinable. In addition, we will not be permitted to maintain a general reserve for anticipated loan losses. Instead, we will be required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value. Our Board of Directors will value these securities at fair value as they determine in good faith and consistent with the written policies and procedures that we have adopted for this purpose. Where appropriate, our board may utilize the services of an independent valuation firm to assist in the determination of fair value. Because valuations, and particularly valuations of private investments, are inherently uncertain and may be based on estimates, our fair value determinations may differ materially from those that would be assessed if a liquid market for these securities existed. Our net asset value could be adversely affected if we determine the fair value of our investments to be materially higher than the values we ultimately realize from those investments.
If we are unable to source investments effectively, we may be unable to achieve our investment objectives.
Our ability to achieve our investment objective will depend on our senior management team’s ability to identify, evaluate, finance and invest in suitable companies that meet our investment criteria. Accomplishing this result in a cost-effective manner will largely be a function of our management of the investment process, our ability to provide efficient services and our access to financing sources on acceptable terms. In addition to monitoring the performance of our investments, our management team must offer managerial assistance to our portfolio companies. These demands on their time may distract them, slowing the rate of overall investment. To grow, we expect that we will need to hire, train, supervise and manage new employees and to implement computer and other systems capable of effectively accommodating our growth. Our failure to effectively manage our future growth could materially and adversely affect our business, financial condition and results of operations.
We will be exposed to risks associated with changes in interest rates.
General interest rate fluctuations may have a substantial and negative impact on our investments, the value of our common stock and our rate of return on invested capital. A reduction in interest spreads on new investments could also have an adverse impact on our net interest income. An increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates. Also, an increase in interest rates could make investment in our common stock less attractive if we are unable to increase our dividend rate, which could reduce the value of our common stock.
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
Once we become a BDC subject to RIC taxation upon making a RIC election, we may be required to include in our taxable income certain amounts that we have not yet received in cash. Any of these amounts will increase the amounts we are required to distribute to qualify under the RIC rules. In any such event, we would need to obtain cash from other sources to satisfy our RIC-related distribution requirements. If we are unable to so obtain cash, we may fail to qualify for tax treatment as a RIC, and thus could become subject to a corporate-level income tax on all of our income. Accordingly, we may have to sell some of our assets, raise additional debt or equity capital, or reduce new investment originations to meet these distribution requirements and avoid a corporate-level income tax.
If we incur additional debt, it could increase the risk of investing in our Company.
We expect, in the future, that we may borrow from, and issue senior debt securities to, banks, insurance companies and other lenders. In such a case, lenders will have fixed-dollar claims on our assets that are superior to the claims of our shareholders, and we may grant a security interest in our assets in connection with our borrowings. In the case of a liquidation event, those lenders would receive proceeds before our shareholders. In addition, borrowings generally magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value attributable to our common stock to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage; and any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds, and could negatively affect our ability to make distributions on our common stock. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.
As a BDC, we will be required to meet an asset-coverage ratio, calculated as total assets (less all liabilities and indebtedness not represented by senior securities) to total indebtedness represented by senior securities, of at least 200%. If this ratio declines below 200%, we will be unable to incur additional debt and may need to sell a portion of our investments to repay debt when it is otherwise disadvantageous to do so, and we may be unable to make distributions.
Because we intend to distribute substantially all of our income and net realized capital gains to our shareholders once we make a RIC election, we will likely need additional capital to finance our growth.
To qualify for RIC taxation and avoid payment of excise taxes and minimize or avoid payment of income taxes, we intend to distribute to our shareholders substantially all of our net ordinary income and realized net capital gains except for certain net long-term capital gains (which we may retain, pay applicable income taxes with respect thereto, and elect to treat as deemed distributions to our shareholders). As described elsewhere, as a BDC we will be required to meet a 200% asset-coverage ratio limiting the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may require us to raise additional equity at a time when it may be disadvantageouscapital in the near future to do so. While we expect to be able to borrowfund operations, and issue additional debt and equity securities, debt and equity financingsuch 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 not potential or actual plans to seek additional financing. Nevertheless, if we determine to acquire an existing business, or make one or more significant investments, we may 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 terms,or acceptable to us if at all. In addition, as a BDC, we will generally not be permitted to issue equity securities below our net asset value without shareholder approval. 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 us, we could be forced to curtailconsummate acquisitions or cease new investment activities,investments desired by our management and our net asset value could decline.board.
Our Boardability to avail ourselves of Directorsfuture acquisition and investment opportunities as they arise, and any need we may change our investment objective, operating policies and strategies without prior notice or shareholder approval.have for additional capital, will almost certainly be affected by general economic conditions.
Our Board of Directors has the authority from time to time to modify or waive certain of our operating policies and strategies without prior notice (except as required by the 1940 Act) and without shareholder approval. Under Section 58 of the 1940 Act, our Board of Directors may not, however, choose to withdraw our status as a BDC, or change its operations so as to cease to be a BDC, without the prior approval of our shareholders. The effects of any such exercise of authority may adversely affect our business and the value of your investment.
Failure to achieve and maintain effective internal controls could limitGeneral economic conditions will almost certainly impact our ability to detect(i) identify and prevent fraudpursue acquisition and thereby adversely affect our businessinvestment opportunities, and stock price.
Effective internal controls are(ii) if necessary, forseek and obtain additional financing on terms acceptable or favorable to us, to provide reliable financial reports. Nevertheless, all internal control systems, no matter how well designed, have inherent limitations. Even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our most recent evaluationif at all. Therefore, a deterioration in general economic conditions may slow the reorientation of our internal controls resulted in our conclusion that our disclosure controls and procedures were effective. Our inability to maintain an effective control environment may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our stock price.strategic direction.
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 certainour senior management and other key 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. Presently,Although we currently have no written employment agreement with either Mr. Geraci or Mr. Polinsky (their prior written employment agreements having expired in March 2016). Nevertheless, we expect to enter into written employment agreements with Messrs. Polinskythese 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 Geraci in 2017 that will be substantially similaradverse effect on our operations and ability to their prior written agreements. We do not have any key-man insurance in place with respect to Messrs. Geraci and Polinsky.execute our business plans.
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Our articles of incorporation grant our Boardboard of Directorsdirectors 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. Unless otherwise specifically so designated upon issuance, all shares of capital issued we issue will be common stock. Pursuant to authority granted by our articles of incorporation, our Boardboard of Directors,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 othernew 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 (commonstock—common or preferred) preferred—will dilute the percentage of 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 on the OTCQXPink Sheets and we expect that our common stock will generally 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.
Our common stock qualifies as a “penny stock,” whichWe may make it difficult to sell shares ofnot pay dividends on our common stock.
Our common stock is categorized as a “penny stock” subject to the requirements of Rule 15g-9 under the Securities and Exchange Act of 1934. Under this rule, broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. Under applicable regulations, our common stock will generally remain a “penny stock” until and for such time as its per-share price is $5.00 or more (as determined in accordance with SEC regulations), or until we meet certain net asset or revenue thresholds. These thresholds include the possession of net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2,000,000 in the event we have been operating for at least three years or $5,000,000 in the event we have been operating for fewer than three years, and the recognition of average revenues equal to at least $6,000,000 for each of the last three years. We do not anticipate meeting any of the foregoing thresholds in the foreseeable future.
The penny-stock rules severely limit the liquidity of securities in the secondary market, and many brokers choose not to participate in penny-stock transactions. As a result, there is generally less trading in penny stocks. If you become a holder of our common stock, you may not always be able to resell shares of our common stock in public broker’s transaction, if at all, at the times and prices that you feel are fair or appropriate.
Risks Related to our Investments
Our investments may involve significant risks, which could ultimately materially and adversely affect our results of operation, financial condition and the value of our common stock. You could lose all of your investment.
We expect to invest primarily in senior secured term loans, mezzanine debt and selected equity investments issued by privately held and public “small- and micro-capitalization” companies, and may also use short sales and options in connection with our business.
Senior Secured Loans. When we extend senior secured term loans, we will generally take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries, which we expect to help mitigate the risk of default. However, there is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions. In some circumstances, our lien could be subordinate to claims of other creditors. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collectpay cash dividends on the loan should we be forced to enforce our remedies.
Mezzanine Debt. Any mezzanine debt investments will generally be unsecured and subordinated to senior loans. We expect this will result in above-average risk and volatility, which could adversely affect our investment returns. Because mezzanine debt generally does not receive any cash prior to maturity of the debt, the investment will be of greater risk. To the extent interest payments associated with such debt are deferred, such debt will necessarily be subject to greater fluctuations in value based on changes in interest rates, and such debt could subject us to phantom income.
Equity Investments. We expect to make equity investments. In addition, when we invest in senior loans or mezzanine debt, we may acquire warrants in connection with such investments. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. Nevertheless, the equity interests we receive may not appreciate in value and may in fact decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
Short Sales. We may engage in short selling. In certain circumstances, short sales can substantially increase the impact of adverse price movements in our investment positions. A short sale involves the theoretically unlimited increase in the market price of the security and uncertainty as to the availability of such security for purchase—theoretically an unlimited loss.
Options. We may buy or sell (write) both call options and put options, and may do so on a “covered” or an “uncovered” basis. Any options transactions may be part of a hedging tactic (i.e., offsetting the risk involved in another securities position) or as a form of leverage, in which we have the right to benefit from price movements in a large number of securities with a small commitment of capital. These activities involve risks that can be large, depending on the circumstances under which a particular transaction or position is entered into. When we buy an option, a decrease (or inadequate increase) in the price of the underlying security in the case of a call, or an increase (or inadequate decrease) in the price of the underlying security in the case of a put, could result in a total loss of our investment in the option. When we sell (write) an option, the risk can be substantially greater. The seller of an uncovered call option bears the risk of an increase in the market price of the underlying security above the exercise price. This risk is theoretically unlimited unless the option is “covered.” If it is covered, an increase in the market price of the security above the exercise price would cause us to lose the opportunity for gain on the underlying security—assuming it bought the security for less than the exercise price.
Middle-Market Companies. Investments in middle-market companies also involve a number of additional significant risks, including:
The lack of liquidity in our investments may adversely affect our business.
We may invest in private companies and certain public companies. These securities may be subject to legal and other restrictions on resale or otherwise be less liquid than other publicly traded securities. The relative illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve near-term liquidity in our investments. Our investments may occasionally be subject to contractual or legal restrictions on resale or will be otherwise illiquid due to the fact that there is no established trading market for such securities, or such trading market is thinly traded. The relative illiquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of collateral securing our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
Defaults by our portfolio companies could harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other debt holders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets. Such events could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt that we hold and the value of any equity securities we own. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.
When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.
We anticipate making both debt and minority equity investments in our portfolio companies. Therefore, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and may take risks or otherwise act in ways that do not immediately or ultimately serve our interests and that could decrease the value of our portfolio holdings. We will not be in a position to control any portfolio company, and mitigate these risks, by investing in its debt securities or minority equity positions.
The prepayment of our debt investments could adversely impact our results of operations and reduce our return on equity.
We will be subject to the risk that our portfolio investments may be repaid prior to maturity. When this occurs, we generally expect to reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt that has been prepaid, and we could experience significant delays in reinvesting these prepaid amounts. Any future investment in a new portfolio company may also be at lower yields than the prepaid debt. As a result, our results of operations could be materially and adversely affected if one or more of our portfolio companies were to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
Our portfolio companies may incur debt that ranks equally with or senior to our investments.
In some cases, portfolio companies will have other debt ranking equal or senior to the debt securities in which we invest. By their terms, such debt instruments may provide that holders thereof are entitled to receive payment of interest or principal on or before us. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, senior debt holders will typically be entitled to receive full payment before we receive distributions in respect of our investment, if any. In the case of debt ranking equal to our investment, we would have to share distributions on a pro rata basis with other creditors holding such debt upon any insolvency, liquidation, dissolution, reorganization or bankruptcy.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender-liability claims.
Even though we may structure investments as senior loans, if one of our portfolio companies goes bankrupt, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. In addition, lenders such as us can be subject to lender-liability claims when they become too involved in the borrower’s business or exercise control over the borrower.
Investments in equity securities involve a substantial degree of risk.
We may purchase common stock and other equity securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless, and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including the risk of dilution as a result of additional issuances. Even investments in preferred securities involve unique risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights.
Risks Related to Our Operation as a BDC
Our ability to enter into transactions with our affiliates will be restricted.
The 1940 Act prohibits us from participating in certain transactions with certain of our directors, officers and affiliates without the prior approval of our independent directors and, in some cases, the SEC. In this regard, any person owning, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include co-investments in a portfolio company, without prior approval of our independent directors and, in some cases, the SEC. In this regard, if a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons absent the prior approval of the SEC. As a result of these restrictions, the scope of investment opportunities that would otherwise be available to us may be materially limited.
BDC regulations affect our ability to raise additional capital.
We will likely require additional capital. We may acquire additional capital by issuing senior securities or indebtedness, by issuing additional common shares or from securitization transactions. Nonetheless, we may be unable to raise additional capital on favorable terms, if at all. We may issue debt securities or preferred securities, which we refer to collectively as “senior securities,” and we may borrow money from banks or other financial institutions, up to the maximum amount permitted by the 1940 Act. Our ability to pay dividends or issue additional senior securities would be restricted if our asset-coverage ratio were not at least 200%. If the value of our assets declines, we may be unable to satisfy this test. In such a case, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous.
Changes in the laws or regulations governing our business, or in the interpretations thereof, and any failure by us to comply with these laws or regulations, could negatively affect the profitability of our operations.
Changes in the laws, regulations or the interpretations thereof that govern BDCs, RICs or non-depository commercial lenders, could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements, we may have to incur significant compliance expenses or we might have to restrict our operations. If we fail to comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines or criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition.
If our primary investments are not deemed to be qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.
To maintain qualification as a BDC, we must not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. If we fail to meet this “qualifying assets test,” we could be forced to dispose of certain investments, be precluded from investing in the manner described in this Form 10K, or lose our status as a BDC, any of which would have a material adverse effect on our business, financial condition and results of operations. The disposition of such investments may need to occur quickly, which would make it difficult to dispose of such investments on favorable terms. In addition, because these types of investments will generally be illiquid, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss.
If we are unable to qualify for RIC tax treatment, we will be subject to corporate-level income tax, which will adversely affect our results of operations and financial condition.
Provided we qualify for tax treatment as a RIC, we can generally avoid corporate-level federal income taxes on income distributed to our shareholders as dividends. We will not qualify for this pass-through tax treatment, and thus will be subject to corporate-level federal income taxes, if we are unable to comply with the source of income, diversification and distribution requirements contained in the Internal Revenue Code, or if we fail to maintain our registration under the 1940 Act. If we fail to qualify for RIC tax treatment, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution to shareholders and the actual amount of our distributions. As such, any such failure would have a material adverse effect on us, the net asset value of our common stock and have only a limited history of paying dividends, which history relates to the total return obtainable from your investmentperiod of time during which we operated as a BDC. Accordingly, investors in our common stock.stock may only obtain a return on their investment, if any, upon a subsequent sale of shares.
On June 6, 2013,January 1, 2019 we entered intoadopted ASU No. 2016-2, Leases (Topic 842), and its amendments and elected the effective date transition method.
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.
Because our lease does not provide an agreementimplicit 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 approximately 1,917 square feetpayments on a collateralized basis over the term of commercial spacea lease. The weighted average discount rate as of September 30, 2019 was 4.5% and two parking spots, for a period of 62 months. The leased space became available for occupancy on September 23, 2013. The 62-monththe weighted average remaining lease term began on October 1, 2013 and runs through November 30, 2018. The total baseis 3 years.
Under ASC 840, rent expense for office facilities for the year ended December 31, 2016 and December 31, 20152019 was $45,378 and $45,378, respectively.$73,685.
The following is a schedule of the required annual minimum lease payments.
Year | Amount | |||
2017 | $ | 50,311 | ||
2018 | 46,988 | |||
TOTAL | $ | 97,299 |
On March 15, 2017, we filed a complaint in the Superior Court for the State of Arizona, Maricopa County, against defendants Mix 1 Life, Inc., a Nevada corporation, and Messrs. Christopher Larson and Cameron Robb. The complaint alleges a breach of contract on the part of Mix 1 Life for its default on two senior secured promissory notes. The first secured note is convertible into common stock of Mix 1 Life, was purchased on February 6, 2014 in the original principal amount of $500,000 and originally became due on February 6, 2016. The second secured note is not convertible by its terms, was purchased on March 13, 2015 in the original principal amount of $250,000, and originally became due on March 13, 2016. Mr. Larson is a guarantor of Mix 1 Life’s obligations under the promissory notes, and each of Mr. Larson and Mr. Robb caused certain shares of Mix 1 Life common stock to be pledged to us as collateral security for the obligations under the promissory notes. As a result, the complaint also alleges breaches of related security contracts on the part of Messrs. Larson and Robb.None.
The complaint seeks recovery of the full aggregate original principal amount of $750,000, plus accrued but unpaid interest, plus attorney’s fees and other costs of collection and enforcement under the promissory notes and related security documents, from each of Mix 1 Life and Mr. Larson, and further seeks recovery of all attorney’s fees and costs of collection and enforcement of the related security documents from Mr. Robb. The complaint also seeks (i) appointment of a receiver, pursuant to an Arizona state statute, over the business operations of Mix 1 Life to preserve and liquidate our collateral, and (ii) an equitable relief enjoining Messrs. Robb and Larson from interfering with the functions of the court-appointed receiver.
As of the date of this report, none of the defendants had answered our complaint.
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 OTCQXOTC Pink Sheets under the symbol “MCVT”. The transfer agent and registrar for our common stock is Pacific Stock Transfer Company, 4045 South Spencer Street,6725 Via Austi Parkway, Suite 403,300, Las Vegas, NV 89119. The following table sets forth the high and low bid prices for our common stock as reported by the OTCQXOTCPK in 20162019 and 2015.2018. These quotations reflect inter-dealerinterdealer prices, without retail mark-up,markup, 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 | Market Price | Market Price | |||||||||||||
(High/Low) | (High/Low) | (High/Low) | (High/Low) | |||||||||||||
For the Fiscal Year/Quarter | 2016 | 2015 | 2019 | 2018 | ||||||||||||
First Quarter | $ | 0.75 - 0.60 | $ | 1.00 - 0.80 | $ 1.70 0.47 | $ 0.75 0.50 | ||||||||||
Second Quarter | $ | 0.65 - 0.37 | $ | 0.89 - 0.60 | $ 0.70 0.58 | $ 0.61 0.40 | ||||||||||
Third Quarter | $ | 0.75 - 0.40 | $ | 0.89 - 0.75 | $ 0.59 0.46 | $ 0.60 0.45 | ||||||||||
Fourth Quarter | $ | 0.80 - 0.28 | $ | 0.75 - 0.75 | $ 0.70 0.41 | $ 0.60 0.25 |
Holders
As of the date of this filing, we had approximately 183186 holders of record of our common stock.
Dividends
We have not paid any dividends onOn February 15, 2019, our common stock and do not anticipate paying any such dividends in the near future. We do, however, intendBoard of Directors declared a cash dividend of $0.05 per share to distribute dividends annually toall of our shareholders once we make an election to be treatedof record as a regulated investment company (RIC) under the Internal Revenue Code.of March 8, 2019. The dividend was paid on March 15, 2019.
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2016,2019, 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.SK. 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-regulatoryselfregulatory 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. Nevertheless, there are restrictions and limitations under the 1940 Act on our ability to grant options and warrants to members of our management and our non-interested, non-employeenoninterested, nonemployee directors that, in our case, generally prohibit any such grants in the absence of prior SEC approval.
Recent Sales of Unregistered Securities
None.
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.
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Cautionary Note Regarding Forward-LookingForwardLooking Statements
Some of the statements made in this section of our report are forward-lookingforwardlooking statements. These forward-lookingforwardlooking 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-lookingforwardlooking statements are reasonable. Nevertheless, all forward-lookingforwardlooking 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 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-lookingforwardlooking statements included in this filing may ultimately prove to be inaccurate―even materially inaccurate. Because of the significant uncertainties inherent in such forward-lookingforwardlooking 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.
Results of Operations
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
Item | 2016 | 2015 | ||||||
Investment Income: | ||||||||
Interest Income | $ | 289,990 | $ | 478,331 | ||||
Dividend Income | 98,675 | 89,751 | ||||||
Operating Expenses: | ||||||||
General Operating Expenses | 149,909 | 126,012 | ||||||
Legal and Accounting Expenses | 174,454 | 206,292 | ||||||
Executive Management Compensation | 157,490 | 162,861 | ||||||
Insurance Expense | 78,134 | 89,421 | ||||||
Director’s Fees | 58,956 | 55,000 | ||||||
Net Investment Loss | $ | (230,278 | ) | $ | (71,504 | ) |
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
Item | 2019 | 2018 | ||||||
Investment Income: | ||||||||
Interest Income | $ | 109,795 | $ | 130,463 | ||||
Investment Income: | ||||||||
Interest Income | $ | 112,189 | $ | 109,795 | ||||
Dividend Income | 49,473 | 40,927 | ||||||
Operating Expenses: | ||||||||
General Operating Expenses | 111,757 | 106,150 | ||||||
Legal and Accounting Expenses | 209,897 | 186,477 | ||||||
Executive Management Compensation | 340,003 | 248,101 | ||||||
Insurance Expense | 82,773 | 80,318 | ||||||
Director’s Fees | 90,000 | 60,000 | ||||||
Net Investment Loss | $ | (672,768 | ) | $ | (530,324 | ) |
For the year ended December 31, 2016,2019, the Company earned $289,990$78,264 in interest payments from fourone eligible portfolio companies―Mix 1 Life, Inc.,company― DBR Phase IIIEnclave US Investors, LLC Creative Realities, Inc. and Bravo Financial, LLC―― an additional $170$33,925 in bank interest on cash balances and $48,949note receivable, an aggregate of $46,293 in dividend payments from sixfive eligible portfolio companies—Manning & Napier, Inc., Simulations Plus, Inc., Tessco Technologies, Inc., Educational Development Corp., and Taitron Components, Inc., and $3,180 in non-eligible portfolio company dividends.
For the year ended December 31, 2018, the Company earned $99,088 in interest payments from two eligible portfolio companies― DBR Enclave US Investors, LLC and Bravo Financial, LLC― an additional $10,707 in bank interest on cash balances and note receivable, an aggregate of $37,155 in dividend payments from five eligible portfolio companies—OTC Markets Group Cl A, Simulations Plus, Inc., Tessco Technologies, Inc., EscaladeEducational Development Corp., and Taitron Components, Inc., and National American University Holdings, Inc., and $49,726$3,772 in non-eligible portfolio company dividends. For the year ended December 31, 2015, the Company earned $445,381 in interest payments from six eligible portfolio companies―Insite Software Solutions, Inc., Mix 1 Life, Inc. DBR Phase III US Investors, LLC, The Igloo, LLC, Creative Realities, Inc. and Bravo Financial, LLC―an additional $450 bank interest on cash balances, $32,500 in loan origination fees, $15,000 in dividend payments from one eligible portfolio company, Dala Petroleum, Inc., and $74,751 in noneligible portfolio company dividends.
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As the table above indicates, we incurred general and administrativeoperating expenses aggregating $581,443$834,430 for the year ended December 31, 2016,2019, and $639,586$681,046 for the year ended December 31, 2015.2018. A discussion of the various components of our general and administrativeoperating expenses for these periods is set forth below.
General Operating Expenses.Director’s Fees. Our general operating expenses, which primarily include rent occupancy expense, bad debt expense, and miscellaneous office supply expenses,director’s fees were $149,909$90,000 for the year ended December 31, 2016. Our general operating expenses were $126,0122019 and $60,000 for the year ended December 31, 2015.2018. The increase is due to an increase in the current period is primarily related to our bad debt expense incurred in 2016.director compensation approved during 2019.
Legal and Accounting Expenses. Our legal and accounting expenses were $174,454$209,897 for the year ended December 31, 20162019 and $206,292$186,477 for the year ended December 31, 2015.2018. The increase in the current period is primarily related to costs we incurred in the process of planning for, seeking, and obtaining authority for, the withdrawal of our BDC election.
Executive Management Compensation. For the year ended December 31, 20162019 and December 31, 2015,2018, executive management compensation aggregated $157,490$340,003 and $162,861,$248,101, respectively, in cash payments. The increase in the current period is primarily due to the payment of a one-time bonus payment paid in 2019.
For the year ended December 31, 20162019 and December 31, 2015,2018, our net investment loss was $192,778$672,768 and $71,504,$530,324, respectively. The increased net investment loss is primarily the result of lower income received on our investment portfolio.higher expenses as discussed above.
Financial Condition
For the year ended December 31, 2016,2019, we had an increasea decrease in net assets of $646,120.$1,210,356. This increasedecrease in net assets was primarily due to the increase in valuationpayment of our holding in BiteSquad.com, LLC, offset by the decrease in valuation of our holdings in Mix 1 Life secured loans.a dividend during 2019. Our net assets decreasedincreased by $2,732,402$1,649,674 for the year ended December 31, 2015,2018, primarily due to the write down ofappreciation in value on our oilportfolio positions in Bitesquad.com, LLC and gas holdings, Southern Plains Resources, Inc. and Dala Petroleum, Inc., and the write off of The Igloo, LLC note. The decrease in the closing price of our holdings in the Mix 1 common stock was also a major contributor to this decrease.HemaCare Corporation.
Liquidity and Capital Resources
Summary cash flow data is as follows:
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Cash flows used by: | ||||||||
Operating activities | $ | (635,908 | ) | $ | (1,125,252 | ) | ||
Investing activities | (0 | ) | (0 | ) | ||||
Financing activities | (0 | ) | (0 | ) | ||||
Net decrease in cash | (635,908 | ) | (1,125,252 | ) | ||||
Cash, beginning of period | 2,980,659 | 4,105,911 | ||||||
Cash, end of period | $ | 2,344,751 | $ | 2,980,659 |
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2019 | 2018 | |||||||
Cash flows provided (used) by: | ||||||||
Operating activities | $ | 7,653,905 | $ | (1,192,193 | ) | |||
Financing activities | (553,370 | ) | ||||||
Net increase (decrease) in cash | 7,100,535 | (1,192,193 | ) | |||||
Cash, beginning of period | 966,121 | 2,158,314 | ||||||
Cash, end of period | $ | 8,066,656 | $ | 966,121 |
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 $2,344,751$8,066,656 of cash at the end fiscal 20162019 and our $2,980,659$966,121 of cash at the end of fiscal 20152018 constituted our sole source of liquidity. Management believes cash on hand is sufficient to fund our anticipated operational and financing activities through fiscal 2017.
Presently, we expect that our $2.3 million in cash as of December 31, 2016 will be substantially invested within the next 12 months.2020.
Capital Expenditures
We did not have any material commitments for capital expenditures in fiscal 20162019 and we do not anticipate any such capital expenditures for fiscal 2017. Given our business model, investment in capital resources is not required beyond investments in certain securities.2020.
Off-BalanceOffBalance Sheet Arrangements
We do not have any off-balanceoffbalance 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.
7 |
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 a BDC.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 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.
Interest and Dividend Income Recognition
Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective 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-accrualnonaccrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrualnonaccrual status. Interest payments received on non-accrualnonaccrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrualNonaccrual 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 this if the 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-dividendexdividend date for publicly traded portfolio companies.
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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors and
Shareholders of
Mill City Ventures III, Ltd.
Wayzata, Minnesota
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Mill City Ventures III, Ltd.(the “Company”) (the Company) as of December 31, 20162019 and 2015,2018, including the schedule of investments as of December 31, 2016 and 2015 andinvestment schedules, the related statements of operations, shareholders'shareholders’ equity, and cash flows for each of the yearyears in the two-year period ended December 31, 2016,2019 and 2018, 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, 20152019 and 2018, and the financial highlightsresults of its operations and its cash flows for each of the four years then ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the period then ended. United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the company'sCompany’s management. Our responsibility is to express an opinion on thesethe 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 Public Company Accounting Oversight Board (United States).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.misstatement, whether due to error or fraud. The companyCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits, included considerationwe are required to obtain an understanding of its internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes
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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as wewell as evaluating the overall presentation of the financial statement presentation. Our procedures included confirmation of investments as of December 31, 2016 and 2015, by correspondence with the custodian, loan agents or borrowers.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above, including the scheduleEmphasis of investments, present fairly, in all material respects, the financial position of Mill City Ventures III, Ltd. as of December 31, 2016 and 2015 and the results of their operations and cash flows for the years ended December 31, 2016 and 2015 and the financial highlights for each of the four years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.Matter – Investment Valuation
As explained in noteNote 7 to the financial statements, the accompanying financial statements include investments valued at $4,240,640,$834,200 and $5,164,319, for 2019 and 2018, respectively, whose fair values have been estimated by the Valuation Committeevalidation committee and management in the absence of readily determinable fair values. Such estimates are based on financial and other information provided by management in the 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“Fair Value Measurement,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 exitsexists 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. As of December 31, 2016, $4,240,640 ofThe investments are valued based on unobservable inputs.inputs as of December 31, 2019, and 2018 of $834,200 and $5,164,319, 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.
/s/ Boulay PLLP
We have served as the Company’s auditor since 2019
Minneapolis, Minnesota
March 30, 2020
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Investments, at fair value | ||||||||
Non-control/Non-affiliate investments (cost of $7,397,908 and $7,218,131) | $ | 6,987,002 | $ | 5,747,808 | ||||
Cash | 2,344,751 | 2,980,659 | ||||||
Prepaid expenses | 61,661 | 43,808 | ||||||
Interest and dividends receivable | 4,853 | 23,840 | ||||||
Leasehold improvements, net | 15,665 | 23,773 | ||||||
Property and equipment, net | 9,946 | 14,222 | ||||||
Total Assets | $ | 9,423,878 | $ | 8,834,110 | ||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 25,097 | $ | 10,431 | ||||
Payable for purchase of investments | - | 65,622 | ||||||
Deferred interest income | - | 5,645 | ||||||
Deferred rent | 11,373 | 11,124 | ||||||
Total Current Liabilities | 36,470 | 92,822 | ||||||
Total Liabilities | 36,470 | 92,822 | ||||||
Commitments and Contingencies (Note 4) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common Stock, $.001 par value: Authorized 250,000,000 shares: Issued and outstanding 12,151,493 and 12,151,493 shares. | 12,151 | 12,151 | ||||||
Additional paid-in capital | 11,857,660 | 11,857,660 | ||||||
Accumulated deficit | (1,159,665 | ) | (1,159,665 | ) | ||||
Accumulated undistributed investment loss | (1,330,205 | ) | (1,099,927 | ) | ||||
Accumulated undistributed net realized gains on investment transactions | 418,373 | 601,392 | ||||||
Net unrealized appreciation/(depreciation) in value of investments | (410,906 | ) | (1,470,323 | ) | ||||
Total Shareholders’ Equity | 9,387,408 | 8,741,288 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 9,423,878 | $ | 8,834,110 |
December 31, 2019 | December 31, 2018 | ||||||||
ASSETS | |||||||||
Investments, at fair value: | $ | 1,740,897 | $ | 9,960,192 | |||||
Non-control/non-affiliate investments (cost: $1,976,370 and | |||||||||
$6,958,827 respectively) | |||||||||
Cash | 8,066,656 | 966,121 | |||||||
Note receivable | 250,000 | 250,000 | |||||||
Prepaid expenses | 31,557 | 47,156 | |||||||
Receivable for sale of investments | — | 18,999 | |||||||
Interest and dividend receivables | 6,500 | 72,901 | |||||||
Right-of-use lease asset | 40,823 | — | |||||||
Property and equipment, net | 2,071 | 4,645 | |||||||
Total Assets | $ | 10,138,504 | $ | 11,320,014 | |||||
LIABILITIES | |||||||||
Accounts payable | $ | 24,996 | $ | 41,125 | |||||
Lease liability | 44,975 | — | |||||||
Total Liabilities | 69,971 | 41,125 | |||||||
Commitments and Contingencies | |||||||||
SHAREHOLDERS EQUITY (NET ASSETS) | |||||||||
Common Stock, par value $0.001 per share (250,000,000 authorized; | 11,067 | 11,067 | |||||||
11,067,402 and 11,067,402 outstanding) | |||||||||
Additional paid-in capital | 10,774,653 | 10,774,653 | |||||||
Accumulated deficit | (1,159,665 | ) | (1,159,665 | ) | |||||
Accumulated undistributed investment loss | (2,397,865 | ) | (1,725,097 | ) | |||||
Accumulated undistributed net realized gains on investment transactions | 3,075,816 | 376,566 | |||||||
Net unrealized appreciation (depreciation) in value of investments | (235,473 | ) | 3,001,365 | ||||||
Total Shareholders' Equity (net assets) | 10,068,533 | 11,278,889 | |||||||
Total Liabilities and Shareholders' Equity | $ | 10,138,504 | $ | 11,320,014 | |||||
Net Asset Value Per Common Share | $ | 0.91 | $ | 1.02 |
The accompanying notes are an integral part of these financial statements.
11 |
Mill City Ventures III, Ltd.
Year Ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Investment Income | ||||||||
Interest income | $ | 112,189 | $ | 109,795 | ||||
Dividend income | 49,473 | 40,927 | ||||||
Total Investment Income | 161,662 | 150,722 | ||||||
Operating Expenses | ||||||||
Professional fees | 209,897 | 186,477 | ||||||
Payroll | 340,003 | 248,101 | ||||||
Insurance | 82,773 | 80,318 | ||||||
Occupancy | 73,685 | 78,180 | ||||||
Director's fees | 90,000 | 60,000 | ||||||
Depreciation and amortization | 2,574 | 10,130 | ||||||
Other general and administrative | 35,498 | 17,840 | ||||||
Total Operating Expenses | 834,430 | 681,046 | ||||||
Net Investment Loss | $ | (672,768 | ) | $ | (530,324 | ) | ||
Realized and Unrealized Gain (Loss) on Investments | ||||||||
Net realized gain (loss) on investments | 3,252,620 | (581,252 | ) | |||||
Net change in unrealized appreciation (depreciation) on investments | (3,236,838 | ) | 2,761,250 | |||||
Net Realized and Unrealized Gain on Investments | 15,782 | 2,179,998 | ||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (656,986 | ) | $ | 1,649,674 | |||
Net Increase (Decrease) in Net Assets Resulting from Operations per share: | ||||||||
Basic and diluted | $ | (0.06 | ) | $ | 0.15 | |||
Weighted-average number of common shares outstanding – basic and diluted | 11,067,402 | 11,067,402 |
The accompanying notes are an integral part of these financial statements.
Statements of Operations
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Investment Income | ||||||||
Interest income | $ | 289,990 | $ | 478,331 | ||||
Dividend income | 98,675 | 89,751 | ||||||
Total Investment Income | 388,665 | 568,082 | ||||||
Operating Expenses: | ||||||||
Professional fees | 174,454 | 206,292 | ||||||
Payroll expense | 157,490 | 162,861 | ||||||
Insurance expense | 78,134 | 89,421 | ||||||
Occupancy | 82,901 | 91,217 | ||||||
Director’s fees | 58,956 | 55,000 | ||||||
Bad debt expense | 37,500 | - | ||||||
Depreciation and amortization | 12,384 | 12,849 | ||||||
Other general and administrative expenses | 17,124 | 21,946 | ||||||
Total Operating Expenses | 618,943 | 639,586 | ||||||
Net Investment Loss | $ | (230,278 | ) | $ | (71,504 | ) | ||
Realized and Unrealized Gain (Loss) on Investments | ||||||||
Net realized gain (loss) on investments | $ | (183,019 | ) | $ | 183,416 | |||
Net change in unrealized appreciation (depreciation) on investments | $ | 1,059,417 | $ | (2,844,314 | ) | |||
Net Realized and Unrealized Gain (Loss) on Investments | 876,398 | (2,660,898 | ) | |||||
Net Increase (Decrease) in Net Asset Value Resulting from Operations | $ | 646,120 | $ | (2,732,402 | ) | |||
Net Increase (Decrease) in Net Assets Resulting from Operations per share: | ||||||||
Basic and diluted | $ | 0.05 | $ | (0.22 | ) | |||
Weighted-average number of common shares outstanding | 12,151,493 | 12,151,493 |
The accompanying notes are an integral part of these financial statements.
Statements of Shareholders’ Equity
For the years ended December 31, 20162019 and 20152018
Accumulated | ||||||||||||||||||||||||||||||||
Undistributed | Net | |||||||||||||||||||||||||||||||
Accumulated | Net Realized | Unrealized | ||||||||||||||||||||||||||||||
Additional | Undistributed | Gains on | Appreciation | Total | ||||||||||||||||||||||||||||
Common Stock | Paid In | Accumulated | Investment | Investments | in value of | Shareholders’ | ||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Transactions | Investments | Equity | |||||||||||||||||||||||||
Balance as of January 1, 2015 | 12,151,493 | $ | 12,151 | $ | 11,857,660 | $ | (1,159,665 | ) | $ | (1,028,423 | ) | $ | 417,976 | $ | 1,373,991 | $ | 11,473,690 | |||||||||||||||
Undistributed investment loss | — | — | — | — | (71,504 | ) | — | — | (71,504 | ) | ||||||||||||||||||||||
Undistributed net realized gains on investment transactions | — | — | — | — | — | 183,416 | — | 183,416 | ||||||||||||||||||||||||
Depreciation in value of investments | — | — | — | — | — | — | (2,844,314 | ) | (2,844,314 | ) | ||||||||||||||||||||||
Balance as of December 31, 2015 | 12,151,493 | $ | 12,151 | $ | 11,857,660 | $ | (1,159,665 | ) | $ | (1,099,927 | ) | $ | 601,392 | $ | (1,470,323 | ) | $ | 8,741,288 | ||||||||||||||
Undistributed investment loss | — | — | — | — | (230,278 | ) | — | — | (230,278 | ) | ||||||||||||||||||||||
Undistributed net realized gains on investment transactions | — | — | — | — | — | (183,019 | ) | — | (183,019 | ) | ||||||||||||||||||||||
Appreciation in value of investments | — | — | — | — | — | — | 1,059,417 | 1,059,417 | ||||||||||||||||||||||||
Balance as of December 31, 2016 | 12,151,493 | $ | 12,151 | $ | 11,857,660 | $ | (1,159,665 | ) | $ | (1,330,205 | ) | $ | 418,373 | $ | (410,906) | $ | 9,387,408 |
Year Ended December 31, 2019 | Common Shares | Par Value | Additional Paid In Capital | Accumulated Deficit | Accumulated Undistributed Net Investment Loss | Accumulated Undistributed Net Realized Gain on Investments Transactions | Net Unrealized Appreciation (Depreciation) in value of Investments | Total Shareholders' Equity | ||||||||||||||||||||||||
Balance as of December 31, 2018 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,725,097 | ) | $ | 376,566 | $ | 3,001,365 | $ | 11,278,889 | |||||||||||||||
Dividend Distribution | — | — | — | — | (553,370 | ) | — | (553,370 | ) | |||||||||||||||||||||||
Undistributed net investment loss | — | — | — | (672,768 | ) | — | — | (672,768 | ) | |||||||||||||||||||||||
Undistributed net realized gain on investment transactions | — | — | — | — | 3,252,620 | — | 3,252,620 | |||||||||||||||||||||||||
Depreciation in value of investments | — | — | — | — | — | (3,236,838 | ) | (3,236,838 | ) | |||||||||||||||||||||||
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 | ||||||||||||||
Year Ended December 31, 2018 | Common Shares | Par Value | Additional Paid In Capital | Accumulated Deficit | Accumulated Undistributed Net Investment Loss | Accumulated Undistributed Net Realized Gain on Investments Transactions | Net Unrealized Appreciation in value of Investments | Total Shareholders' Equity | ||||||||||||||||||||||||
Balance as of December 31, 2017 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,194,773 | ) | $ | 957,818 | $ | 240,115 | $ | 9,629,215 | |||||||||||||||
Undistributed net investment loss | — | — | — | (530,324 | ) | — | — | (530,324 | ) | |||||||||||||||||||||||
Undistributed net realized loss on investment transactions | — | — | — | — | (581,252 | ) | — | (581,252 | ) | |||||||||||||||||||||||
Appreciation in value of investments | — | — | — | — | — | 2,761,250 | 2,761,250 | |||||||||||||||||||||||||
Balance as of December 31, 2018 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,725,097 | ) | $ | 376,566 | $ | 3,001,365 | $ | 11,278,889 |
The accompanying notes are an integral part of these financial statements.
Statements of Cash Flows
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net increase (decrease) in net asset value resulting from operations | $ | 646,120 | $ | (2,732,402 | ) | |||
Adjustments to reconcile net increase (decrease) in net asset value resulting from operations to net cash used in operating activities: | ||||||||
Net change in unrealized appreciation or depreciation on investments | (1,059,417 | ) | 2,844,314 | |||||
Net realized gain or loss on investments | 183,019 | (183,416 | ) | |||||
Payments for purchases of investments | (2,520,559 | ) | (3,999,675 | ) | ||||
Proceeds from sales of investments | 2,157,763 | 2,762,478 | ||||||
Depreciation and amortization | 12,384 | 12,849 | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivable from sale on investments | - | 82,103 | ||||||
Interest and dividends receivable | 18,987 | 35,954 | ||||||
Prepaid expenses | (17,853 | ) | 5,815 | |||||
Accounts payable | 14,666 | (25,667 | ) | |||||
Deferred rent | 249 | 1,128 | ||||||
Deferred interest income | (5,645 | ) | 5,645 | |||||
Payable for purchase of investment | (65,622 | ) | 65,622 | |||||
Net cash used in operating activities | (635,908 | ) | (1,125,252 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | - | - | ||||||
Purchases of leasehold improvements | - | - | ||||||
Net cash used in investing activities | - | - | ||||||
Cash flows from financing activities: | ||||||||
Payment for repurchase of common stock | - | - | ||||||
Net cash used in financing activities | - | - | ||||||
Net decrease in cash | (635,908 | ) | (1,125,252 | ) | ||||
Cash, beginning of the year | 2,980,659 | 4,105,911 | ||||||
Cash, end of the year | $ | 2,344,751 | $ | 2,980,659 |
The accompanying notes are an integral part of these financial statements.
Mill City Ventures III, Ltd.
Investment Schedule
AsStatements of December 31, 2016Cash Flows
Year Ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net increase (decrease) in net assets resulting from operations | $ | (656,986 | ) | $ | 1,649,674 | |||
Adjustments to reconcile net increase (decrease) in net assets resulting | ||||||||
from operations to net cash provided (used) in operating activities: | ||||||||
Net change in unrealized appreciation or depreciation on investments | 3,236,838 | (2,761,250 | ) | |||||
Net realized gain or loss on investments | (3,252,620 | ) | 581,252 | |||||
Payments for purchases of investments | (875,160 | ) | (3,097,109 | ) | ||||
Payments for purchases of investments sold short | — | (477,442 | ) | |||||
Proceeds from sales of investments | 9,080,118 | 2,579,072 | ||||||
Proceeds from sales of investments sold short | 30,119 | 456,145 | ||||||
Depreciation & amortization expense | 2,574 | 10,130 | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivable from sale on investments | 18,999 | 248,120 | ||||||
Note receivable from shareholder | — | (250,000 | ) | |||||
Interest and dividends receivable | 66,401 | (33,327 | ) | |||||
Prepaid expenses and other assets | 32,299 | 15,393 | ||||||
Accounts payable and other liabilities | (28,677 | ) | 4,034 | |||||
Deferred rent | — | (10,663 | ) | |||||
Payable for purchase of investments | — | (106,222 | ) | |||||
Net cash provided (used) in operating activities | 7,653,905 | (1,192,193 | ) | |||||
Cash flows from financing activities: | ||||||||
Payments for common stock dividend | (553,370 | ) | — | |||||
Net cash used by financing activities | (553,370 | ) | — | |||||
Net increase (decrease) in cash | 7,100,535 | (1,192,193 | ) | |||||
Cash, beginning of period | 966,121 | 2,158,314 | ||||||
Cash, end of period | $ | 8,066,656 | $ | 966,121 |
Investments(1) | Investment Type | Interest Rate(2) | Maturity Date | Principal Amount | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||||
Debt Investments | ||||||||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||||
Mix 1 Life, Inc. | Secured Loan(4) | 12 | % | 2/6/2016 | $ | 500,000 | 500,000 | 180,000 | — | 320,000 | (320,000) | |||||||||||||||||||||||||
Mix 1 Life, Inc. | Secured Loan | 12 | % | 3/13/2016 | $ | 250,000 | 250,000 | — | — | 250,000 | (250,000) | |||||||||||||||||||||||||
750,000 | 180,000 | 1.92 | % | — | 570,000 | (570,000) | ||||||||||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||||
Bravo Financial LLC | Secured Loan | 12 | % | 8/31/2018 | $ | 500,000 | 500,000 | 500,000 | 5.32 | % | — | — | — | |||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||||||
Dala Petroleum, Inc. | Secured Loan | 12 | % | 12/31/2015 | $ | 25,000 | 25,000 | — | — | 25,000 | (25,000 | ) | ||||||||||||||||||||||||
Dala Petroleum, Inc. | Secured Loan | 12 | % | 12/22/2016 | $ | 35,195 | 35,195 | — | — | 35,195 | (35,195 | ) | ||||||||||||||||||||||||
Dala Petroleum, Inc. | Secured Loan | 12 | % | 12/16/2017 | $ | 22,500 | 22,500 | — | — | 22,500 | (22,500 | ) | ||||||||||||||||||||||||
82,695 | — | 0.00 | % | — | 82,695 | (82,695 | ) | |||||||||||||||||||||||||||||
Total Debt Investments | 1,332,695 | 680,000 | 7.24 | % | — | 652,695 | (652,695 | ) |
The accompanying notes are an integral part of these financial statements.
Investments(1) | Investment Type(5) | Interest Rate(6) | Expiration Date(7) | Shares/Units | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||||
Equity Investments | ||||||||||||||||||||||||||||||||||||
Advertising | ||||||||||||||||||||||||||||||||||||
Creative Realities, Inc. | Warrants(8) | n/a | 12/28/2020 | 1,071,429 | — | 32,143 | 0.34 | % | 32,143 | — | 32,143 | |||||||||||||||||||||||||
Bio-technology | ||||||||||||||||||||||||||||||||||||
Bio Life Solutions, Inc. | Warrants(8) | n/a | 3/20/2021 | 100,000 | — | — | — | — | — | |||||||||||||||||||||||||||
Combimatrix Corporation | Warrants(8) | n/a | 5/6/2019 | 5,464 | — | — | — | — | — | |||||||||||||||||||||||||||
Combimatrix Corporation | Warrants(8) | n/a | 6/28/2019 | 5,464 | — | — | — | — | — | |||||||||||||||||||||||||||
Combimatrix Corporation | Warrants(8) | n/a | 12/19/2018 | 16,666 | — | — | — | — | — | |||||||||||||||||||||||||||
— | — | 0.00 | % | — | — | — | ||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||||
Escalade Inc. | Common Stock | n/a | n/a | 7,929 | 93,975 | 104,663 | 10,688 | — | 10,688 | |||||||||||||||||||||||||||
Mix 1 Life, Inc. | Common Stock(8) | n/a | n/a | 40,051 | — | 15,219 | 15,219 | — | 15,219 | |||||||||||||||||||||||||||
Mix 1 Life, Inc. | Common Stock(10) | n/a | n/a | 100,000 | 46,160 | 30,000 | — | 16,160 | (16,160 | ) | ||||||||||||||||||||||||||
Tzfat Spirits of Israel, LLC | LLC Membership Units(8) | n/a | n/a | 55,000 | 101,019 | 25,000 | — | 76,019 | (76,019 | ) | ||||||||||||||||||||||||||
241,154 | 174,882 | 1.86 | % | 25,907 | 92,179 | (66,272 | ) | |||||||||||||||||||||||||||||
Education | ||||||||||||||||||||||||||||||||||||
Nat'l Amer. Univ. Holdings, Inc. | Common Stock | n/a | n/a | 59,839 | 119,027 | 116,686 | 1.24 | % | 992 | 3,333 | (2,341 | ) | ||||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||||
Comm. Sales & Leasing | Common Stock(9) | n/a | n/a | 2,000 | 65,620 | 50,820 | — | 14,800 | (14,800 | ) | ||||||||||||||||||||||||||
OTC Markets Group Cl A | Common Stock | n/a | n/a | 19,074 | 297,381 | 438,702 | 141,321 | — | 141,321 | |||||||||||||||||||||||||||
QC Holdings, Inc. | Common Stock(8) | n/a | n/a | 15,000 | 10,655 | 11,100 | 445 | — | 445 | |||||||||||||||||||||||||||
373,656 | 500,622 | 5.33 | % | 141,766 | 14,800 | 126,966 | ||||||||||||||||||||||||||||||
Healthcare | ||||||||||||||||||||||||||||||||||||
WaferGen Bio-Systems, Inc. | Common Stock(8) | n/a | n/a | 85,210 | 369,800 | 420,085 | 50,285 | — | 50,285 | |||||||||||||||||||||||||||
WaferGen Bio-Systems, Inc. | Warrants(8) | n/a | 10/21/2020 | 40,000 | — | — | — | — | — | |||||||||||||||||||||||||||
369,800 | 420,085 | 4.48 | % | 50,285 | — | 50,285 | ||||||||||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||||||||||||
Insite Software Solutions, Inc | Warrants(8) | n/a | 12/30/2023 | 108,960 | — | — | — | — | — | |||||||||||||||||||||||||||
MAX 4G, Inc. | Preferred Stock(8) | n/a | n/a | 300,000 | 150,000 | 300,000 | 150,000 | — | 150,000 | |||||||||||||||||||||||||||
Mitek Systems Inc. | Common Stock(8) | n/a | n/a | 7,772 | 50,540 | 47,798 | — | 2,742 | (2,742 | ) | ||||||||||||||||||||||||||
Simulations Plus, Inc. | Common Stock | n/a | n/a | 18,639 | 173,310 | 179,862 | 10,659 | 4,107 | 6,552 | |||||||||||||||||||||||||||
Travelzoo, Inc. | Common Stock | n/a | n/a | 15,100 | 177,459 | 141,940 | — | 35,519 | (35,519 | ) | ||||||||||||||||||||||||||
551,309 | 669,600 | 7.13 | % | 160,659 | 42,368 | 118,291 | ||||||||||||||||||||||||||||||
Investment Fund | ||||||||||||||||||||||||||||||||||||
Calamos Conv. & High Inc. Fund | Common Stock(9) | n/a | n/a | 10,000 | 128,357 | 105,500 | — | 22,857 | (22,857 | ) | ||||||||||||||||||||||||||
Solar Senior Capital Ltd | Common Stock(9) | n/a | n/a | 6,047 | 91,983 | 99,412 | 7,429 | — | 7,429 | |||||||||||||||||||||||||||
220,340 | 204,912 | 2.18 | % | 7,429 | 22,857 | (15,428 | ) | |||||||||||||||||||||||||||||
Leisure & Hospitality | ||||||||||||||||||||||||||||||||||||
Bitesquad.com LLC | Preferred LLC Units(4) (8) | n/a | n/a | 100,000 | 1,380,000 | 2,747,011 | 29.26 | % | 1,367,011 | — | 1,367,011 | |||||||||||||||||||||||||
Media | ||||||||||||||||||||||||||||||||||||
Discovery Communications Inc. | Common Stock(9) | n/a | n/a | 5,000 | 149,609 | 137,050 | 1.46 | % | — | 12,559 | (12,559 | ) | ||||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||||||
Dala Petroleum, Inc. | Preferred Stock(8) | n/a | n/a | 500 | 500,000 | — | — | 500,000 | (500,000 | ) | ||||||||||||||||||||||||||
Dala Petroleum, Inc. | Warrants(8) | n/a | 6/3/2017 | 714,286 | — | — | — | — | — | |||||||||||||||||||||||||||
Northern Capital Partners I, LP | Limited Partnership Units(8) | n/a | n/a | 550,000 | 550,000 | 488,629 | — | 61,371 | (61,371 | ) | ||||||||||||||||||||||||||
Southern Plains Resources, Inc. | Common Stock(8) | n/a | n/a | 600,000 | 730,000 | — | — | 730,000 | (730,000 | ) | ||||||||||||||||||||||||||
1,780,000 | 488,629 | 5.21 | % | — | 1,291,371 | (1,291,371 | ) | |||||||||||||||||||||||||||||
Publishing | ||||||||||||||||||||||||||||||||||||
Educational Development Corp. | Common Stock | n/a | n/a | 36,905 | 409,380 | 367,205 | 3.91 | % | 3,141 | 45,316 | (42,175 | ) | ||||||||||||||||||||||||
Telecommunications | ||||||||||||||||||||||||||||||||||||
AT&T | Common Stock(9) | n/a | n/a | 5,000 | 175,260 | 212,650 | 37,390 | — | 37,390 | |||||||||||||||||||||||||||
CenturyLink, Inc. | Common Stock(9) | n/a | n/a | 5,000 | 157,360 | 118,900 | — | 38,460 | (38,460 | ) | ||||||||||||||||||||||||||
MagicJack VocalTek Ltd. | Common Stock(8) (9) | n/a | n/a | 5,754 | 34,141 | 39,415 | 5,274 | — | 5,274 | |||||||||||||||||||||||||||
Tessco Technologies Inc. | Common Stock | n/a | n/a | 5,000 | 83,090 | 65,000 | — | 18,090 | (18,090 | ) | ||||||||||||||||||||||||||
Windstream Holdings Inc. | Common Stock(9) | n/a | n/a | 1,666 | 21,087 | 12,212 | — | 8,875 | (8,875 | ) | ||||||||||||||||||||||||||
470,938 | 448,177 | 4.78 | % | 42,664 | 65,425 | (22,761 | ) | |||||||||||||||||||||||||||||
Total Equity Investments | 6,065,213 | 6,307,002 | 67.18 | % | 1,831,997 | 1,590,208 | 241,789 | |||||||||||||||||||||||||||||
Total Cash and Cash Equivalents | 2,344,751 | 2,344,751 | 24.98 | % | — | — | — | |||||||||||||||||||||||||||||
Total Investments, Cash and Cash Equivalents | $ | 9,742,659 | $ | 9,331,753 | 99.40 | % | $ | 1,831,997 | $ | 2,242,903 | $ | (410,906) |
Mill City Ventures III, Ltd.
As of December 31, 2019
Investments(1) | Investment Type(5) | Interest Rate(2)(6) | Expiration Date(7) | Shares /Units | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
Equity Investments | ||||||||||||||||||||||||||||||||
Advertising | ||||||||||||||||||||||||||||||||
Creative Realities, Inc. | Warrants(8) | n/a | 12/28/2020 | 35,714 | $ | — | $ | — | 0.00 | % | $ | — | $ | — | $ | — | ||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Tzfat Spirits of Israel, LLC | LLC Membership Units(8) | n/a | n/a | 55,000 | 101,019 | 15,000 | — | 86,019 | (86,019 | ) | ||||||||||||||||||||||
101,019 | 15,000 | 0.15 | % | — | 86,019 | (86,019 | ) | |||||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||
Manning & Napier, Inc. | Common Stock | n/a | n/a | 86,700 | 188,969 | 150,858 | — | 38,111 | (38,111 | ) | ||||||||||||||||||||||
188,969 | 150,858 | 1.50 | % | — | 38,111 | (38,111 | ) | |||||||||||||||||||||||||
Healthcare | ||||||||||||||||||||||||||||||||
Reshape Life Sciences Inc. | Warrants(8) | n/a | 8/16/2024 | 566 | 679 | — | — | 679 | (679 | ) | ||||||||||||||||||||||
679 | — | 0.00 | % | — | 679 | (679 | ) | |||||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||||||||
Kwikbit Inc. (fka MAX 4G) | Preferred Stock(8) | n/a | n/a | 300,000 | 150,000 | 300,000 | 150,000 | — | 150,000 | |||||||||||||||||||||||
150,000 | 300,000 | 2.98 | % | 150,000 | — | 150,000 | ||||||||||||||||||||||||||
Leisure & Hospitality | ||||||||||||||||||||||||||||||||
DBR Enclave US Investors, LLC | LLC Units Units | n/a | n/a | 369,200 | 369,200 | 369,200 | — | — | — | |||||||||||||||||||||||
369,200 | 369,200 | 3.67 | % | — | — | — | ||||||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||
Northern Capital Partners I, LP | Limited Partnership Units(8) | n/a | n/a | 550,000 | 550,000 | 150,000 | — | 400,000 | (400,000 | ) | ||||||||||||||||||||||
550,000 | 150,000 | 1.49 | % | — | 400,000 | (400,000 | ) | |||||||||||||||||||||||||
Publishing | ||||||||||||||||||||||||||||||||
Educational Development Corp. | Common Stock | n/a | n/a | 122,304 | 616,503 | 755,839 | 7.50 | % | 150,106 | 10,770 | 139,336 | |||||||||||||||||||||
Total Equity Investments | $ | 1,976,370 | $ | 1,740,897 | 17.29 | % | $ | 300,106 | $ | 535,579 | $ | (235,473 | ) | |||||||||||||||||||
Total Cash | 8,066,656 | 8,066,656 | 80.12 | % | — | — | — | |||||||||||||||||||||||||
Total Investments and Cash | $ | 10,043,339 | $ | 9,807,553 | 97.41 | % | $ | 300,106 | $ | 535,579 | $ | (235,473 | ) |
(1) | All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote. |
(2) | Interest is presented on a per annum basis. |
(5) | In the case of warrants, warrants provide for the right to purchase common equity of the issuer. |
(6) | In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis. |
(7) | In the case of warrants, purchase rights under the warrants will expire at the close of business on this date. |
(8) | Investment is not an income-producing investment. |
At December 31, 2019, aggregate non-qualifying assets represented approximately 0.9% of our total assets.
At December 31, 2019, the estimated net unrealized loss for federal tax purposes was $58,586, based on a tax cost basis of $1,799,483.
At December 31, 2019, the estimated aggregate gross unrealized gain for federal income tax purposes was $300,106 and the estimated aggregate gross unrealized loss for federal income tax purposes was $358,692.
The accompanying notes are an integral part of these financial statements.
Mill City Ventures III, LtdLtd.
Investment Schedule of Investments
As of December 31, 20152018
Investments(1) | Investment Type | Interest Rate(2) | Maturity Date | Principal Amount | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||||
Debt Investments | ||||||||||||||||||||||||||||||||||||
Advertising | ||||||||||||||||||||||||||||||||||||
Creative Realities, Inc. | Secured Loan(3) | 12% cash + 2% PIK | 4/15/2017 | $ | 600,000 | $ | 600,000 | $ | 600,000 | 6.86 | % | — | — | — | ||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||||
Mix 1 Life, Inc. | Secured Loan(4) | 12 | % | 2/6/2016 | $ | 500,000 | 500,000 | 500,000 | — | — | — | |||||||||||||||||||||||||
Mix 1 Life, Inc. | Secured Loan | 12 | % | 3/13/2016 | $ | 250,000 | 250,000 | 250,000 | — | — | — | |||||||||||||||||||||||||
750,000 | 750,000 | 8.58 | % | — | — | — | ||||||||||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||||
Bravo Financial LLC | Secured Loan | 12 | % | 8/31/2018 | $ | 500,000 | 500,000 | 500,000 | 5.72 | % | — | — | — | |||||||||||||||||||||||
Leisure & Hospitality | ||||||||||||||||||||||||||||||||||||
The Igloo LLC | Secured Loan | 20 | % | 12/31/2016 | 500,000 | 500,000 | — | 0.00 | % | — | 500,000 | (500,000 | ) | |||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||||||
Dala Petroleum, Inc. | Secured Loan | 12 | % | 12/22/2016 | $ | 5,195 | 5,195 | — | — | 5,195 | (5,195 | ) | ||||||||||||||||||||||||
Pacific Oil & Gas LLC | Secured Loan | 12 | % | 12/31/2015 | $ | 25,000 | 25,000 | — | — | 25,000 | (25,000 | ) | ||||||||||||||||||||||||
30,195 | — | 0.00 | % | — | 30,195 | (30,195 | ) | |||||||||||||||||||||||||||||
Total Debt Investments | $ | 2,380,195 | $ | 1,850,000 | 21.16 | % | — | $ | 530,195 | $ | (530,195 | ) |
The accompanying notes are an integral part of these financial statements.
Investments(1) | Investment Type(5) | Interest Rate(6) | Expiration Date(7) | Shares/Units | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||||
Equity Investments | ||||||||||||||||||||||||||||||||||||
Advertising | ||||||||||||||||||||||||||||||||||||
Creative Realities, Inc. | Warrants(8) | n/a | 12/28/2020 | 1,071,429 | — | — | — | — | — | |||||||||||||||||||||||||||
Creative Realities, Inc. | Common Stock(8) | n/a | n/a | 975,000 | — | 243,750 | 243,750 | — | 243,750 | |||||||||||||||||||||||||||
— | 243,750 | 2.79 | % | 243,750 | — | 243,750 | ||||||||||||||||||||||||||||||
Bio-technology | ||||||||||||||||||||||||||||||||||||
Bio Life Solutions, Inc. | Warrants(8) | n/a | 3/20/2021 | 100,000 | — | — | — | — | — | |||||||||||||||||||||||||||
Combimatrix Corporation | Warrants(8) | n/a | 5/6/2019 | 81,967 | — | — | — | — | — | |||||||||||||||||||||||||||
Combimatrix Corporation | Warrants(8) | n/a | 6/28/2019 | 81,967 | — | — | — | — | — | |||||||||||||||||||||||||||
Combimatrix Corporation | Warrants(8) | n/a | 12/19/2018 | 250,000 | — | — | — | — | — | |||||||||||||||||||||||||||
— | — | 0.00 | % | — | — | — | ||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||||
Mix 1 Life, Inc. | Common Stock(8) | n/a | n/a | 237,470 | — | 237,470 | 237,470 | — | 237,470 | |||||||||||||||||||||||||||
Tzfat Spirits of Israel, LLC | LLC Membership Units(8) | n/a | n/a | 55,000 | 101,019 | 25,000 | — | 76,019 | (76,019 | ) | ||||||||||||||||||||||||||
101,019 | 262,470 | 3.00 | % | 237,470 | 76,019 | 161,451 | ||||||||||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||||
Comm. Sales & Leasing | Common Stock(9) | n/a | n/a | 2,000 | 65,620 | 37,380 | 0.43 | % | — | 28,240 | (28,240 | ) | ||||||||||||||||||||||||
Healthcare | ||||||||||||||||||||||||||||||||||||
WaferGen Bio-Systems, Inc. | Common Stock(8) | n/a | n/a | 200,000 | 200,000 | 146,760 | — | 53,240 | (53,240 | ) | ||||||||||||||||||||||||||
WaferGen Bio-Systems, Inc. | Warrants(8) | n/a | 10/21/2020 | 200,000 | — | — | — | — | — | |||||||||||||||||||||||||||
200,000 | 146,760 | 1.68 | % | — | 53,240 | (53,240 | ) | |||||||||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||||||||||||
Insite Software Solutions, Inc | Warrants(8) | n/a | 12/30/2023 | 108,960 | — | — | — | — | — | |||||||||||||||||||||||||||
MAX 4G | Preferred Stock(8) | n/a | n/a | 300,000 | 150,000 | 300,000 | 150,000 | — | 150,000 | |||||||||||||||||||||||||||
Simulations Plus, Inc. | Common Stock | n/a | n/a | 5,000 | 47,869 | 49,550 | 1,681 | — | 1,681 | |||||||||||||||||||||||||||
197,869 | 349,550 | 4.00 | % | 151,681 | — | 151,681 | ||||||||||||||||||||||||||||||
Investment Fund | ||||||||||||||||||||||||||||||||||||
Calamos Conv. & High Inc. Fund | Common Stock(9) | n/a | n/a | 10,000 | 128,357 | 105,100 | — | 23,257 | (23,257 | ) | ||||||||||||||||||||||||||
Powershares High Dividend Yield | Common Stock(9) | n/a | n/a | 10,000 | 253,510 | 210,000 | — | 43,510 | (43,510 | ) | ||||||||||||||||||||||||||
Solar Senior Capital Ltd | Common Stock(9) | n/a | n/a | 6,047 | 91,983 | 90,100 | — | 1,883 | (1,883 | ) | ||||||||||||||||||||||||||
473,850 | 405,200 | 4.64 | % | — | 68,650 | (68,650 | ) | |||||||||||||||||||||||||||||
Leisure & Hospitality | ||||||||||||||||||||||||||||||||||||
Bitesquad.com LLC | Preferred LLC Units(4) (8) | n/a | n/a | 60,000 | 780,000 | 780,000 | 8.92 | % | — | — | — | |||||||||||||||||||||||||
DBR Phase III US Investors, LLC | Limited Partnership Units(8) | n/a | n/a | 761,050 | 761,050 | 761,050 | 8.71 | % | — | — | — | |||||||||||||||||||||||||
1,541,050 | 1,541,050 | 17.63 | % | — | — | — | ||||||||||||||||||||||||||||||
Media | ||||||||||||||||||||||||||||||||||||
Discovery Communications Inc. | Common Stock(9) | n/a | n/a | 5,000 | 149,609 | 133,400 | 1.53 | % | — | 16,209 | (16,209 | ) | ||||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||||||
Dala Petroleum, Inc. | Preferred Stock(8) | n/a | n/a | 500 | 500,000 | — | — | 500,000 | (500,000 | ) | ||||||||||||||||||||||||||
Dala Petroleum, Inc. | Warrants(8) | n/a | 6/3/2017 | 714,286 | — | — | — | — | — | |||||||||||||||||||||||||||
Northern Capital Partners I, LP | Limited Partnership Units(8) | n/a | n/a | 500,000 | 500,000 | 444,208 | — | 55,792 | (55,792 | ) | ||||||||||||||||||||||||||
Southern Plains Resources, Inc. | Common Stock(8) | n/a | n/a | 600,000 | 730,000 | — | — | 730,000 | (730,000 | ) | ||||||||||||||||||||||||||
1,730,000 | 444,208 | 5.08 | % | — | 1,285,792 | (1,285,792 | ) | |||||||||||||||||||||||||||||
Publishing | ||||||||||||||||||||||||||||||||||||
Educational Development Corp. | Common Stock | n/a | n/a | 2,300 | 25,212 | 25,461 | 0.29 | % | 249 | — | 249 | |||||||||||||||||||||||||
Telecommunications | ||||||||||||||||||||||||||||||||||||
AT&T | Common Stock(9) | n/a | n/a | 5,000 | 175,260 | 172,050 | — | 3,210 | (3,210 | ) | ||||||||||||||||||||||||||
CenturyLink, Inc. | Common Stock(9) | n/a | n/a | 5,000 | 157,360 | 125,800 | — | 31,560 | (31,560 | ) | ||||||||||||||||||||||||||
Windstream Holdings Inc. | Common Stock(9) | n/a | n/a | 1,666 | 21,087 | 10,729 | — | 10,358 | (10,358 | ) | ||||||||||||||||||||||||||
353,707 | 308,579 | 3.53 | % | — | 45,128 | (45,128 | ) | |||||||||||||||||||||||||||||
Total Equity Investments | $ | 4,837,936 | $ | 3,897,808 | 44.59 | % | $ | 633,150 | $ | 1,573,278 | $ | (940,128 | ) | |||||||||||||||||||||||
Total Cash and Cash Equivalents | $ | 2,980,659 | $ | 2,980,659 | 34.10 | % | — | — | — | |||||||||||||||||||||||||||
Total Investments, Cash and Cash Equivalents | $ | 10,198,790 | $ | 8,728,467 | 99.85 | % | $ | 633,150 | $ | 2,103,473 | $ | (1,470,323 | ) |
Investments(1) | Investment Type | Interest Rate(2) | Maturity Date | Principal Amount | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
Equity Investments | ||||||||||||||||||||||||||||||||
Advertising | ||||||||||||||||||||||||||||||||
Creative Realities, Inc. | Warrants(8) | n/a | 12/28/2020 | 35,714 | $ | — | $ | — | 0.00 | % | $ | — | $ | — | $ | — | ||||||||||||||||
Business Services | ||||||||||||||||||||||||||||||||
Park City Group Inc. | Common Stock | n/a | n/a | 10,000 | 68,222 | 59,700 | — | 8,522 | (8,522 | ) | ||||||||||||||||||||||
Qualstar Corp. | Common Stock | n/a | n/a | 11,299 | 61,455 | 59,320 | — | 2,135 | (2,135 | ) | ||||||||||||||||||||||
Spar Group Inc. | Common Stock(8) | n/a | n/a | 200,012 | 284,592 | 107,206 | — | 177,386 | (177,386 | ) | ||||||||||||||||||||||
414,269 | 226,226 | 2.01 | % | — | 188,043 | (188,043 | ) | |||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Famous Daves of America, Inc. | Common Stock | n/a | n/a | 38,963 | 154,409 | 178,840 | 24,431 | — | 24,431 | |||||||||||||||||||||||
Gaia, Inc. | Common Stock | n/a | n/a | 10,000 | 157,047 | 103,600 | — | 53,447 | (53,447 | ) | ||||||||||||||||||||||
HG Holdings, Inc. | Common Stock(8) | n/a | n/a | 200,000 | 199,118 | 87,000 | — | 112,118 | (112,118 | ) | ||||||||||||||||||||||
NTN Buzztime Inc. | Common Stock | n/a | n/a | 16,370 | 46,437 | 31,921 | — | 14,516 | (14,516 | ) | ||||||||||||||||||||||
Tzfat Spirits of Israel, LLC | LLC Membership Units(8) | n/a | n/a | 55,000 | 101,019 | 25,000 | — | 76,019 | (76,019 | ) | ||||||||||||||||||||||
658,030 | 426,361 | 3.78 | % | 24,431 | 256,100 | (231,669 | ) | |||||||||||||||||||||||||
Education | ||||||||||||||||||||||||||||||||
Nat'l Amer. Univ. Holdings, Inc. | Common Stock | n/a | n/a | 52,053 | 59,123 | 9,370 | 0.08 | % | — | 49,753 | (49,753 | ) | ||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||
OTC Markets Group Cl A | Common Stock | n/a | n/a | 7,000 | 118,889 | 203,280 | 84,391 | — | 84,391 | |||||||||||||||||||||||
Ladenburg Thalmn | Common Stock(9) | n/a | n/a | 50,000 | 145,364 | 116,500 | — | 28,864 | (28,864 | ) | ||||||||||||||||||||||
264,253 | 319,780 | 2.84 | % | 84,391 | 28,864 | 55,527 | ||||||||||||||||||||||||||
Healthcare | ||||||||||||||||||||||||||||||||
Reshape Life Sciences Inc Pfd Conv Ser B | Preferred LLC Units(4) (8) | n/a | n/a | 156 | 155,321 | 32,448 | — | 122,873 | (122,873 | ) | ||||||||||||||||||||||
Reshape Life Sciences Inc Pfd Conv Ser B | Warrants(8) | n/a | 8/16/2024 | 67,860 | 679 | — | — | 679 | (679 | ) | ||||||||||||||||||||||
HemaCare Corp. | Common Stock(8) | n/a | n/a | 134,697 | 416,222 | 1,306,561 | 890,339 | — | 890,339 | |||||||||||||||||||||||
572,222 | 1,339,009 | 11.87 | % | 890,339 | 123,552 | 766,787 | ||||||||||||||||||||||||||
Industrial Goods | ||||||||||||||||||||||||||||||||
CPI Aerostructures Inc. | Common Stock | n/a | n/a | 25,000 | 229,832 | 159,250 | — | 70,582 | (70,582 | ) | ||||||||||||||||||||||
Optex Systems Holdings, Inc. | Common Stock | n/a | n/a | 21,642 | 39,531 | 28,351 | — | 11,180 | (11,180 | ) | ||||||||||||||||||||||
269,363 | 187,601 | 1.66 | % | — | 81,762 | (81,762 | ) | |||||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||||||||
Franklin Wireless Corp. | Common Stock | n/a | n/a | 38,189 | 71,435 | 86,689 | 15,254 | — | 15,254 | |||||||||||||||||||||||
Gogo Inc. | Common Stock | n/a | n/a | 10,000 | 57,640 | 29,900 | — | 27,740 | (27,740 | ) | ||||||||||||||||||||||
Insite Software Solutions, Inc | Warrants(8) | n/a | 12/30/2023 | 108,960 | — | — | — | — | — | |||||||||||||||||||||||
Intelligent Systems Corp. | Common Stock | n/a | n/a | 9,671 | 130,269 | 124,949 | — | 5,320 | (5,320 | ) | ||||||||||||||||||||||
Kwikbit Inc. (fka MAX 4G) | Preferred Stock(8) | n/a | n/a | 300,000 | 150,000 | 300,000 | 150,000 | — | 150,000 | |||||||||||||||||||||||
Microvision, Inc. | Common Stock | n/a | n/a | 5,000 | 6,250 | 3,020 | — | 3,230 | (3,230 | ) | ||||||||||||||||||||||
Points International, Inc. | Common Stock | n/a | n/a | 8,000 | 98,932 | 79,680 | — | 19,252 | (19,252 | ) | ||||||||||||||||||||||
Simulations Plus, Inc. | Common Stock | n/a | n/a | 24,001 | 237,363 | 477,611 | 240,248 | — | 240,248 | |||||||||||||||||||||||
Taitron Components Inc. | Common Stock | n/a | n/a | 20,000 | 41,295 | 34,600 | 470 | 7,165 | (6,695 | ) | ||||||||||||||||||||||
TESSCO Technologies Inc. | Common Stock | n/a | n/a | 20,074 | 346,203 | 240,888 | — | 105,315 | (105,315 | ) | ||||||||||||||||||||||
Travelzoo, Inc. | Common Stock | n/a | n/a | 15,100 | 138,966 | 148,433 | 11,159 | 1,692 | 9,467 | |||||||||||||||||||||||
1,278,353 | 1,525,770 | 13.53 | % | 417,131 | 169,714 | 247,417 | ||||||||||||||||||||||||||
Leisure & Hospitality | ||||||||||||||||||||||||||||||||
Bitesquad.com LLC | Preferred LLC Units(4) (8) | n/a | n/a | 13,227 | 726,736 | 714,258 | — | 12,478 | (12,478 | ) | ||||||||||||||||||||||
Bitesquad.com LLC | Common Stock(8) | n/a | n/a | 60,316 | 288,157 | 3,136,432 | 2,848,275 | — | 2,848,275 | |||||||||||||||||||||||
DBR Enclave US Investors, LLC | LLC Units Units | n/a | n/a | 500,000 | 500,000 | 500,000 | — | — | — | |||||||||||||||||||||||
1,514,893 | 4,350,690 | 38.57 | % | 2,848,275 | 12,478 | 2,835,797 | ||||||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||
Northern Capital Partners I, LP | LP Units(8) | n/a | n/a | 550,000 | 550,000 | 488,629 | — | 61,371 | (61,371 | ) | ||||||||||||||||||||||
Southern Plains Resources, Inc. | Common Stock(8) | n/a | n/a | 600,000 | 730,000 | — | — | 730,000 | (730,000 | ) | ||||||||||||||||||||||
1,280,000 | 488,629 | 4.33 | % | — | 791,371 | (791,371 | ) | |||||||||||||||||||||||||
Publishing | ||||||||||||||||||||||||||||||||
Educational Development Corp. | Common Stock | n/a | n/a | 127,404 | 648,321 | 1,086,756 | 9.64 | % | 438,435 | — | 438,435 | |||||||||||||||||||||
Total Equity Investments | $ | 6,958,827 | $ | 9,960,192 | 88.31 | % | $ | 4,703,002 | $ | 1,701,637 | $ | 3,001,365 | ||||||||||||||||||||
Total Cash | 966,121 | 966,121 | 8.57 | % | — | — | — | |||||||||||||||||||||||||
Total Investments and Cash | $ | 7,924,948 | $ | 10,926,313 | 96.87 | % | $ | 4,703,002 | $ | 1,701,637 | $ | 3,001,365 |
(1) | All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote. |
(2) | Interest is presented on a per annum basis. |
Investment is secured |
(5) | In the case of warrants, warrants provide for the right to purchase common equity of the issuer. |
(6) | In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis. |
(7) | In the case of warrants, purchase rights under the warrants will expire at the close of business on this date. |
(8) | Investment is not an income-producing investment. |
(9) | Investment is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.
|
At December 31, 2018, aggregate non-qualifying assets represented approximately 6.0% of our total assets.
At December 31, 2018, the estimated net unrealized gain for federal tax purposes was $3,202,798, based on a tax cost basis of $6,757,394.
At December 31, 2018, the estimated aggregate gross unrealized gain for federal income tax purposes was $4,789,742 and the estimated aggregate gross unrealized loss for federal income tax purposes was $1,586,944.
The accompanying notes are an integral part of these financial statements.
NOTE 1 — ORGANIZATION
Mill City Ventures III, Ltd. is an investment company incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.
We are an internally managed closed-end non-diversified management investment company.were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a developmentstage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. On February 7, 2013, we filed Form N-54A to become a business development company (“BDC”) under the 1940 Act. We have electedoperated as a BDC until we withdrew our election to be regulatedtreated as a BDC by filing a Form N-54C with SEC on December 27, 2019. As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC, and we are seeking opportunities to invest in or acquire one or more businesses. Nevertheless, any investment we make in business will be limited and structured in such a way as to ensure that no more than 40% of our total assets consist of investment securities.
Because we operated as a BDC or investment company from 2013 through December 27, 2019, the financial statements in this report reflect our operations as a business development company, or “BDC,” under the Investment Company Act of 1940 (the “1940 Act”). To date, including the December 31, 2019 balance sheet. During that time, we have not made an election to be treated as a regulated investment company, or “RIC,” under the Internal Revenue Code of 1986.
Wewere primarily focusfocused on investing in or lending to privately held and small-capsmall capitalization publicly traded U.S. companies, and making managerial assistance available to such companies. TheseA majority of our investments are typicallyby dollar amount were structured as purchases of preferred or common stock investment contracts, or loans evidenced by promissory notes that may behave been convertible into stock by their terms or that may behave been accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. Our future revenues will relate to the gain we realize from the sale of securities we purchase, and to dividends and interest we derive from those securities. Our investment objective iswas to generate both current income and capital appreciation that ultimately becomebecame 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 47 – 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 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.
17 |
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.
Income taxes: We account
Due to our change in business model, we now accounts for income taxes under the asset and liability method. Under this 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 determined based onrecognized for the differenceexpected future tax consequences of temporary differences between the financial statement carrying amount and tax basesbasis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reducereverse. 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 amounts expectedextent we believe these assets will more likely than not be realized. In making such determination, we considers 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.
The Company files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. Based on its evaluation, the Company believes it has no significant unrecognized tax positions. The Company’s evaluation was performed for the tax years ended December 31, 2016 through 2019, which are the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2019. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
Prior to the business model change in 2019, we operated as a BDC under the 1940 Act. As such, we planned to be realized.taxed as a regulated investment company, or “RIC”. Compliance with the requirements of the Internal Revenue Code applicable to RICs required us to distribute at least 90% of our investment company taxable income to shareholders. Our intention was to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain, therefore we have made no provision for income taxes prior to 2019. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences were reclassified to paid-in capital. For more information of the current year provision, see Note 711, “Income Taxes.”Taxes”.
Revenue recognition: Realized gains or losses on the sale of investments are calculated using the specific investment method.
Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities purchased are accreted or amortized, as applicable, into interest income over the life of the related security using the effective-yield method. The amortized cost of investments represents the original cost, adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more, or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and is in the process of collection.
Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
18 |
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.
Allocation of net gains and losses: All income, gains, losses, deductions and credits for any investment are allocated in a manner proportionate to the shares owned.
Management and service fees: We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities.
Recently Adopted Accounting Pronouncements:
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Leases (Topic 840). Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The guidance requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted.
Effective January 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company elected the package of practical expedients, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company has also elected the practical expedient allowing us to not separate the lease and non-lease components for all classes of underlying assets. The Company elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualified, the Company did not recognize right-of-use assets or lease liabilities, and this included not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities of $57,523 each, as of January 1, 2019, with no impact on accumulated deficit. Financial position for reporting periods beginning on or after January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.
Additional information and disclosures required by this new standard are contained in Note 10, 'Operating Leases'.
NOTE 3 — NET GAIN (LOSS) PER COMMON SHARE
Basic net gain (loss) per common share is computed by dividing net gain (loss)increase (decrease) in net assets resulting from operations by the weighted-averageweightedaverage number of vested 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 follows:
Year Ended | Year Ended | For the Year Ended December 31, | ||||||||||||||
December 31, | December 31, | 2019 | 2018 | |||||||||||||
2016 | 2015 | |||||||||||||||
Numerator: Net Gain (Loss) | $ | 646,120 | $ | (2,732,402 | ) | |||||||||||
Numerator: Net increase (decrease) in net assets resulting from operations | $ | (656,986 | ) | $ | 1,649,674 | |||||||||||
Denominator: Weighted-average number of common shares outstanding | 12,151,493 | 12,151,493 | 11,067,402 | 11,067,402 | ||||||||||||
Basic and diluted net gain (loss) per common share | $ | 0.05 | $ | (0.22 | ) | $ | (0.06 | ) | $ | 0.15 |
At December 31, 20162019 and 2015,2018, the Company did not have any options or warrants outstanding or any other dilutive common equivalent shares.
19 |
NOTE 4 — COMMITMENTS AND CONTINGENCIES4—LEASES
On June 6, 2013,January 1, 2019 we entered intoadopted ASU No. 2016-2, Leases (Topic 842), and its amendments and elected the effective date transition method.
The Company is subject to two non-cancelable operating leases for office space expiring March 31, 2022. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew.
Because our lease does not provide an agreementimplicit 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 approximately 1,917 square feetpayments on a collateralized basis over the term of commercial spacea lease. The weighted average discount rate as of December 31, 2019 was 4.5% and two parking spots, for a period of 62 months. The leased space became available for occupancy on September 23, 2013. The 62-monththe weighted average remaining lease term began October 1, 2013 and runs through November 30, 2018. The total baseis 2 years.
Under ASC 840, rent expense for office facilities for the year ended December 31, 20162019 and December 31, 20152018 was $45,378$73,685 and $45,378,$78,180, respectively.
The components of our operating lease were as follows for the three and twelve months ended December 31, 2019:
Three-Month | Year | |||||||
Ended | Ended | |||||||
December 31, 2019 | December 31, 2019 | |||||||
Operating lease costs | $ | 4,779 | $ | 19,008 | ||||
Variable lease cost | $ | 4,223 | 16,654 | |||||
Short-term lease cost | $ | 7,433 | 29,660 | |||||
Total | $ | 16,435 | $ | 65,322 |
The following is a schedule of the aggregate required annual minimum lease payments.
Year | Amount | Amount | ||||||
2017 | $ | 50,311 | ||||||
2018 | 46,988 | |||||||
2020 | $ | 20,551 | ||||||
2021 | 21,162 | |||||||
2022 | 5,396 | |||||||
TOTAL | $ | 97,299 | $ | 47,109 |
NOTE 5 — 5—SHAREHOLDERS’ EQUITY
At December 31, 2016,2019 and 2018, a total of 12,151,49311,067,402 shares of common stock were issued and outstanding.
NOTE 6 — 6—INVESTMENTS
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 20162019 (together with the corresponding percentage of total portfolio investments):
As of December 31, 2016 | ||||||||||||||||
Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
Loans (Secured) | $ | 1,332,695 | 18.0 | % | $ | 680,000 | 9.7 | % | ||||||||
Preferred Stock | 2,030,000 | 27.4 | 3,047,011 | 43.6 | ||||||||||||
Common Stock | 3,384,194 | 45.8 | 2,714,219 | 38.8 | ||||||||||||
Warrants | - | - | 32,143 | 0.5 | ||||||||||||
Other Equity | 651,019 | 8.8 | 513,629 | 7.4 | ||||||||||||
Total | $ | 7,397,908 | 100.0 | % | $ | 6,987,002 | 100.0 | % |
20 |
As of December 31, 2019 | ||||||||||||||||
Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
Senior Secured Loans | $ | — | — | % | — | — | % | |||||||||
Preferred Stock | 150,000 | 7.6 | 300,000 | 17.2 | ||||||||||||
Common Stock | 805,472 | 40.8 | 906,697 | 52.1 | ||||||||||||
Warrants | 679 | — | — | — | ||||||||||||
Other Equity | 1,020,219 | 51.6 | 534,200 | 30.7 | ||||||||||||
Total | $ | 1,976,370 | 100.0 | % | 1,740,897 | 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, 20152018 (together with the corresponding percentage of total portfolio investments):
As of December 31, 2015 | ||||||||||||||||
Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
Loans (Secured) | $ | 2,380,195 | 33.0 | % | $ | 1,850,000 | 32.2 | % | ||||||||
Preferred Stock | 1,430,000 | 19.8 | 1,080,000 | 18.8 | ||||||||||||
Common Stock | 2,045,867 | 28.3 | 1,587,550 | 27.6 | ||||||||||||
Warrants | - | - | - | - | ||||||||||||
Other Equity | 1,362,069 | 18.9 | 1,230,258 | 21.4 | ||||||||||||
Total | $ | 7,218,131 | 100.0 | % | $ | 5,747,808 | 100.0 | % |
As of December 31, 2018 | ||||||||||||||||
Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
Preferred Stock | $ | 1,032,057 | 14.8 | % | 1,046,706 | 10.5 | % | |||||||||
Common Stock | 4,775,072 | 68.6 | 7,899,857 | 79.3 | ||||||||||||
Warrants | 679 | — | — | — | ||||||||||||
Other Equity | 1,151,019 | 16.6 | 1,013,629 | 10.2 | ||||||||||||
Total | $ | 6,958,827 | 100.0 | % | 9,960,192 | 100.0 | % |
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2016:2019:
As of December 31, 2016 | ||||||||
Investments at Fair Value | Percentage of Fair Value | |||||||
Advertising | $ | 32,143 | 0.5 | % | ||||
Consumer | 354,882 | 5.1 | ||||||
Education | 116,686 | 1.7 | ||||||
Financial | 1,000,622 | 14.3 | ||||||
Healthcare | 420,085 | 6.0 | ||||||
Information Technology | 669,600 | 9.6 | ||||||
Investment Fund | 204,912 | 2.9 | ||||||
Leisure & Hospitality | 2,747,011 | 39.3 | ||||||
Media | 137,050 | 2.0 | ||||||
Oil & Gas | 488,629 | 7.0 | ||||||
Publishing | 367,205 | 5.2 | ||||||
Telecommunications | 448,177 | 6.4 | ||||||
Total | $ | 6,987,002 | 100.0 | % |
As of December 31, 2019 | ||||||||
Investments at Fair Value | Percentage of Fair Value | |||||||
Consumer | $ | 15,000 | 0.9 | % | ||||
Financial | 150,858 | 8.7 | ||||||
Information Technology | 300,000 | 17.2 | ||||||
Leisure & Hospitality | 369,200 | 21.2 | ||||||
Oil & Gas | 150,000 | 8.6 | ||||||
Publishing | 755,839 | 43.4 | ||||||
Total | $ | 1,740,897 | 100.0 | % |
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2015:2018:
As of December 31, 2015 | ||||||||
Investments at Fair Value | Percentage of Fair Value | |||||||
Advertising | $ | 843,750 | 14.7 | % | ||||
Consumer | 1,012,470 | 17.6 | ||||||
Financial | 537,380 | 9.3 | ||||||
Healthcare | 146,760 | 2.6 | ||||||
Information Technology | 349,550 | 6.1 | ||||||
Investment Fund | 405,200 | 7.1 | ||||||
Leisure & Hospitality | 1,541,050 | 26.8 | ||||||
Media | 133,400 | 2.3 | ||||||
Oil & Gas | 444,208 | 7.7 | ||||||
Publishing | 25,461 | 0.4 | ||||||
Telecommunications | 308,579 | 5.4 | ||||||
Total | $ | 5,747,808 | 100.0 | % |
As of December 31, 2018 | ||||||||
Investments at Fair Value | Percentage of Fair Value | |||||||
Advertising | — | —% | ||||||
Business Services | $ | 226,226 | 2.3 | |||||
Consumer | 426,361 | 4.3 | ||||||
Education | 9,370 | 0.1 | ||||||
Financial | 319,780 | 3.2 | ||||||
Healthcare | 1,339,009 | 13.4 | ||||||
Industrial Goods | 187,601 | 1.9 | ||||||
Information Technology | 1,525,770 | 15.3 | ||||||
Leisure & Hospitality | 4,350,690 | 43.7 | ||||||
Oil & Gas | 488,629 | 4.9 | ||||||
Publishing | 1,086,756 | 10.9 | ||||||
Total | $ | 9,960,192 | 100.00 | % |
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We do not “control,” and we are not an “affiliate” (as each of those terms is defined in the 1940 Act), of any of our portfolio companies as of December 31, 2016.2019 and 2018. Under the 1940 Act, we would generally be presumed to “control” a portfolio company if we owned more than 25% of its voting securities, and be an “affiliate” of a portfolio company is we owned at least 5% and up to 25% of its voting securities.
NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS
General information: Accounting guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the relative observability of inputs used in the valuation. The three levels are defined as follows:
· | Level 1:Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities. |
· | Level 2:Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets. |
· | Level 3:Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances. |
Our valuation policy and procedures: Under our valuation policies and procedures, we evaluate the source of inputs, including any markets in which our investments are trading, and then apply the resulting information in determining fair value. For our Level 1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter market, to average the last quoted bid and ask price on the most active market on which the security is quoted. In the case of traded debt securities the prices for which are not readily available, we may value those securities using a present value approach, at their weighted-average yield to maturity.
The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by the Valuation Committee of our Board of Directors, pursuant to our written Valuation Policy and Procedures. These policies and procedures generally require that we value our Level 3 equity investments at cost plus any accrued interest, unless circumstances warrant a different approach. Our Valuation Policy and Procedures provide examples of these circumstances, such as when a portfolio company has engaged in a subsequent financing of more than ade 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.
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For non-traded (Level 3) debt securities with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists.
On a quarterly basis, our management provides members of our Valuation Committee with (i) valuation reports for each portfolio investment (which reports include our cost,, the most recent prior valuation and any current proposed valuation, and an indication of the valuation methodology used, together with any other supporting materials); (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; and (iii) quarter- or period-end statements from our custodial firms holding any of our portfolio investments.investments; and (iv) recommendations to change any existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing. The committee then discusses these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.
We made no changes to our Valuation Policy and Procedures during the reporting period.
Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investment portfolio as of December 31, 20162019 and 2018 may differ materially from values that would have been used had a readily available market for the securities existed.
The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2016,2019, according to the fair value hierarchy:
As of December 31, 2016 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Loans (Secured) | $ | - | $ | - | $ | 680,000 | $ | 680,000 | ||||||||
Preferred Stock | - | - | 3,047,011 | 3,047,011 | ||||||||||||
Common Stock | 2,684,219 | 30,000 | - | 2,714,219 | ||||||||||||
Warrants | - | 32,143 | - | 32,143 | ||||||||||||
Other Equity | - | - | 513,629 | 513,629 | ||||||||||||
Total | $ | 2,684,219 | $ | 62,143 | $ | 4,240,640 | $ | 6,987,002 |
As of December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Preferred Stock | $ | — | $ | — | $ | 300,000 | $ | 300,000 | ||||||||
Common Stock | 906,697 | — | — | 906,697 | ||||||||||||
Warrants | — | — | — | — | ||||||||||||
Other Equity | — | — | 534,200 | 534,200 | ||||||||||||
Total | $ | 906,697 | $ | — | $ | 834,200 | $ | 1,740,897 |
The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2015,2018, according to the fair value hierarchyhierarchy:
As of December 31, 2018 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Preferred Stock | $ | — | $ | 32,448 | $ | 1,014,258 | $ | 1,046,706 | ||||||||
Common Stock | 4,763,425 | — | 3,136,432 | 7,899,857 | ||||||||||||
Warrants | — | — | — | — | ||||||||||||
Other Equity | — | — | 1,013,629 | 1,013,629 | ||||||||||||
Total | $ | 4,763,425 | $ | 32,448 | $ | 5,164,319 | $ | 9,960,192 |
As of December 31, 2015 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Loans (Secured) | $ | - | $ | - | $ | 1,850,000 | $ | 1,850,000 | ||||||||
Preferred Stock | - | - | 1,080,000 | 1,080,000 | ||||||||||||
Common Stock | 1,587,550 | - | - | 1,587,550 | ||||||||||||
Warrants | - | - | - | - | ||||||||||||
Other Equity | - | - | 1,230,258 | 1,230,258 | ||||||||||||
Total | $ | 1,587,550 | $ | - | $ | 4,160,258 | $ | 5,747,808 |
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the period ended December 31, 2016:
Secured Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
Balance as of December 31, 2015 | $ | 1,850,000 | $ | 1,080,000 | $ | - | $ | - | $ | 1,230,258 | ||||||||||
Net change in unrealized appreciation | (122,500 | ) | 1,367,011 | - | (5,579 | ) | ||||||||||||||
Purchases and other adjustments to cost | 64,500 | 600,000 | - | - | 50,000 | |||||||||||||||
Sales and redemptions | (724,000 | ) | - | - | - | (761,050 | ) | |||||||||||||
Net realized gain | (388,000 | ) | - | - | - | - | ||||||||||||||
Balance as of December 31, 2016 | $ | 680,000 | $ | 3,047,011 | $ | - | $ | - | $ | 513,629 |
The net change in unrealized appreciation for the period ended December 31, 2016 attributable to Level 3 portfolio investments still held at December 31, 2016 is $713,932, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the periodyear ended December 31, 2015:2019:
Secured | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
Balance as of December 31, 2014 | $ | 1,750,000 | $ | 650,000 | $ | 300,000 | $ | - | $ | 1,525,000 | ||||||||||
Net change in unrealized appreciation | (530,195 | ) | (350,000 | ) | (300,000 | ) | - | (55,792 | ) | |||||||||||
Purchases and other adjustments to cost | 2,380,195 | 780,000 | - | - | - | |||||||||||||||
Sales and redemptions | (1,750,000 | ) | - | - | - | (238,950 | ) | |||||||||||||
Net realized gain | - | - | - | - | - | |||||||||||||||
Balance as of December 31, 2015 | $ | 1,850,000 | $ | 1,080,000 | $ | - | $ | - | $ | 1,230,258 |
For the year ended December 31, 2019 | ||||||||||||||||||||
Secured Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
Balance as of January 1, 2019 | $ | — | $ | 1,014,258 | $ | 3,136,432 | $ | — | $ | 1,013,629 | ||||||||||
Net change in unrealized appreciation (depreciation) | — | 12,478 | (2,848,275 | ) | — | (348,629 | ) | |||||||||||||
Purchases and other adjustments to cost | — | — | — | — | — | |||||||||||||||
Sales and redemptions | — | (726,691 | ) | (3,341,639 | ) | (128,775 | ) | (130,800 | ) | |||||||||||
Net realized gain (loss) | — | (45 | ) | 3,053,482 | 128,775 | — | ||||||||||||||
Balance as of December 31, 2019 | $ | — | $ | 300,000 | $ | — | $ | — | $ | 534,200 | ||||||||||
Net change in unrealized appreciation for the year ended 12/31/19 on securities still held | $ | — | $ | — | $ | — | $ | — | $ | (348,629 | ) |
The net change in unrealized depreciation for the periodyear ended December 31, 20152019 attributable to Level 3 portfolio investments still held atas of December 31, 2015 was $1,235,987,2019 is $348,629, 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, 2019 and the unobservable inputs used to determine their valuation:
Security Type | 12/31/19 FMV | Unobservable Inputs | ||||||
Tzfat Spirits of Israel, LLC | Other Equity | $ | 15,000 | last known funding secured by company | ||||
Kwikbit Inc. (fka MAX 4G) | Preferred Stock | 300,000 | last funding secured by company | |||||
DBR Enclave US Investors, LLC | Other Equity | 369,200 | cost | |||||
Northern Capital Partners I, LP | Other Equity | 150,000 | analysis of issuer provided financials and management commentary | |||||
$ | 834,200 |
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31, 2018:
As of December 31, 2018 | ||||||||||||||||||||
Secured Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
Balance as of January 1, 2018 | $ | 500,000 | $ | 1,026,736 | $ | 1,293,490 | $ | — | $ | 1,013,629 | ||||||||||
Net change in unrealized appreciation | 750,000 | (12,478 | ) | 1,842,942 | — | — | ||||||||||||||
Purchases and other adjustments to cost | — | — | — | — | — | |||||||||||||||
Sales and redemptions | (550,000 | ) | — | — | — | — | ||||||||||||||
Net realized gain (loss) | (700,000 | ) | — | — | — | — | ||||||||||||||
Balance as of December 31, 2018 | $ | — | $ | 1,014,258 | $ | 3,136,432 | $ | — | $ | 1,013,629 | ||||||||||
Net change in unrealized appreciation for the year ended 12/31/18 on securities still held | $ | — | $ | (12,478 | ) | $ | 1,842,942 | $ | — | $ | — |
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The net change in unrealized appreciation for the year ended December 31, 2018 attributable to Level 3 portfolio investments still held as of December 31, 2018 was $1,830,464, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.
The following table lists our level 3 investments held as of December 31, 2018 and the unobservable inputs used to determine their valuation:
Security Type | 12/31/18 FMV | Unobservable Inputs | ||||||
Insite Software Solutions, Inc | Warrants | $ | — | intrinsic value of warrants | ||||
Tzfat Spirits of Israel, LLC | Other Equity | 25,000 | last funding secured by company | |||||
MAX 4G, Inc. | Preferred Stock | 300,000 | last funding secured by company | |||||
Bitesquad.com LLC | Preferred Stock | 714,258 | announced merger of company | |||||
Bitesquad.com LLC | Common Stock | 3,136,432 | announced merger of company | |||||
DBR Enclave US Investors, LLC | Other Equity | 500,000 | cost | |||||
Northern Capital Partners I, LP | Other Equity | 488,629 | issuer provided financials | |||||
Southern Plains Resources, Inc. | Common Stock | — | company has substantially ceased operations | |||||
$ | 5,164,319 |
There were no transfers between levels during the years ended December 31, 20162019 and 2015.2018.
NOTE 8 — MINIMUM ASSET COVERAGE
As a BDC, we arewere required to meet various regulatory tests. Among other things, these tests will requirerequired us to invest at least 70% of our total assets in private or small-capsmallcap public U.S.-basedU.S.based companies, and to maintain an asset coverage ratio of total assets (less all liabilities and indebtedness not represented by senior securities) to total indebtedness represented by senior securities and borrowings (including accrued interest payable) of at least 200%. As of December 31, 2016,2019, approximately 89%99% of our investments (by fair value at that date) were in private or small-capsmallcap public U.S.-basedU.S.based companies and our asset coverage ratio was 100%.we did not carry any debt.
NOTE 9 —– RELATED-PARTY TRANSACTIONS
We maintain a Code of Ethics and certain other policies relating to conflicts of interest and related-party transactions, as well as policies and procedures relating to what regulations applicable to BDCs generally describe as “affiliate transactions.” Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested. Our Board of Directors has adopted a policy to require our disclosure of these instances in our periodic filings with the SEC. Our related-party transactions requiring disclosure under this policy are:
· | Mr. Joseph A. Geraci, II, our Chief Financial Officer, and Mr. Douglas M. Polinsky, our Chief Executive Officer, hold direct and indirect interests in the common stock of Southern Plains Resources, Inc., a company in which we made investments in common stock in each of March and July 2013. |
· |
Lantern Advisors, LLC is a limited liability company equally owned by Messrs. Geraci and Polinsky, and owns a cashless warrant to purchase up to |
· | On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owns approximately 1,500,000 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory note bears interest payable monthly at the rate of 10% per annum. The note is secured by the debtors pledge to us of 625,000 shares of our common stock. The pledged shares are held in physical custody for us by our custodial agent Milliennium Trust Company. |
25 |
NOTE 10 — RETIREMENT SAVINGS PLANS
Our two employees, Messrs. Geraci and Polinsky, are eligible to participate in a qualified defined contribution 401(k) plan whereby they may elect to have a specified portion of their salary contributed to the plan. We will make a safe harbor match equal to 100% of their elective deferrals up to 5% of eligible earnings in addition to our option to make discretionary contributions to the plan. We made contributions totaling $10,000 and $11,250 to the plans for the years ended 2019 and 2018, respectively.
NOTE 11 — INCOME TAXES
We planPrior to December 27, 2019, before we withdrew our election to be treated as a Business Development Company, we planned to be taxed as a regulated investment company or “RIC,” and intend to comply (RIC). Compliance with the requirements of the Internal Revenue Code applicable to RICs. Currently, however, we have not elected to be treated as a RIC. Upon our election to be taxed as a RIC, we will be requiredRICs requiredus to distribute at least 90% of our investment company taxable income and we intend at that time to shareholders. Our intention wasto distribute to shareholders (or retain through a deemed distribution) all of our investment company taxable income and net capital gain. Based on the foregoing,gain, therefore we have made no provision for income taxes. taxes prior to December 27, 2019.Now that the election to be an RIC has passed and as of December 27, 2019 we are a C-Corporation for tax purposes. Income taxes as of December 31, 2019 are described below.
The characterizationCompany has not reflected any benefit of income and gains thatsuch net operating loss carry-forwards in the accompanying financial statements. Our current taxes due are not material to the financial statements. Therefore, we will distribute is determined in accordance withdo not have a provision for income tax regulationsexpense (benefit). The income tax expense benefit differed from the amount computed by applying the U.S. federal income tax rate of 21% to income before income taxes as a result of the following:
Tax Year ended | December 31, 2019 | |||
Computed "expected" tax benefit | 21.0 | % | ||
State income tax, net of federal benefit | 1.7 | |||
Change in valuation allowance | (22.7 | ) | ||
— | % |
The tax effect of temporary differences that may differgive rise to significant portions of the deferred tax assets for the period ended December 31, 2019 is presented below:
2019 | ||||
Deferred tax assets: | ||||
Net operating loss carryforward | $ | 356,000 | ||
Unrealized losses | 56,000 | |||
R&D and foreign tax credit | 34,000 | |||
Total gross deferred tax assets | $ | 446,000 | ||
Valuation allowance | (446,000 | ) | ||
Net deferred tax assets | $ | — |
The Company had Federal net operating loss carryforwards of approximately $978,000 at December 31, 2019 expiring from GAAP. Book and2036-2037. The Company had Minnesota net operating loss carryforwards of approximately $1,922,000 at December 31, 2019 expiring from 2021 through 2023. The Company also has insignificant net operating loss carryforwards from other states.
The Company concluded that it was no longer more likely than not that it would realize a portion of its deferred tax basis differences relatingassets due to shareholder dividends and distributions and other permanent book andthe uncertainty of profitability after implementing the new business model. As such, the Company maintained a full valuation allowance against its net deferred tax differences are reclassified to paid-in capital.assets as of December 31, 2019.
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NOTE 1112 — FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the years ended December 31, 20162019 through 2013:2015:
Year Ended December 31, | ||||||||||||||||
2016 | 2015 | 2014 | 2013 | |||||||||||||
Per Share Data: (1) | ||||||||||||||||
Net asset value at beginning of period | 0.72 | 0.94 | 0.86 | 0.04 | ||||||||||||
Net investment income | (0.02 | ) | 0.00 | (0.04 | ) | (0.05 | ) | |||||||||
Net realized and unrealized losses | 0.07 | (0.22 | ) | 0.12 | 0.03 | |||||||||||
Issuance of common stock | 0.00 | 0.00 | 0.00 | 0.84 | ||||||||||||
Net asset value at end of period | 0.77 | 0.72 | 0.94 | 0.86 | ||||||||||||
Ratio / Supplemental Data: | ||||||||||||||||
Per share market value of investments at end of period | 0.57 | 0.47 | 0.59 | 0.27 | ||||||||||||
Shares outstanding at end of period | 12,151,493 | 12,151,493 | 12,151,493 | 12,169,422 | ||||||||||||
Average weighted shares outstanding for the period | 12,151,493 | 12,151,493 | 12,166,608 | 10,219,737 | ||||||||||||
Net assets at end of period | 9,387,408 | 8,741,288 | 11,473,690 | 10,521,830 | ||||||||||||
Average net assets (2) | 8,651,742 | 10,520,199 | 11,416,452 | 8,538,872 | ||||||||||||
Portfolio turnover rate (3) | 24.94 | % | 26.26 | % | 11.21 | % | 7.53% | |||||||||
Ratio of operating expenses to average net assets (3) | -7.15 | % | -6.08 | % | -7.00 | % | -7.12% | |||||||||
Ratio of net operating loss to average net assets (3) | -2.66 | % | -0.68 | % | -4.02 | % | -6.71% | |||||||||
Ratio of realized gains to average net assets (3) | -2.12 | % | 1.74 | % | 2.54 | % | 1.51% |
Year Ended December 31, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Per Share Data(1) | ||||||||||||||||||||
Net asset value at beginning of period | $ | 1.02 | 0.87 | 0.77 | 0.72 | 0.94 | ||||||||||||||
Net investment income (loss) | (0.06 | ) | (0.05 | ) | (0.05 | ) | (0.02 | ) | — | |||||||||||
Net realized and unrealized gains (losses) | — | 0.20 | 0.11 | 0.07 | (0.22 | ) | ||||||||||||||
Repurchase of common stock | — | — | 0.04 | — | — | |||||||||||||||
Payment of common stock dividend | (0.05 | ) | — | — | — | — | ||||||||||||||
Net asset value at end of period | $ | 0.91 | 1.02 | 0.87 | 0.77 | 0.72 | ||||||||||||||
Ratio / Supplemental Data | ||||||||||||||||||||
Per share market value of investments at end of period | $ | 0.16 | 0.90 | 0.65 | 0.57 | 0.47 | ||||||||||||||
Shares outstanding at end of period | 11,067,402 | 11,067,402 | 11,067,402 | 12,151,493 | 12,151,493 | |||||||||||||||
Average weighted shares outstanding for the period | 11,067,402 | 11,067,402 | 11,863,392 | 12,151,493 | 12,151,493 | |||||||||||||||
Net assets at end of period | $ | 10,068,533 | 11,278,889 | 9,629,215 | 9,387,408 | 8,741,288 | ||||||||||||||
Average net assets(2) | $ | 11,473,535 | 10,341,702 | 9,444,440 | 8,651,742 | 10,520,199 | ||||||||||||||
Total investment return | (5.88 | )% | 17.24 | % | 7.79 | % | 6.94 | % | (23.40 | )% | ||||||||||
Portfolio turnover rate (3) | 7.63 | % | 26.93 | % | 35.03 | % | 24.94 | % | 26.26 | % | ||||||||||
Ratio of operating expenses to average net assets(3) | (7.27 | )% | (6.59 | )% | (7.30 | )% | (7.15 | )% | (6.08 | )% | ||||||||||
Ratio of net investment income (loss) to average net assets(3) | (5.86 | )% | (5.13 | )% | (5.45 | )% | (2.66 | )% | (0.68 | )% | ||||||||||
Ratio of realized gains (losses) to average net assets(3) | 28.35 | % | (5.62 | )% | 5.71 | % | (2.12 | )% | 1.74 | % |
(1) | Per-share data was derived using the weighted-average number of shares outstanding for the period. |
(2) | Based on the monthly average of net assets as of the beginning and end of each period presented. |
(3) | Ratios are annualized. |
NOTE 1213 — SUBSEQUENT EVENTS
On January 6, 2017, we received $726,785 from BiteSquad.com, LLC2020, the Company loaned $254,000 to the buyer of a residential real estate property in St. Louis Park, Minnesota, and obtained in return a 12-month promissory note accruing interest at the rate of 15% per annum (paying interest only for the first 11 months, and with accrued interest and all principal being due on January 6, 2021), together with a mortgage on the salepurchased real estate and a pledge of 26,457 preferred LLC units.all of the equity interests in the buyer.
In February 2017,On January 29, 2020, we commenced actions to take title toinvested $3.0 million in a real estate development project and possession of, with the intent of consummating periodic public foreclosure sales, shares of Mix 1 Life, Inc. that had been pledged to us by third parties as collateral security for obligations owed to us under secured promissory notes. As of the date of this report, we have obtained title to and engagedacquired in one or more public sales of the pledged shares.
On March 15, 2017, we filedreturn a complaint in the Superior Court for the State of Arizona, Maricopa County, against defendants Mix 1 Life, Inc., a Nevada corporation, and Messrs. Christopher Larson and Cameron Robb. The complaint alleges breaches of contract on the part of the defendants in connection with a default by Mix 1 Life on two senior secured promissory notes having an aggregate original principal amount of $750,000. Please see Part I, Item 3, “Legal Proceedings” for more information.
On February 2, 2017, we entered into a mezzanine loan agreement with DBR Enclave US Investors, LLC for a total commitment of $500,000, of which $333,333 was called. The$3.0 million promissory note we obtained in exchange for our investment bearsaccruing interest at the per annum rate of 15%, and maturesmaturing on June 30, 2021.October 31, 2020. The obligations under the promissory note are secured by personal guarantees delivered by the principals involved in the project, as well as a pledge of membership interests in the management company that manages the project.
On March 11, 2020, the World Health Organization declared the outbreak of a 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.
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ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 December 31, 2016,2019, our Chief Executive Officer and Chief Financial Officer in conjunction with our Chief Compliance 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 December 31, 2016.2019.
Report of Management on Internal Control Over Financial Reporting
Board of Directors and Shareholders Mill City Ventures III, Ltd.:
The management of Mill City Ventures III, Ltd. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities and Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, the Company’s management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 20162019 based on the framework set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016. Baker Tilly Virchow Krause, LLP,2019. Boulay PLLP, an independent registered public accounting firm, is not required to issue, and thus has not issued, an attestation report on the Company’s internal control over financial reporting as of December 31, 2016.2019.
/s/ Douglas M. Polinsky
Chairman, President and Chief Executive Officer
/s/ Joseph A. Geraci, II
Chief Financial Officer
Changes in Internal Controls
There were no changes in our internal control over financial reporting during the year ended December 31, 20162019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers, Promoters, and Control Persons
Name | Age | Positions | |||
Douglas M. Polinsky | Chairman, Chief Executive Officer and President | ||||
Joseph A. Geraci, II | Director and Chief Financial Officer | ||||
Howard Liszt | Director | ||||
Lyle Berman | Director | ||||
Laurence Zipkin | Director |
Douglas M. Polinsky co-founded the Company in January 2006 and since that time has been the Chairman and Chief Executive Officer of the Company. Since 1994, Mr. Polinsky has been the Chief Executive OfficerPresident of Great North Capital Consultants, Inc., a financial advisory and investment company that he founded. Great North Capital Consultants, advises corporate clientsInc. primarily engages in the business of investing in hard money lending with collateral on matters regarding corporatethe loans being first or second mortgages in both residential and governance structures, public company acquisitions of private companies and other transaction-related matters, and also makecommercial properties. In addition, Great North Capital Consultants, Inc. makes direct investments into public and private companies. Since 2007, Mr. Polinsky has been an independent director of FAB Universal, Inc., a Pennsylvania-based company specializingColorado corporation based in Pennsylvania which did specialize in digital content distribution.distribution but is now dormant. Mr. Polinsky is a member of the Audit and Compensation Committees of the Board of Directors. Since 2012, Mr. Polinsky has been an independent director of Future Healthcare of America, Inc., a Wyoming Corporation with headquarters in Pennsylvania. Future Healthcare of America is an in-home healthcare company with operations in Wyoming and Montana. Mr. Polinsky is a member of the Audit and Compensation Committees of the Board of Directors. Since 2015, Mr. Polinsky has been an independent director of Liberated Syndication, Inc., a Nevada corporation with its operations in Pennsylvania. Liberated Syndication, Inc. is a host and publisher of podcasts. Mr. Polinsky is a member of the Audit and Compensation committees of the Board of Directors. Mr. Polinsky earned a Bachelor of Science degree in hotel administration at the University of Nevada at Las Vegas.Vegas in 1981.
Joseph A. Geraci, II co-foundedcofounded the Company in January 2006 and has been a director and the Chief Financial Officer of the Company since that time. Since February 2002 through the present time, Mr. Geraci has been managing member of Isles Capital, LLC, an advisory and consulting firm that assists small businesses, both public and private, in business development. In March 2005, Mr. Geraci also became the managing member of Mill City Advisors, LLC, the general partner of Mill City Ventures, LP, and Mill City Ventures II, LP, each a Minnesota limited partnership that invested directly into both private and public companies. From January 2005 until August 2005, Mr. Geraci served as the Director of Finance for Gelstat Corporation, a purveyor of homeopathic remedies, based in Bloomington, Minnesota. Mr. Geraci provided investment advice to clients as a stockbroker and Vice President of Oak Ridge Financial Services, Inc., a Minneapolis-based brokerdealerMinneapolisbased broker-dealer firm, from June 2000 to December 2004. While at Oak Ridge Financial Services, Mr. Geraci’s business was focused on structuring and negotiating debt and equity private placements with both private and publicly held companies. From his career and investment experiences, Mr. Geraci has established networks of colleagues, clients, co-investors,coinvestors, and the officers and directors of public and private companies. Mr. Geraci was employed at other Minneapolis brokerage firms from July 1991 to June 2000. These networks offer a range of contacts across a number of sectors and companies that may provide opportunities for investment, including many that meet the Company’s screening criteria.
In August 2003, the National Association of Securities Dealers (NASD) found in an administrative hearing that Mr. Geraci, while employed by and affiliated with a NASD member, had violated NASD Conduct Rule 2110 and SEC Rule 10b-5 in August 1999, and barred him from associating with any NASD member in the future.
Howard Liszt served as Chief Executive Officer of Campbell Mithun, a national marketing communications agency he joined in 1976, until 2001. He currently serves on the board of the following companies: Eggland’s Best, a branded egg company, andcompany; Land O’ Lakes, the second largest cooperative in the United States. Mr. Liszt previously served on the board of Wireless Ronin Technologies (now known as Creative Realities, Inc.), but resigned from that board in August 2014.States; and OCO Holdings, an independent marketing communications company; Mr. Liszt holds a Bachelor of Arts in Journalism and Marketing and a Master’sMasters of Science in BusinessMarketing from the University of Minnesota, Minneapolis.
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Lyle Berman is a 1964 graduate of the University of Minnesota with a degree in Business Administration. Mr. Berman began his career with Berman Buckskin, his family's leather business. He helped grow the business into a major specialty retailer with 27 outlets. In 1990, Mr. Berman participated in the founding of Grand Casinos, Inc. Mr. Berman is credited as one of the early visionaries in the development of casinos outside of the traditional gaming markets of Las Vegas and Atlantic City. In less than five years, the company opened eight casino resorts in four states. In 1994, Mr. Berman financed the initial development of Rainforest Cafe. He served as the Chairman and CEO from1994 until2000. In October 1995, Mr. Berman was honored with the B'nai B'rith "Great American Traditions Award." In April 1996, he received the Gaming Executive of the Year Award; in 2004, Mr. Berman was inducted into the Poker Hall of Fame; and in 2009, he received the Casino Lifetime Achievement Award from Raving Consulting & Casino Journal. In 1998, Lakes Entertainment, Inc. was formed. In 2002, as Chairman of the Board and CEO of Lakes Entertainment, Inc., Mr. Berman was instrumental in creating the World Poker Tour. Since January 2005, Mr. Berman has also served as Chairman of the Board of Pokertek, Inc.
Laurence Zipkin is nationally recognized for his expertise in the gaming industry, restaurants, and emerging small growth companies. From 1996 to 2006, Mr. Zipkin owned Oakridge Securities, Inc. where, as an investment banker, he successfully raised capital for various early growth-stagegrowthstage companies and advising clients with regard to private placements, initial public offerings, mergers, debt offerings, bridge and bank financings, developing business plans and evaluating cash needs and resources. He has extensive experience in the merger and acquisition field and has represented companies on both the buy and sell side. Since 2006, Mr. Zipkin has been self-employed,selfemployed, engaging in various consulting activities, owning and operating two restaurant properties, and purchasing distressed real estate. Mr. Zipkin is a licensed insurance agent for both life and health insurance. Mr. Zipkin attended the University of Pennsylvania Wharton School of Finance.
Under the Company’s bylaws, the directors serve for indefinite terms expiring upon the next annual meeting of the Company’s shareholders.
When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board of Directors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director. With regard to Messrs. Polinsky and Geraci, the Board of Directors considered their significant experience, expertise and background with regard to investing in general and the Company in particular. With regard to Mr. Berman, the Board of Directors considered his background and experience with the public securities markets and his former employment and experience in operational capacities. With regard to Mr. Liszt, the Board of Directors considered his experience on other boards of public companies, his past experience in the communications and advertising fields, and his organizational experience. With regard to Mr. Zipkin, the Board of Directors considered his knowledge, experience and skills in the finance, public securities and investment banking fields.
Code of Ethics
Our Board of Directors adopted a Code of Ethics on August 5, 2008, and revised March 6, 2013. The Code of Ethics includes our Company’s principal executive officer and principal financial officer, or persons performing similar functions, as required by Sections 406 and 407 of the Sarbanes-OxleySarbanesOxley Act of 2002. Our Code of Ethics is available at our website, www.millcityventures3.com, or without charge, to any shareholder upon written request made to Mill City Ventures III, Ltd., Attention: Chief Executive Officer, 328 Barry Ave. S.1907 Wayzata Blvd., Suite 210,205, Wayzata, MN 55391.
The Code of Ethics has been drafted in order to facilitate compliance with the requirements applicable to the Company, as a BDC, under Section 17 of the 1940 Act. In this regard, the Company has recently implemented procedures to ensure compliance with the provisions of the Code of Ethics, which procedures are part of the various requirements applicable to the Company under Section 17 of the 1940 Act and Rule 17j-1 promulgated by the SEC thereunder.
Changes to Board of Director Nomination Procedures
We have not had any material changes to the procedures for shareholder nominations of candidates to serve on our Board of Directors during the fiscal year ended December 31, 2016.2019.
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Committees of the Board of Directors; Audit Committee Financial Expert
The Board of Directors has an Audit Committee, a Compensation Committee and a Valuation Committee. The members of the Audit Committee are Laurence Zipkin, Howard Liszt and Lyle Berman., each of whom is independent for purposes of the Securities Exchange Act of 1934 and “non-interested”“noninterested” directors for purposes of the 1940 Act. Mr. Berman currently serves as chair of the Audit Committee. The board has adopted a charter for the Audit Committee a copy of which is available at the Company’s website at http://www.millcityventures3.com. The Audit Committee is responsible for approving the Company’s independent accountants and recommending them to the board (including a majority of the independent directors) for approval and submission to the shareholders for ratification, if any, reviewing with its independent accountants the plans and results of the audit engagement, approving professional services provided by its independent accountants, reviewing the independence of its independent accountants and reviewing the adequacy of its internal accounting controls. The Audit Committee is also responsible for discussing with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company's risk assessment and risk management policies. The board has determined that Mr. Berman is an “audit committee financial expert” within the meaning of the rules of the Commission. Mr. Berman’s relevant experience is detailed in his biography above. The Board of Directors has determined that each of the Audit Committee members is able to read and understand fundamental financial statements and that at least one member of the Audit Committee has past employment experience in finance or accounting.
The members of the Compensation Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1934 and “non-interested”“noninterested” directors for purposes of the 1940 Act. Mr. ZipkinLiszt currently serves as chair of the Compensation Committee. The compensation committee is responsible for approving the Company’s compensation arrangements with its executive management, including bonus-relatedbonusrelated decisions and employment agreements with respect to such individuals. The board has adopted a charter for the Compensation Committee, a copy of which is available at http//www.millcityventures3.com.
The members of the Valuation Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1934 and “non-interested”“noninterested” directors for purposes of the 1940 Act. Mr. LisztZipkin currently serves as chair of the Valuation Committee. The Valuation Committee is responsible for approving the fair value of debt and equity securities comprising the Company’s investment portfolio pursuant to the Company’s written valuation policy and procedures.
Of the directors presently serving on the board, Messrs. Berman, Liszt and Zipkin are “independent” as that term is defined in Section 4200(a)(15) of National Association of Securities Dealers’ listing standards, and “non-interested”“noninterested” persons as that term is defined in the 1940 Act. Our company is not, however, subject to the Nasdaq listing standards because its common stock is not listed for trading on any Nasdaq market tier.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file with the SEC certain reports regarding their ownership of common stock or any changes in such ownership. Based on our own review, we believe that a Form 3 was filedthere were no late by Mr. Lyle Berman in connection with his joining our Board of Directors, and a Form 4 was filed late by Mr. Geraci in December 2016 in connection with a purchase by him of our common stock.filings during 2018.
ITEM 11 EXECUTIVE AND DIRECTOR COMPENSATION
Executive Compensation — Summary Compensation Table
The following table sets forth the total compensation paid by the Company during its two most recent fiscal years ended December 31, 20162019 and 20152018 to those persons who served as the Company’s President or Chief Executive Officer and Chief Financial Officer during such periods (collectively, the “named executives”).
Stock | All Other | |||||||||||||||||
Salary | Awards | Compensation | Total | |||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) | |||||||||||||
Douglas M. Polinsky, | 2016 | $ | 50,000 | $ | 0 | $ | — | $ | 50,000 | |||||||||
Chief Executive Officer | 2015 | $ | 50,000 | $ | 0 | $ | — | $ | 50,000 | |||||||||
Joseph A. Geraci, II, | 2016 | $ | 95,000 | $ | 0 | $ | — | $ | 95,000 | |||||||||
Chief Financial Officer | 2015 | $ | 100,000 | $ | 0 | $ | — | $ | 100,000 |
Salary | Stock Awards | All Other Compensation | Total | |||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) | |||||||||||||||
Douglas M. Polinsky, | 2019 | $ | 100,000 | $ | $ | 0 | $ | 31,831 | * | $ | 131,831 | |||||||||
Chief Executive Officer | 2018 | $ | 60,000 | $ | $ | 0 | $ | 27,685 | * | $ | 87,685 | |||||||||
Joseph A. Geraci, II, | 2019 | $ | 150,000 | $ | $ | 0 | $ | 35,702 | * | $ | 185,702 | |||||||||
Chief Financial Officer | 2018 | $ | 110,000 | $ | $ | 0 | $ | 26,101 | * | $ | 136,101 |
*includes additional compensation of payment of health insurance premiums and 401(k) matching contributions under the employment retirement program.
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Outstanding Equity Awards at Fiscal Year End
We had no outstanding options, warrants, unvested stock awards or equity incentive plan awards as of December 31, 20152019 held by any named executive. In addition, we have no options, warrants, unvested stock awards or equity incentive plan awards outstanding and held by any named executive as of the date of this filing.
Director Compensation
For 2016,2019, we paid a total of $58,956$90,000 in director fees to our independent directors. Presently, each such director receives an annualized fee of $20,000.$30,000.
Name | Year | Compensation | Total | |||||||
Joseph A. Geraci, III | 2016 | — | — | |||||||
Douglas M. Polinsky | 2016 | — | — | |||||||
Lyle Berman | 2016 | $ | 18,956 | $ | 18,956 | |||||
Howard P. Liszt | 2016 | $ | 20,000 | $ | 20,000 | |||||
Laurence S. Zipkin | 2016 | $ | 20,000 | $ | 20,000 |
Name | Year | Compensation | Total | |||||||||
Joseph A. Geraci, II | 2019 | — | — | |||||||||
Douglas M. Polinsky | 2019 | — | — | |||||||||
Lyle Berman | 2019 | $ | 30,000 | $ | 30,000 | |||||||
Howard P. Liszt | 2019 | $ | 30,000 | $ | 30,000 | |||||||
Laurence S. Zipkin | 2019 | $ | 30,000 | $ | 30,000 |
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The table below sets forth certain information with respect to beneficial ownership of our common stock as of March 15, 201729, 2019
(on which date there were 12,151,49311,067,402 shares of common stock outstanding), by:
Unless otherwise indicated in the table or its footnotes, the business address of each of the following persons or entities is 328 Barry Avenue S.1907 Wayzata Blvd., Suite 210,205, Wayzata, Minnesota 55391, and each such person or entity has sole voting and investment power with respect to the shares of common stock set forth opposite their respective name.
Number of | ||||||||
Shares | Percentage of | |||||||
Beneficially | Outstanding | |||||||
Owned(1) | Shares(1) | |||||||
Douglas M. Polinsky(2) | 554,858 | 4.6 | % | |||||
Joseph A. Geraci, II(3) | 639,079 | 5.3 | % | |||||
Howard Liszt(4) | — | * | ||||||
Lyle Berman(5) | — | * | ||||||
Laurence Zipkin(6) | — | * | ||||||
Neal Linnihan | 2,500,000 | 20.6 | % | |||||
Scott and Elizabeth Zbikowski(7) | 1,865,000 | 15.3 | % | |||||
Ervin Kramer | 1,087,728 | 8.9 | % | |||||
Donald Schreifels | 1,060,001 | 8.7 | % | |||||
David Bester | 1,000,000 | 8.2 | % | |||||
Patrick Kinney(8) | 942,278 | 7.8 | % | |||||
William Hartzell | 650,000 | 5.3 | % | |||||
All current directors and executive officers as a group(9) (five persons) | 1,193,937 | 9.9 | % |
Number of Shares Beneficially Owned(1) | Percentage of Outstanding Shares(1) | |||||||
Douglas M. Polinsky(2) | 476,833 | 4.31 | % | |||||
Joseph A. Geraci, II(3) | 608,092 | 5.49 | % | |||||
Howard Liszt(4) | 20,000 | 0.18 | % | |||||
Lyle Berman(5) | 20,000 | 0.18 | % | |||||
Laurence Zipkin(6) | 20,000 | 0.18 | % | |||||
Neal Linnihan SEP/IRA | 2,500,000 | 22.59 | % | |||||
Scott and Elizabeth Zbikowski(7) | 1,865,000 | 16.85 | % | |||||
Donald Schreifels | 1,060,001 | 9.58 | % | |||||
David Bester | 1,000,000 | 9.04 | % | |||||
Patrick Kinney(8) | 929,547 | 8.540 | % | |||||
William Hartzell | 650,000 | 5.87 | % | |||||
All current directors and executive officers as a group(9) (five persons) | 1,144,925 | 10.35 | % |
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(1) | Beneficial ownership is determined in accordance with the rules of the SEC and includes general voting power and/or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days of the applicable record date, are deemed outstanding for computing the beneficial ownership percentage of the person holding such options or warrants but are not deemed outstanding for computing the beneficial ownership percentage of any other person. |
(2) | Mr. Polinsky is the Company’s Chairman and Chief Executive Officer. Includes 69,411 common shares held by Great North Capital Consultants, Inc. (f/k/a Great North Capital Corp.), a Minnesota corporation of which Mr. Polinsky is the sole shareholder, officer and director, 290,055 common shares held by Lantern Advisers, LLC, a Minnesota limited liability company |
(3) | Mr. Geraci is a director and the Company’s Chief Financial Officer. Includes 290,055 common shares held by Lantern Advisers, LLC, a Minnesota limited liability company |
(4) | Mr. Liszt is a director of the Company. |
(5) | Mr. Berman is a director of the Company. |
(6) | Mr. Zipkin is a director of the Company. |
(7) | Based upon a Schedule 13G filed by Mr. and Mrs. Zbikowski, Mr. Zbikowski is the beneficial owner of 1,240,000 shares, and Mrs. Zbikowski is the beneficial owner of 625,000 shares. Mr. and Mrs. Zbikowski are husband and wife. |
(8) | Based upon a Schedule 13G filed by Mr. Kinney on March 19, 2013, Mr. Kinney may be deemed to be the beneficial owner of 942,278 shares, which includes 3,640 shares that are held in custodial accounts for the benefit of his grandchildren. |
(9) | Consists of Messrs. Polinsky, Geraci, Liszt, Berman and Zipkin. |
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons and Certain Conflict Disclosures
Our Board of Directors has adopted a policy to require our disclosure of instances in our periodic filings with the SEC. Our related-party transactions requiring disclosure under this policy are:
· | Mr. Joseph A. Geraci, II, our Chief Financial Officer, and Mr. Douglas M. Polinsky, our Chief Executive Officer, hold direct and indirect interests in the common stock of Southern Plains Resources, Inc., a company in which we made investments in common stock in each of March and July 2013. |
· |
Lantern Advisors, LLC is a limited liability company equally owned by Messrs. Geraci and Polinsky, and owns a cashless warrant to purchase up to |
Related-Party
33 |
RelatedParty Transaction Policy
The Board of Directors has adopted a written Conflict of Interest and Related Party Transaction Policy. That policy governs the approval of all related-partyrelatedparty transactions, subject only to certain customary exceptions (e.g., compensation, certain charitable donations, transactions made available to all employees generally, etc.). The policy contains a minimum dollar threshold of $5,000.
The entire Board of Directors administers the policy and approves any related-partyrelatedparty transactions, subject to conflicting requirements of the 1940 Act or the Company’s written Code of Ethics. In general, after full disclosure of all material facts, review and discussion, the board approves or disapproves related-partyrelatedparty transactions by a vote of a majority of the directors who have no interest in such transaction, direct or indirect. Procedurally, no director is allowed vote in any approval of a related-partyrelatedparty transaction for which he or she is the related party, except that such a director may otherwise participate in a related discussion and shall provide to the board all material information concerning the related-partyrelatedparty transaction and the director’s interest therein. If a related-partyrelatedparty transaction will be ongoing, the board may establish guidelines for management to follow in its ongoing dealings with the related party.
Director Independence
The Company currently has five directors, three of whom—Messrs. Liszt, Berman and Zipkin, are “independent” as that term is defined in Section 4200(a)(15) of National Association of Securities Dealers’ listing standards. None of our independent directors are “interested persons” as that term is defined in the 1940 Act. The Company is not subject to those listing standards, however, because its common stock is not listed for trading on a Nasdaq market. Based upon information requested from each such director concerning his background, employment and affiliations, the board has affirmatively determined that none of the independent directors has a material business or professional relationship with the Company, other than in his or her capacity as a member of the board or any committee thereof.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
AggregateThe following table summarizes the fees for professional audit services provided by (i) Boulay PLLP for the audit of the Company’s annual financial statements for the year ended December 31, 2019 and December 31, 2018, as well as the fees billed for other services rendered by our principal independent registered public accounting firm for the fiscal years indicated:Boulay PLLP during year ended December 31, 2019.
2016 | 2015 | |||||||
Audit Fees | $ | 50,004 | $ | 49,694 | ||||
Audit-Related Fees | — | — | ||||||
Tax Fees | 4,750 | 8,200 | ||||||
Total | $ | 54,754 | $ | 57,894 |
2019 | 2018 | |||||||
Audit Fees | $ | 56,310 | $ | 30,000 | ||||
AuditRelated Fees | — | — | ||||||
Tax Fees | 8,660 | — | ||||||
Total | $ | 58,810 | $ | 30,000 |
Audit Fees. The fees identified under this caption were for professional services rendered by Baker Tilly Virchow Krause, LLPBoulay, PLLP for the years ended 20162019 and 20152018 in connection with the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q. The amounts also include fees for services that are normally provided by the independent public registered accounting firm in connection with statutory and regulatory filings and engagements for the years identified.
Audit-RelatedAuditRelated Fees. The fees identified under this caption were for assurance and related services that were related to the performance of the audit or review of our financial statements and were not reported under the caption “Audit Fees.” This category may include fees related to the performance of audits and attestation services not required by statute or regulations, and accounting consultations about the application of generally accepted accounting principles to proposed transactions.
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Tax Fees. The fees identified under this caption were for tax compliance and corporate tax services. Corporate tax services encompass a variety of permissible services, including technical tax advice related to tax matters; assistance with state and local taxes.
Approval Policy. The Audit Committee of our Board of Directors approves in advance all services provided by our independent registered public accounting firm. All engagements of our independent registered public accounting firm in years ended 20162019 and 20152018 were pre-approvedpreapproved by the Audit Committee.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements |
Financial Statements
10 | ||||
Balance Sheets — December 31, | 11 | |||
Statements of Operations | ||||
12 | ||||
Statements of Shareholders’ Equity — Years ended December 31, 2019 and December 31, 2018 | 13 | |||
Statements of Cash Flows — | 14 | |||
Investment Schedule — December 31, 2019 | 15 | |||
Investment Schedule — December 31, 2018 | 16 | |||
Notes to Financial Statements | 17 |
Exhibits
_______________
* Filed electronically herewith.
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MILL CITY VENTURES III, LTD. | |
/s/ Douglas Polinsky | |
Douglas Polinsky | |
Chief Executive Officer | |
Dated: March |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Douglas M. Polinsky | Chief Executive Officer, President and | March 30, 2020 | ||
Douglas M. Polinsky | Director (principal executive officer) | |||
/s/ Joseph A. Geraci, II | Chief Financial Officer and Director | March 30, 2020 | ||
Joseph A. Geraci, II | (principal accounting and financial officer) | |||
/s/ Lyle Berman | Director | March 30, 2020 | ||
Lyle Berman | ||||
/s/ Howard Liszt | Director | March 30, 2020 | ||
Howard Liszt | ||||
/s/ Laurence Zipkin | Director | March 30, 2020 | ||