UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________

 

FORM 10-Q

__________________________

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2024
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 001-41472

__________________________

 

MILL CITY VENTURES III, LTD.

(Exact name of registrant as specified in its charter)

__________________________

 

Minnesota		90-0316651
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1907 Wayzata Blvd, #205, Wayzata, Minnesota		55391
(Address of principal executive offices)		(Zip Code)

 

(952) 479-1923

(Registrant’s telephone number, including area code)

__________________________

 

N/A

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

__________________________

 

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

 

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

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

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

 

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

 

As of November 15, 2024, Mill City Ventures III, Ltd. had 6,385,255 shares of common stock, and no other classes of capital stock, outstanding.

 

 

MILL CITY VENTURES III, LTD.

 

Index to Form 10-Q

for the Quarter Ended September 30, 2024

 

PART I.	FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements (unaudited)		3
	Condensed Balance Sheets – September 30, 2024 and December 31, 2023		3
	Condensed Statements of Operations – Three and nine months ended September 30, 2024 and September 30, 2023		4
	Condensed Statements of Shareholders’ Equity – Three and nine months ended September 30, 2024 and September 30, 2023		5
	Condensed Statements of Cash Flows – Nine months ended September 30, 2024 and September 30, 2023		6
	Condensed Schedule of Investments – September 30, 2024 and Schedule of Investments – December 31, 2023		7
	Condensed Notes to Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 4.	Controls and Procedures		21
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors		17
Item 6.	Exhibits		22
SIGNATURES			23

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

 

		September 30, 2024 (unaudited)				December 31, 2023
ASSETS
Investments, at fair value:		$	16,208,065			$	17,284,676
Non-control/non-affiliate investments (cost: $17,208,066 and $18,577,481 respectively)
Cash			3,132,877				376,024
Note receivable			—				250,000
Prepaid expenses			67,637				165,301
Interest and dividend receivables			152,500				264,413
Right-of-use lease asset			—				9,283
Deferred taxes			779,000				757,000
Total Assets		$	20,340,079			$	19,106,697
LIABILITIES
Accounts payable		$	111,178			$	71,702
Deferred interest income			62,000				—
Accrued payroll liabilities			7,716				435,449
Operating lease liability			—				9,283
Accrued income tax			310,100				—
Total Liabilities			490,994				516,434
SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (111,111,111 authorized;			6,385				6,385
6,385,255 outstanding)
Additional paid-in capital			15,473,121				15,473,121
Additional paid-in capital - stock options			1,460,209				1,460,209
Accumulated deficit			(1,159,665	)			(1,159,665	)
Accumulated undistributed investment loss			(224,819	)			(1,052,183	)
Accumulated undistributed net realized gains on investment transactions			5,293,855				5,155,200
Net unrealized depreciation in value of investments			(1,000,001	)			(1,292,804	)
Total Shareholders' Equity (Net Assets)			19,849,085				18,590,263
Total Liabilities and Shareholders' Equity		$	20,340,079			$	19,106,697
Net Asset Value Per Common Share		$	3.11			$	2.91

 

See accompanying Notes to Financial Statements

 

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30, 2024				September 30, 2023				September 30, 2024				September 30, 2023
Investment Income
Interest income		$	711,022			$	725,158			$	2,432,318			$	2,496,688
Total Investment Income			711,022				725,158				2,432,318				2,496,688
Operating Expenses
Professional fees			190,369				184,008				502,838				601,184
Payroll			148,072				141,040				444,997				1,418,640
Insurance			24,694				26,452				76,186				79,974
Occupancy			11,126				14,890				31,348				55,005
Director's fees			30,000				30,000				90,000				592,968
Interest expense			—				—				320				78,000
Other general and administrative			15,586				24,983				33,304				57,464
Total Operating Expenses			419,847				421,373				1,178,993				2,883,235
Net Investment Gain (Loss)			291,175				303,785				1,253,325			$	(386,547	)
Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investments			(232,585	)			—				138,655				(558,629	)
Net change in unrealized appreciation (depreciation) on investments			530,693				2,175				292,803				629,491
Net Realized and Unrealized Gain (Loss) on Investments			298,108				2,175				431,458				70,862
Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes		$	589,283			$	305,960			$	1,684,783			$	(315,685	)
Provision for (Benefit from) Income Taxes			125,500				(63,600	)			425,961				(37,922	)
Net Increase (Decrease) in Net Assets Resulting from Operations		$	463,783			$	369,560			$	1,258,822				(277,763	)
Net Increase (Decrease) in Net Assets Resulting from Operations per share:
Basic		$	0.07			$	0.06			$	0.20			$	(0.04	)
Diluted		$	0.07			$	0.06			$	0.19			$	(0.04	)
Weighted-average number of common shares outstanding - basic			6,385,255				6,241,777				6,385,255				6,204,303
Weighted-average number of common shares outstanding - diluted			6,501,823				6,358,345				6,501,823				6,204,303

 

See accompanying Notes to Financial Statements

 

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

Three Months Ended September 30, 2024		Common Shares				Par Value				Additional Paid In Capital				Accumulated Deficit				Accumulated Undistributed Net Investment Loss				Accumulated Undistributed Net Realized Gain (Loss) on Investments Transactions				Net Unrealized Appreciation (Depreciation) in value of Investments				Total Shareholders' Equity
Balance as of June 30, 2024			6,385,255			$	6,385			$	16,933,330			$	(1,159,665	)		$	(390,494	)		$	5,526,440			$	(1,530,694	)		$	19,385,302
Undistributed net investment gain							—				—				—				165,675				—				—				165,675
Undistributed net realized loss on investment transactions							—				—				—				—				(232,585	)			—				(232,585	)
Appreciation in value of investments							—				—				—				—				—				530,693				530,693
Balance as of September 30, 2024			6,385,255			$	6,385			$	16,933,330			$	(1,159,665	)		$	(224,819	)		$	5,293,855			$	(1,000,001	)		$	19,849,085
Three Months Ended September 30, 2023		Common Shares				Par Value				Additional Paid In Capital				Accumulated Deficit				Accumulated Undistributed Net Investment Loss				Accumulated Undistributed Net Realized Gain on Investments Transactions				Net Unrealized Appreciation in value of Investments				Total Shareholders' Equity
Balance as of June 30, 2023			6,185,255			$	12,215			$	16,503,500			$	(1,159,665	)		$	(1,802,749	)		$	5,155,200			$	(24,055	)		$	18,684,446
Exercise of stock options			200,000				200				423,800				—				—				—				—				424,000
Undistributed net investment gain							—				—				—				367,385				—				—				367,385
Appreciation in value of investments							—				—				—				—				—				2,175				2,175
Balance as of September 30, 2023			6,385,255			$	12,415			$	16,927,300			$	(1,159,665	)		$	(1,435,364	)		$	5,155,200			$	(21,880	)		$	19,478,006
Nine Months Ended September 30, 2024		Common Shares				Par Value				Additional Paid In Capital				Accumulated Deficit				Accumulated Undistributed Net Investment Gain (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, 2023			6,385,255			$	6,385			$	16,933,330			$	(1,159,665	)		$	(1,052,183	)		$	5,155,200			$	(1,292,804	)		$	18,590,263
Undistributed net investment gain							—				—				—				827,364				—				—				827,364
Undistributed net realized gain on investment transactions							—				—				—				—				138,655				—				138,655
Appreciation in value of investments							—				—				—				—				—				292,803				292,803
Balance as of September 30, 2024			6,385,255			$	6,385			$	16,933,330			$	(1,159,665	)		$	(224,819	)		$	5,293,855			$	(1,000,001	)		$	19,849,085
Nine Months Ended September 30, 2023		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, 2022			6,185,255			$	12,215			$	15,043,291			$	(1,159,665	)		$	(1,086,739	)		$	5,713,829			$	(651,371	)		$	17,871,560
Issuance of stock options							—				1,460,209				—				—				—				—				1,460,209
Exercise of stock options			200,000				200				423,800				—				—				—				—				424,000
Net investment loss, net of tax benefit of $139,300							—				—				—				(348,625	)			—				—				(348,625	)
Undistributed net realized loss on investment transactions							—				—				—				—				(558,629	)			—				(558,629	)
Appreciation in value of investments							—				—				—				—				—				629,491				629,491
Balance as of September 30, 2023			6,385,255			$	12,415			$	16,927,300			$	(1,159,665	)		$	(1,435,364	)		$	5,155,200			$	(21,880	)		$	19,478,006

 

See accompanying Notes to Financial Statements

 

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended
		September 30, 2024				September 30, 2023
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations		$	1,258,822			$	(277,763	)
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Net change in unrealized (appreciation) depreciation on investments			(292,803	)			(629,491	)
Net realized (gain) loss on investments			(138,655	)			558,629
Purchases of investments			(5,106,503	)			(11,900,500	)
Proceeds from sales of investments			6,614,573				11,124,193
Issuance of stock options			—				1,460,209
Deferred income taxes			(22,000	)			(196,000	)
Changes in operating assets and liabilities:
Prepaid expenses and other assets			356,947				2,700
Interest and dividends receivable			111,913				31,674
Accounts payable and other liabilities			(397,541	)			(654,278	)
Accrued income taxes			310,100				—
Deferred interest income			62,000				(70,154	)
Net cash provided (used) in operating activities			2,756,853				(550,781	)
Cash flows from financing activities:
Proceeds from stock option exercise			—				424,000
Proceeds from line of credit			—				2,750,000
Repayments on line of credit			—				(2,750,000	)
Net cash provided by financing activities			—				424,000
Net increase (decrease) in cash			2,756,853				(126,781	)
Cash, beginning of period			376,024				1,089,641
Cash, end of period		$	3,132,877			$	962,860
Supplemental disclosure of cash flow information:
Cash paid for interest		$	320			$	78,000

 

See accompanying Notes to Financial Statements

 

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MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS (UNAUDITED)

SEPTEMBER 30, 2024

 

Investment / Industry		Cost				Fair Value				Percentage of Net Assets
Short-Term Non-banking Loans
Business Services - 15% secured loans
Mustang Litigation Funding		$	10,000,000			$	10,037,732				50.57	%
Consumer - 15% secured loans			500,000				502,375				2.53	%
Consumer - 36% secured loans
Enchant Christmas LLC			2,000,000				2,003,915				10.10	%
Real Estate - 12% secured loans
Alatus Development Corp			2,000,000				2,017,583				10.16	%
Real Estate - 24% secured loans
Coventry Holdings LLC			1,150,000				1,154,217				5.81	%
Total Short-Term Non-Banking Loans			15,650,000				15,715,822				73.36	%
Preferred Stock
Consumer
Wisdom Gaming, Inc			900,000				-				0.00	%
Information Technology			150,000				-				0.00	%
Total Preferred Stock			1,050,000				-				0.00	%
Common Stock
Consumer			3,911				3,735				0.02	%
Financial			494,155				488,508				2.46	%
Total Common Stock			498,066				492,243				2.48	%
Other Equity
Financial			10,000				-				0.00	%
Total Investments		$	17,208,066			$	16,208,065				75.84	%
Total Cash and cash equivalents			3,132,877				3,132,877				15.78	%
Total Investments and Cash		$	20,340,943			$	19,340,942				91.62	%

 

See accompanying Notes to the Financial Statements

 

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MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2023

 

Investment / Industry		Cost				Fair Value				Percentage of Net Assets
Short-Term Non-banking Loans
Business Services - 15% secured loans
Mustang Litigation Funding		$	10,000,000			$	10,069,354				54.16	%
Consumer - 23% secured loans
Intelligent Mapping, LLC			2,900,000				2,906,464				15.63	%
Financial - 12% secured loans			500,000				-				0.00	%
Information Technology - 15% convertible note			212,500				213,501				1.15	%
Real Estate - 18% secured loans			745,000				760,119				4.09	%
Tailwind, LLC			1,000,000				1,001,954				5.39	%
Real Estate - 12% secured loans
Alatus Development Corp			2,000,000				2,010,374				10.81	%
Total Short-Term Non-Banking Loans			17,357,500				16,961,766				91.23	%
Preferred Stock
Consumer
Wisdom Gaming, Inc			900,000				265,000				1.43	%
Information Technology			150,000				-				0.00	%
Total Preferred Stock			1,050,000				265,000				1.43	%
Common Stock
Consumer			159,302				47,910				0.26	%
Warrants
Healthcare			679				—				0.00	%
Other Equity
Financial			10,000				10,000				0.05	%
Total Investments		$	18,577,481			$	17,284,676				92.97	%
Total Cash			376,024				376,024				2.02	%
Total Investments and Cash		$	18,953,505			$	17,660,700				94.99	%

 

See accompanying Notes to the Financial Statements

 

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NOTE 1 – ORGANIZATION

 

In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.

 

We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have remained a public reporting company filing periodic reports with the SEC. We engage in the business of providing short-term specialty finance solutions, typically in the form of short-term loans, primarily to small businesses, both private and public, and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “securities” for purposes of federal securities laws, and we monitor our investments as a whole to ensure that no more than 40% of our total assets consist of “investment securities” as defined under the 1940 Act.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The accompanying unaudited financial statements include the accounts of the Company and have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, as permitted by Article 10, the unaudited financial statements do not include all of the information required by accounting principles generally accepted in the United States (“U.S. GAAP”). The balance sheet at December 31, 2023 was derived from the audited financial statements at that date and does not include all the disclosures required by U.S. GAAP. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair presentation have been reflected in the financial statements. These unaudited condensed financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2023 and the related footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.

 

Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below. The Company presents its financial statements as an investment company following accounting and reporting guidance in ASC 946.

 

Cash and cash equivalents: Cash represents cash on hand and demand deposits held at financial institutions. Cash equivalents include short-term, highly liquid investments of sufficient credit quality that are readily convertible to known amounts of cash and have original maturities of three months or less. Cash equivalents are carried at cost, plus accrued interest, which approximates fair value. Cash equivalents are held to meet short-term liquidity requirements, rather than for investment purposes. Cash and cash equivalents are held at major financial institutions and are subject to credit risk to the extent those balances exceed applicable Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC) limitations.

 

Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by our Board of Directors, based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures.

 

Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.

 

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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 discounted cash flows approach, at their weighted-average yield to maturity.

 

The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors. In general, we value our Level 3 equity investments at cost unless circumstances warrant a different approach. Examples of these circumstances includes a situation in which a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors). Other facts and circumstances that may serve as an 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 the closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above. Generally, “out-of-the-money” warrants will be valued at cost or zero.

 

For non-traded (Level 3) debt instruments with a residual maturity less than or equal to 60 days, we will generally value such instruments based on a discounted cash flows approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. For level 3 non-banking loans with a maturity in excess of 60 days, fair value is determined based on the initial purchase price and adjusted as necessary to reflect any changes in the financial strength of the creditor and changes in interest rates in the high-yield credit markets.

 

On a quarterly basis, our management provides members of our Board of Directors with recommendations, if any, 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. In such a case, the Board of Directors would then discuss 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.

 

Income taxes:

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

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We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine we would be able to realize our deferred income tax assets in the future in excess of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.

 

We file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, 2020 through 2023, which are the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2024.

 

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

 

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

 

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

 

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

 

Stock-based compensation: The Company’s stock-based compensation consists of stock options issued to certain employees and directors of the Company. The Company recognizes compensation expense based on an estimated grant date fair value using the Black Sholes option-pricing method. If the factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future. The Company recognizes stock-based compensation expense for these options on a straight-line basis over the requisite service period. The Company has elected to account for forfeitures as they occur.

 

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.

 

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NOTE 3 – INVESTMENTS

 

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of September 30, 2024 (together with the corresponding percentage of the fair value of our total portfolio of investments):

 

		As of September 30, 2024
		Investments at Amortized Cost				Percentage of Amortized Cost				Investments at Fair Value				Percentage of Fair Value
Short-term Non-banking Loans		$	15,650,000				90.9	%		$	15,715,822				97.0	%
Preferred Stock			1,050,000				6.1				—				—
Common Stock			498,066				2.9				492,243				3.0
Other Equity			10,000				0.1				—				—
Total		$	17,208,066				100.0	%		$	16,208,065				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, 2023 (together with the corresponding percentage of the fair value of our total investments):

 

		As of December 31, 2023
		Investments at Amortized Cost				Percentage of Amortized Cost				Investments at Fair Value				Percentage of Fair Value
Short-term Non-banking Loans		$	17,357,500				93.4	%		$	16,961,766				98.1	%
Preferred Stock			1,050,000				5.6				265,000				1.5
Common Stock			159,302				0.9				47,910				0.3
Warrants			679				—				—				—
Other Equity			10,000				0.1				10,000				0.1
Total		$	18,577,481				100.0	%		$	17,284,676				100.0	%

 

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of September 30, 2024:

 

		As of September 30, 2024
		Investments at Fair Value				Percentage of Fair Value
Business Services		$	10,037,732				61.9	%
Consumer			2,510,025				15.5
Financial			488,508				3.0
Information Technology			—				—
Real Estate			3,171,800				19.6
Total		$	16,208,065				100.0	%

 

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2023:

 

		As of December 31, 2023
		Investments at Fair Value				Percentage of Fair  Value
Business Services		$	10,069,354				58.3	%
Consumer			3,219,374				18.6
Financial			10,000				0.1
Information Technology			213,501				1.2
Real Estate			3,772,447				21.8
Total		$	17,284,676				100.0	%

 

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NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investments portfolio as of September 30, 2024 may differ materially from values that would have been used had a readily available market for the investments existed.

 

The following table presents the fair value measurements of our portfolio investments by major class, as of September 30, 2024, according to the fair value hierarchy:

 

		As of September 30, 2024
		Level 1				Level 2				Level 3				Total
Short-term Non-banking Loans		$	—			$	—			$	15,715,822			$	15,715,822
Preferred Stock			—				—				—				—
Common Stock			492,243				—				—				492,243
Other Equity			—				—				—				—
Total		$	492,243			$	—			$	15,715,822			$	16,208,065

 

The following table presents the fair value measurements of our investment portfolio by major class, as of December 31, 2023, according to the fair value hierarchy:

 

		As of December 31, 2023
		Level 1				Level 2				Level 3				Total
Short-term Non-banking Loans		$	—			$	—			$	16,961,766			$	16,961,766
Preferred Stock			—				—				265,000				265,000
Common Stock			47,910				—				—				47,910
Other Equity			—				—				10,000				10,000
Total		$	47,910			$	—			$	17,236,766			$	17,284,676

 

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the nine months ended September 30, 2024:

 

		For the nine months ended September 30, 2024
		ST Non- banking Loans				Preferred Stock				Other Equity
Balance as of January 1, 2024		$	16,961,766			$	265,000			$	10,000
Net change in unrealized appreciation			461,556				(265,000	)			(10,000	)
Purchases and other adjustments to cost			4,123,438				—				—
Sales and redemptions			(5,570,000	)			—				—
Net realized loss			(100,000	)			—				—
Transfers out of level 3			(160,938	)			—				—
Balance as of September 30, 2024		$	15,715,822			$	—			$	—

 

The net change in unrealized depreciation for the nine months ended September 30, 2024 attributable to Level 3 portfolio investments still held as of September 30, 2024 is $209,178.

 

The following table lists our Level 3 investments held as of September 30, 2024 and the unobservable inputs used to determine their valuation:

 

Security Type		9/30/24 FMV				Valuation Technique		Unobservable Inputs		Range
ST Non-banking Loans		$	15,715,822			discounted cash flow		determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness		12-36	%
Other Equity			—			last secured funding known by company		economic changes since last funding
Preferred Stock			—			last funding secured by company		economic changes since last funding
		$	15,715,822

 

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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, 2023:

 

		For the year ended December 31, 2023
		ST Non- banking Loans				Preferred Stock				Other Equity
Balance as of January 1, 2023		$	15,285,932			$	1,200,000			$	222,500
Net change in unrealized depreciation			(195,041	)			(935,000	)			600,000
Purchases and other adjustments to cost			12,900,500				—				—
Realized gain (loss)			—				—				(600,000	)
Transfers between level 3 and level 1			(11,029,625	)			—				(212,500	)
Balance as of December 31, 2023		$	16,961,766			$	265,000			$	10,000

 

The net change in unrealized depreciation for the year ended December 31, 2023 attributable to Level 3 portfolio investments still held as of December 31, 2023 was $1,126.877.

 

The following table lists our Level 3 investments held as of December 31, 2023 and the unobservable inputs used to determine their valuation:

 

Security Type		12/31/23 FMV				Valuation Technique		Unobservable Inputs		Range
ST Non-banking Loans		$	16,961,766			discounted cash flow		determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness		12-23	%
Other Equity			10,000			last secured funding known by company
Preferred Stock			265,000			last funding secured by company		economic changes since last funding
		$	17,236,766

 

NOTE 5 – RELATED-PARTY TRANSACTIONS

 

We maintain a conflicts of interest and related-party transactions policy requiring (i) certain disclosures be made to our Board of Directors in relation to situations where officers, directors, significant shareholders, or any of their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with the SEC. In this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions:

 

	·	We held a promissory note with two shareholders in the principal amount of $250,000. The promissory note bore interest payable monthly at the rate of 10% per annum. The note was secured by the debtors’ pledge to us of 277,778 shares of common stock. The note was paid in full including all accrued interest on September 26, 2024.
	·	As disclosed in Note 7, a component of our now terminated loan agreement is with a director of our Company.

 

NOTE 6 – INCOME TAXES

 

We are a C-Corporation for tax purposes and have booked an income tax provision for the periods described below. Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate.

 

As of September 30, 2024 and December 31, 2023, we have a deferred tax asset of $779,000 and $757,000, respectively. As of September 30, 2024, our net deferred tax asset consists of foreign tax credit carryforwards, unrealized investment gain/loss, non-qualified stock option expenses, acquisition costs, depreciable assets, and right of use assets. Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes.

 

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As of September 30, 2024 and December 31, 2023 we had accrued income taxes of $310,100 and prepaid income taxes $131,500, respectively. We recorded a provision for income taxes of $426,000 (27 percent effective tax rate) and a benefit from income taxes of $38,000 (27 percent effective tax rate) during the nine months ended September 30, 2024 and September 30, 2023, respectively.

 

NOTE 7 – LINE OF CREDIT

 

The Company had a Loan and Security Agreement (the “Loan Agreement”) with a third party and director (collectively, the Lenders). Under the Loan Agreement, the Lenders made available to us a $5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business, of which our director was required to fund one half of the amount. Amounts drawn under the Loan Agreement accrue interest at the per annum rate of 8%, through January 3, 2027, subject to early termination provisions at the Lender’s right at any time after January 3, 2023. Our obligations under the Loan Agreement were secured by a grant of a collateral security interest in substantially all of our assets.

 

At December 31, 2023, the balance outstanding on the line was $0. In January 2024, we terminated the Loan Agreement. Any applicable fees related to early termination of the Agreement were waived.

 

NOTE 8 – STOCK-BASED COMPENSATION

 

Our 2022 Stock Incentive Plan authorized the issuance of incentives relating to 900,000 shares of common stock. As of September 30, 2024, incentives relating to the issuance of 870,000 shares have been issued under the Plan, leaving 30,000 shares available for issuance.

 

The following table summarizes the activity for all stock options outstanding for the nine months ended September 30, 2024:

 

		Shares				Weighted Average Exercise Price
Options outstanding at beginning of year			670,000			$	2.11
Granted			—				—
Exercised			—				—
Forfeited			—				—
Balance at September 30, 2024			670,000			$	2.11
Options exercisable at September 30:			670,000			$	2.11

 

The following table summarizes additional information about stock options outstanding and exercisable at September 30, 2024:

 

Options Outstanding																Options Exercisable
Options Outstanding				Weighted Average Remaining Contractual Life				Weighted Average Exercise Price				Aggregate Intrinsic Value				Options Exercisable				Weighted Average Exercise Price				Aggregate Intrinsic Value
	670,000				8.17			$	2.11			$	96,900				670,000			$	2.11			$	96,900

 

We recognized stock-based compensation expense for stock options of $0 and $1,460,209 for the nine months ended September 30, 2024 and 2023, respectively.

 

NOTE 9 – SHAREHOLDERS’ EQUITY

 

At September 30, 2024, we had 6,385,255 shares of common stock issued and outstanding.          

 

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In connection with the 2022 public offering, we issued a five-year warrant to the underwriter. The warrant allows the underwriter to purchase up to 75,000 common shares at $5.00 per share. This warrant is exercisable after 180 days, and expires on August 8, 2027. This warrant is equity-classified and the fair value was $201,173 on the offering date.

 

NOTE 10 – PER-SHARE INFORMATION

 

Basic net gain (loss) per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. Diluted net gain (loss) per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of dilutive common shares outstanding during the period calculated using the Treasury Stock method. The Treasury Stock method assumes that the proceeds received upon exercise of stock options are used to repurchase stock at the average market price during the period, thereby increasing the number of shares to be added in computing diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below:

 

		For the Three Months Ended September 30,
		2024								2023
		Basic				Diluted				Basic				Diluted
Numerator: Net increase in net assets resulting from operations		$	463,783			$	463,783			$	369,560			$	369,560
Denominator: Weighted-average number of common shares outstanding			6,385,255				6,501,823				6,241,777				6,358,345
Basic and diluted net gain per common share		$	0.07			$	0.07			$	0.06			$	0.06
		For the Nine Months Ended September 30,
		2024								2023
		Basic				Diluted				Basic				Diluted
Numerator: Net increase (decrease) in net assets resulting from operations		$	1,258,822			$	1,258,822			$	(277,763	)		$	(277,763	)
Denominator: Weighted-average number of common shares outstanding			6,385,255				6,501,823				6,204,303				6,204,303
Basic and diluted net gain (loss) per common share		$	0.20			$	0.19			$	(0.04	)		$	(0.04	)

 

NOTE 11 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights for the nine months ended September 30, 2024 through 2020:

 

		Nine Months Ended September 30,
		2024				2023				2022				2021				2020
Per Share Data (1)
Net asset value at beginning of period		$	2.91				2.89				2.80				2.43				2.05
Net investment income (loss)			0.20				(0.06	)			0.18				0.20				0.05
Net realized and unrealized gains (losses)			0.07				0.01				0.02				0.54				0.14
Provision for (benefit from) income taxes			(0.07	)			0.01				(0.05	)			(0.20	)			0.00
Issuance of stock options			0.00				0.24				0.00				0.00				0.00
Issuance of common stock			0.00				0.05				0.00				0.00				0.00
Stock-based compensation			0.00				0.00				0.05				0.00				0.00
Repurchase of common stock			0.00				0.00				0.00				0.00				0.05
Other changes in equity			0.00				(0.09	)			0.02				0.00				0.00
Payment of common stock dividend			0.00				0.00				0.00				(0.23	)			0.00
Net asset value at end of period		$	3.11				3.05				3.02				2.74				2.29
Ratio / Supplemental Data
Per share market value of investments at end of period		$	2.54				2.75				2.92				2.30				1.71
Shares outstanding at end of period			6,385,255				6,385,255				6,185,255				4,795,739				4,754,104
Average weighted shares outstanding for the period - basic			6,385,255				6,204,303				5,045,830				4,795,075				4,836,170
Average weighted shares outstanding for the period - diluted			6,501,823				6,320,871				5,045,830				4,795,075				4,836,170
Net assets at end of period		$	19,849,085				—				18,658,595				13,140,835				10,805,062
Average net assets (2)		$	19,199,254				18,661,934				15,081,352				13,090,497				10,220,482
Total investment return (loss)			6.87	%			(2.76	)%			6.07	%			22.22	%			8.79	%
Portfolio turnover rate (3)			26.60	%			59.61	%			66.81	%			124.55	%			18.18	%
Ratio of operating expenses to average net assets (3)			(8.12	)%			(20.10	)%			(19.24	)%			(10.31	)%			(6.49	)%
Ratio of net investment income (loss) to average net assets (3)			8.82	%			(2.76	)%			10.09	%			9.87	%			3.35	%
Ratio of realized gains (losses) to average net assets (3)			0.97	%			(3.98	)%			1.18	%			40.81	%			7.06	%

 

(1)	Per-share data was derived using the ending number of shares outstanding for the period.
(2)	Based on the monthly average of net assets as of the beginning and end of each period presented.
(3)	Ratios are annualized.

 

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ITEM 1A.  RISK FACTORS

 

The Company is updating its risk factors with the following risk factor disclosure:

 

Our $10 million loan to Mustang Funding is subordinated to senior lenders both in right of payment and in respect of our exercise of rights and remedies, with the result that our investment portfolio and related results of operations will, for the foreseeable future, be highly concentrated in and dependent upon the operational and financing success of Mustang Funding.

 

On December 12, 2022, contemporaneously with our entry into a non-binding letter of intent with Mustang Funding, LLC (“Mustang”) contemplating a combination or merger transaction, we entered into a lending agreement with Mustang pursuant to which we loaned Mustang the principal amount of $5 million maturing in September 2023. Among other things, our related loan agreement with Mustang requires us to consent to any additional indebtedness Mustang may incur, subject to certain limitations and exceptions.

 

On December 28, 2022, we entered into a subordination agreement with Orion Pip LLC, as administrative and collateral agent for itself and other senior lenders under a senior secured lending agreement (collectively, the “Senior Lenders”), pursuant to which we subordinated our right to payment, subject to certain exceptions, and our right to exercise rights and remedies, to Mustang’s prior repayment in full of amounts owing to the Senior Lenders. The subordination agreement prohibits the Senior Lenders or Mustang from extending the stated maturity of amounts owing under the senior secured lending agreement beyond December 2026. We have been advised that the Senior Lenders are owed $15.675 million in principal amount under the senior secured lending agreement.

 

In June, August and September 2023, we advanced additional principal to Mustang as we continued working with them on a potential definitive merger agreement and related deliverables. These additional principal advances resulted in aggregate loan principal of $10 million. In connection with these advances, the maturity date of our loan was extended to June 2024. In April 2024, we agreed to a final extension of the maturity date to the earlier of December 31, 2024, or 90 days after the termination of negotiations for our combination transaction with Mustang.

 

On August 20, 2024, we terminated the non-binding letter of intent with Mustang. As a result, amounts owing under our $10 million loan to Mustang were to mature on November 18, 2024. Nevertheless, the subordination agreement with the Senior Lenders effectively means that, unless Mustang has free cash flow from operations or other sources of cash permitted under the subordination agreement, we will likely be unable to collect the principal amount until the Senior Lenders are repaid.

 

Presently and for the foreseeable future, we expect that we will receive interest payments as required by our loan agreement with Mustang. The per annum rate of interest for our loan to Mustang is 15%, subject to automatic increase to 25% in the event of a default by Mustang in the payment of interest or principal as required under the loan agreement. Because of this and for other reasons, we presently expect that Mustang may approach us to formalize one or more extensions of our maturity date. We do not expect, however, to consent to any proposal by Mustang to incur additional senior indebtedness not permitted by the agreements to which we are party; and in the event that such indebtedness is incurred in violation of those agreements, we would expect to pursue all legal and equitable remedies available to us.

 

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

 

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

 

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

 

OVERVIEW

 

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

 

We are engaged in the business of providing short-term non-bank lending and specialty finance solutions to companies and individuals, generally on a secured basis. The loans we provide typically have maturities that are nine months or shorter, highly illiquid, and ordinarily involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale, or other projects relating to real estate, title loans, inventory needs, inventory financing, solve for short-term liquidity needs, or for other similar purposes. We intend to remain opportunistic, however, and may occasionally engage in transactions that involve our acquisition of other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make.

 

Our principal sources of income are interest and fees associated with our loans such as origination fees, closing fees or exit fees. In connection with the short-term non-bank specialty finance loans we provide, we may receive reimbursement of legal costs associated with loan documentation. We occasionally derive income from dividends paid on equity securities we hold from time to time, or from the sale of our equity securities. Our statement of operations also reflect increases and decreases in the carrying value of our assets and investments (i.e., unrealized appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.

 

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview.

 

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PORTFOLIO AND INVESTMENT ACTIVITY

 

During the nine months ended September 30, 2024, we made $5,106,503 of investment purchases and had $6,614,573 of redemptions and repayments, resulting in net investments at amortized cost of $17,208,066 at the end of the period.

 

During the nine months ended September 30, 2023, we made $11,900,500 of investment purchases and had $11,124,193 of redemptions and repayments, resulting in net investments at amortized cost of $17,577,481 at the end of that period.

 

Our portfolio composition by major class, based on fair value at September 30, 2024, was as follows:

 

		Investments at  Fair Value				Percentage of Fair Value
Short-term Non-banking Loans		$	15,715,822				97.0	%
Common Stock			492,243				3.0
Total		$	16,208,065				100.0	%

 

RESULTS OF OPERATIONS

 

Our operating results for the three and nine months ended September 30, 2024 and September 30, 2023 were as follows:

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2024				2023				2024				2023
Investment Income:		$	711,022			$	725,158			$	2,432,318			$	2,496,688
Operating Expenses:			(419,847	)			(421,373	)			(1,178,993	)			(2,883,235	)
Net Investment Gain (Loss)		$	291,175			$	303,785			$	1,253,325			$	(386,547	)

 

Investment Income

 

We generate revenue primarily in the form of interest income derived from the short-term non-banking loans we provide, together with fees we charge in connection with those loans, such as commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned. In some cases, the interest payable to us on the short-term loans we provide may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. On occasion, we may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire.

 

For the three and nine months ended September 30, 2024, our total investment income was 711,022 and $2,432,318, respectively. For the three and nine months ended September 30, 2023 our total investment income was $725,158 and $2,496,688, respectively. Our loan portfolio generates interest income, with an average rate on the loans of 16.2%.

 

Professional Fees

 

For the three and nine months ended September 30, 2024, we had $190,369 and $502,838 professional fees expense, respectively. For the three and nine months ended September 30, 2023, we had $184,008 and $601,184 professional fees expense, respectively. The decrease is due to the decrease in loan activity during the current year.

 

Payroll and Directors Fees

 

For the three and nine months ended September 30, 2024, we had $148,072 and $444,997 of payroll expense, respectively, and we had $30,000 and $90,000 of directors fees, respectively. For the three and nine months ended September 30, 2023, we had $141,040 and $1,418,640 of payroll expense, respectively, and we had $30,000 and $592,968 of directors fees, respectively. The increase in 2023 over 2024 is due to a stock option issuance recognized in January 2023.

 

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Interest Expense

 

For the three and nine months ended September 30, 2024, we had $0 and $320 of interest expense, respectively. For the three and nine months ended September 30, 2023, we had $0 and $78,000 of interest expense, respectively. The decrease is due to the termination of the line of credit agreement in January 2024.

 

Net Realized Gain (Loss) from Investments

 

For the three and nine months ended September 30, 2024, we had $5,152,682 and $6,614,573, respectively, of sales of investments resulting in $232,585 of realized losses and $138,655 of realized gains, respectively. For the three and nine months ended September 30, 2023, we had $0 and $94,569, respectively, of sales of investments resulting in $0 and $558,629 of realized losses, respectively.

 

Net Change in Unrealized Appreciation (Depreciation) on Investments

 

For the three and nine months ended September 30, 2024, our investments had $530,693 and $292,803 of unrealized appreciation, respectively. For the three and nine months ended September 30, 2023, our investments had $2,175 and $629,491 of unrealized appreciation, respectively.

 

Changes in Net Assets from Operations

 

For the three and nine months ended September 30, 2024, we recorded a net increase in net assets from operations of $463,783 and $1,258,822, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2024, our per-share net increase in net assets from operations was $0.07 and $0.20, respectively, before dilution, and $0.07 and $0.19, respectively, after dilution. For the three and nine months ended September 30, 2023, we recorded a net increase in net assets from operations of $369,560 and a net decrease in net assets from operations of $277,763, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2023, our per-share net increase in net assets from operations was $0.06 and our per share net decrease in net assets from operations was $0.04, respectively.

 

Cash Flows for the Nine Months Ended September 30, 2024 and 2023

 

The level of cash flows used in or provided by operating activities is affected primarily by our provision of short-term loans, purchases of other investments, redemptions and repayments of our loans or investments, and other related factors. For the nine months ended September 30, 2024, net cash provided in operating activities was $2,756,853. Cash flows provided in operating activities for the nine months ended September 30, 2024 were primarily related to the funding of our short-term loans and purchases of investments aggregating $5,106,503, offset mostly by redemptions and repayments of short-term loans and investments totaling $6,614,573. For the nine months ended September 30, 2023, net cash used in operating activities was $550,781. Cash flows used in operating activities for the nine months ended September 30, 2023 were primarily related to the funding of our short-term loans and purchases of investments aggregating $11,900,500, offset mostly by redemptions and repayments of short-term loans and investments totaling $11,124,193.

 

FINANCIAL CONDITION

 

As of September 30, 2024, we had cash and cash equivalents of $3,132,877, an increase of $2,756,853 from December 31, 2023. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to collectively as “temporary investments.”

 

CRITICAL ACCOUNTING ESTIMATES

 

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

 

In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition. For more information, refer to our Annual Report on Form 10-K for the year ended December 31, 2023.

 

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OFF-BALANCE-SHEET ARRANGEMENTS

 

During the nine months ended September 30, 2024, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.

 

FORWARD-LOOKING STATEMENTS

 

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

 

	·	our future operating results;
	·	the success of our investments;
	·	our relationships with third parties;
	·	the dependence of our success on the general economy and its impact on the industries in which we invest;
	·	the ability of our portfolio companies to achieve their objectives;
	·	our expected financings and investments;
	·	our regulatory structure and tax treatment;
	·	the adequacy of our cash resources and working capital; and
	·	the timing of cash flows, if any, we receive from our investments.

 

The foregoing list is not exhaustive. For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on April 2, 2024 (related to our year ended December 31, 2023) and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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

 

As of September 30, 2024, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were not effective as of September 30, 2024 due to the material weakness in our internal control over financial reporting identified and disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2023.

 

There were no significant changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect such controls.

 

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PART II. OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

Exhibit Number		Description
3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 23, 2013)
3.2		Amended and Restated Bylaws of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10-SB filed on January 29, 2008)
10.1*		Fourth Short-term Loan Agreement with Mustang Funding, LLC, dated September 29,2023
10.2*		Fourth Short-term Promissory Note issued by Mustang Funding, LLC in favor of Mill City Ventures III, Ltd, dated September 29,2023 in original principal amount of $10,000,000.
10.3*		Amendment No. 1 Fourth Short-term Loan Agreement and Fourth Short-term Promissory Note, dated April 29,2024
10.4*		Subordination and Intercreditor Agreement among Mill City Ventures III, Ltd, Mustang Funding, LLC, and Orion Pip LLC, dated December 28, 2022
31.1*		Section 302 Certification of the Chief Executive Officer
31.2*		Section 302 Certification of the Chief Financial Officer
32.1*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

                            

* Filed herewith

 

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SIGNATURES

 

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

 

	MILL CITY VENTURES III, LTD.
Date:  November 15, 2024	By:	/s/ Douglas M. Polinsky
		DOUGLAS M. POLINSINKY
		Chief Executive Officer
Date: November 15, 2024	By:	/s/ Joseph A. Geraci, II
		JOSEPH A. GERACI, II
		Chief Financial Officer

 

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