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Table of Contents

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 June 30, 2022

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 August 15, 2022, Mill City Ventures III, Ltd. had 6,074,725 shares of common stock, and no other classes of capital stock, outstanding.

Table of Contents

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended June 30, 2022

    

Page No.

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

Condensed Balance Sheets – June 30, 2022 and December 31, 2021

 

2

 

 

 

 

 

Condensed Statements of Operations – Three and six months ended June 30, 2022 and June 30, 2021

 

3

 

 

 

 

 

Condensed Statements of Shareholders’ Equity – Three and six months ended June 30, 2022 and June 30, 2022

 

4

 

 

 

 

 

Condensed Statements of Cash Flows – Six months ended June 30, 2022 and June 30, 2021

 

5

 

 

 

 

 

Condensed Schedule of Investments – June 30, 2022 and Schedule of Investments – December 31, 2021

 

6

 

 

 

 

 

Condensed Notes to Financial Statements – June 30, 2022

 

9

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

Item 4.

Controls and Procedures

 

23

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

Item 6.

Exhibits

 

23

SIGNATURES

 

24

- 2 -

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

    

June 30, 2022

    

    

(unaudited)

    

December 31, 2021

ASSETS

  

  

Investments, at fair value:

$

15,341,080

$

14,098,675

Non-control/non-affiliate investments (cost: $15,191,759 and $13,933,057 respectively)

 

 

Cash

 

629,572

 

1,936,148

Note receivable

 

250,000

 

250,000

Prepaid expenses

 

133,613

 

83,674

Interest and dividend receivables

 

439,422

 

324,350

Right-of-use lease asset

 

26,804

 

4,984

Total Assets

$

16,820,491

$

16,697,831

LIABILITIES

 

  

 

  

Line of credit

$

2,075,000

$

Accounts payable

51,783

64,028

Dividend payable

 

 

100

Payable for purchase of investments

1,900,000

Lease liability

 

26,859

 

5,654

Accrued income tax

 

201,242

 

1,269,000

Deferred taxes

 

39,000

 

45,000

Total Liabilities

 

2,393,884

 

3,283,782

Commitments and Contingencies

SHAREHOLDERS EQUITY (NET ASSETS)

 

  

 

  

Common stock, par value $0.001 per share (250,000,000 authorized; 10,855,413 and 10,790,413 outstanding)

 

10,855

 

10,790

Additional paid-in capital

 

10,776,537

 

10,694,163

Accumulated deficit

 

(1,159,665)

 

(1,159,665)

Accumulated undistributed investment loss

 

(1,064,271)

 

(1,877,667)

Accumulated undistributed net realized gains on investment transactions

 

5,713,830

 

5,580,810

Net unrealized appreciation in value of investments

 

149,321

 

165,618

Total Shareholders’ Equity (Net Assets)

 

14,426,607

 

13,414,049

Total Liabilities and Shareholders’ Equity

$

16,820,491

$

16,697,831

Net Asset Value Per Common Share

$

1.33

$

1.24

See accompanying Notes to Financial Statements

- 2 -

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

    

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Investment Income

 

  

 

  

 

  

 

  

Interest income

$

1,236,505

$

675,549

$

2,236,711

$

1,222,391

Total Investment Income

 

1,236,505

 

675,549

 

2,236,711

 

1,222,391

Operating Expenses

 

  

 

  

 

  

 

  

Professional fees

 

197,591

 

77,539

 

392,989

 

220,347

Payroll

 

114,542

 

85,346

 

310,984

 

387,426

Insurance

 

26,979

 

27,854

 

57,076

 

52,133

Occupancy

 

19,141

 

16,337

 

35,953

 

33,026

Director’s fees

 

87,073

 

30,000

 

117,073

 

60,000

Interest expense

47,794

117,853

Other general and administrative

 

9,135

 

13,080

 

16,145

 

31,082

Total Operating Expenses

 

502,255

 

250,156

 

1,048,073

 

784,014

Net Investment Gain

 

734,250

 

425,393

 

1,188,638

$

438,377

Realized and Unrealized Gain on Investments

 

  

 

  

 

  

 

  

Net realized gain (loss) on investments

 

(5,750)

 

621,600

 

133,020

 

3,529,599

Net change in unrealized appreciation (depreciation) on investments

 

5,750

 

83,100

 

(16,297)

 

(430,150)

Net Realized and Unrealized Gain on Investments

 

 

704,700

 

116,723

 

3,099,449

Net Increase in Net Assets Resulting from Operations Before Taxes

$

734,250

$

1,130,093

$

1,305,361

$

3,537,826

Provision for Income Taxes

 

216,242

 

348,587

 

375,242

 

1,011,278

Net Increase in Net Assets Resulting from Operations

$

518,008

$

781,506

$

930,119

2,526,548

Net Increase in Net Assets Resulting from Operations per share:

 

  

 

  

 

  

 

  

Basic and diluted

$

0.05

$

0.07

$

0.09

$

0.23

Weighted-average number of common shares outstanding - basic and diluted

 

10,847,556

 

10,790,413

 

10,819,142

 

10,788,175

See accompanying Notes to Financial Statements

- 3 -

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Accumulated

Accumulated

Undistributed

Net Unrealized

Additional

Undistributed

Net Realized Gain

Appreciation

Total

Common

Par

Paid In

Accumulated

Net Investment

(Loss) on Investments

in value of

Shareholders'

Three Months Ended June 30, 2022

   

Shares

   

Value

   

Capital

   

Deficit

   

Loss

   

Transactions

   

Investments

   

Equity

Balance as of March 31, 2022

10,790,413

$

10,790

$

10,694,163

$

(1,159,665)

$

(1,582,279)

$

5,719,580

$

143,571

$

13,826,160

Common shares issued in stock based compensation

65,000

65

82,374

82,439

Undistributed net investment gain

518,008

518,008

Undistributed net realized loss on investment transactions

(5,750)

  

(5,750)

Appreciation in value of investments

5,750

5,750

Balance as of June 30, 2022

 

10,855,413

$

10,855

$

10,776,537

$

(1,159,665)

$

(1,064,271)

$

5,713,830

$

149,321

$

14,426,607

Accumulated

Accumulated

Undistributed

Net Unrealized

Additional

Undistributed

Net Realized Gain

Appreciation

Total

Common

Paid In

Accumulated

Net Investment

on Investments

in value

Shareholders'

Three Months Ended June 30, 2021

   

Shares

   

Par Value

   

Capital

   

Deficit

   

Loss

   

Transactions

   

of Investments

   

Equity

Balance as of March 31, 2021

10,786,913

$

10,787

$

10,678,763

$

(1,159,665)

$

(2,774,126)

$

5,449,849

$

1,186,071

$

13,391,679

Common shares issued in consideration for expense payment

3,500

3

15,400

15,403

Undistributed net investment gain

 

 

 

 

 

76,806

 

 

 

76,806

Undistributed net realized gain on investment transactions

 

 

 

 

 

 

621,600

 

 

621,600

Appreciation in value of investments

 

 

 

 

 

 

 

83,100

 

83,100

Balance as of June 30, 2021

 

10,790,413

$

10,790

$

10,694,163

$

(1,159,665)

$

(2,697,320)

$

6,071,449

$

1,269,171

$

14,188,588

Accumulated

Net Unrealized

Accumulated

Undistributed

Appreciation

Additional

Undistributed

Net Realized Gain

(Depreciation)

Total

Common

Paid In

Accumulated

Net Investment

on Investments

in Value of

Shareholders’

Six Months Ended June 30, 2022

   

Shares

   

Par Value

   

Capital

   

Deficit

   

Loss

   

Transactions

   

Investments

   

Equity

Balance as of December 31, 2021

10,790,413

$

10,790

$

10,694,163

$

(1,159,665)

$

(1,877,667)

$

5,580,810

$

165,618

$

13,414,049

Common shares issued in stock based compensation

65,000

65

82,374

82,439

Undistributed net investment gain

813,396

813,396

Undistributed net realized gain on investment transactions

133,020

133,020

Depreciation in value of investments

 

 

 

 

 

 

(16,297)

 

(16,297)

Balance as of June 30, 2022

 

10,855,413

$

10,855

$

10,776,537

$

(1,159,665)

$

(1,064,271)

$

5,713,830

$

149,321

$

14,426,607

Accumulated

Net Unrealized

Accumulated

Undistributed

Appreciation

Additional

Undistributed

Net Realized Gain

(Depreciation)

Total

Common

Paid In

Accumulated

Net Investment

on Investments

in Value of

Shareholders’

Six Months Ended June 30, 2021

    

Shares

    

Par Value

    

Capital

    

Deficit

    

Loss

    

Transactions

    

Investments

    

Equity

Balance as of December 31, 2020

10,785,913

$

10,786

$

10,673,014

$

(1,159,665)

$

(2,124,419)

$

2,541,850

1,699,321

$

11,640,887

Issuance of shares

4,500

4

21,149

21,153

Undistributed net investment loss

(572,901)

(572,901)

Undistributed net realized gain on investment transactions

3,529,599

3,529,599

Depreciation in value of investments

(430,150)

(430,150)

Balance as of June 30, 2021

 

10,790,413

$

10,790

$

10,694,163

$

(1,159,665)

$

(2,697,320)

$

6,071,449

$

1,269,171

$

14,188,588

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

    

Six Months Ended

June 30, 2022

    

June 30, 2021

Cash flows from operating activities:

 

  

 

  

Net increase in net assets resulting from operations

$

930,119

$

2,526,548

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

 

  

 

  

Net change in unrealized appreciation on investments

 

16,297

 

430,150

Net realized gain on investments

 

(133,020)

 

(3,529,599)

Purchases of investments

 

(9,103,580)

 

(13,250,664)

Proceeds from sales of investments

 

7,977,898

 

9,889,827

Deferred income taxes

(1,073,758)

1,011,278

Common shares issued as consideration for expense payment

82,439

15,403

Changes in operating assets and liabilities:

 

 

Prepaid expenses and other assets

 

(39,772)

 

(135,934)

Interest and dividends receivable

 

(115,072)

 

(265,504)

Receivable for investment sales

 

 

(75,465)

Payable for investment purchase

(1,900,000)

Accounts payable and other liabilities

 

(23,127)

 

(2,318)

Deferred interest income

 

 

Net cash used in operating activities

 

(3,381,576)

 

(3,386,278)

Cash flows from financing activities:

 

 

Proceeds from line of credit

 

6,075,000

 

Repayments on line of credit

(4,000,000)

Payments for common stock dividend

 

 

(539,296)

Net cash provided (used) by financing activities

 

2,075,000

 

(539,296)

Net decrease in cash

 

(1,306,576)

 

(3,925,574)

Cash, beginning of period

 

1,936,148

 

5,440,579

Cash, end of period

$

629,572

$

1,515,005

Non-cash financing activities:

 

  

 

  

Common shares issued as consideration for investment

$

$

5,750

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

JUNE 30, 2022

Percentage

 

of Net

Investment / Industry

    

Cost

    

Fair Value

    

Assets

Short-Term Non-banking Loans

  

  

  

 

Consumer - 15% secured loans

$

400,000

$

400,000

2.77

%

AirDog Supplies, Inc.

1,250,000

1,250,000

 

8.66

%

Intelligent Mapping, LLC

2,900,000

2,900,000

20.10

%

Financial - 53.02% secured loans

Benton Financial, LLC

598,580

598,580

4.15

%

Financial - 12% secured loans

 

500,000

 

500,000

 

3.46

%

Real Estate - 15% secured loans

 

1,280,000

 

1,280,000

8.87

%

Tailwinds, LLC

 

3,000,000

 

3,000,000

20.79

%

Real Estate - 48% secured loans

Villas at 79th, LLC

3,400,000

3,400,000

23.57

%

Total Short-Term Non-Banking Loans

 

13,328,580

 

13,328,580

92.37

%

Preferred Stock

Consumer

 

 

Wisdom Gaming, Inc

900,000

900,000

6.24

%

Information Technology

 

150,000

 

300,000

 

2.08

%

Total Other Equity

1,050,000

1,200,000

8.32

%

Warrants

 

  

 

  

 

  

Healthcare

 

679

 

 

0.00

%

Other Equity

 

 

  

 

  

Consumer

212,500

212,500

1.47

%

Financial

 

600,000

 

600,000

 

4.16

%

Total Other Equity

812,500

812,500

5.63

%

Total Investments

$

15,191,759

$

15,341,080

 

106.32

%

Total Cash

 

629,572

 

629,572

 

4.36

%

Total Investments and Cash

$

15,821,331

$

15,970,652

 

110.68

%

See accompanying Notes to the Financial Statements

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MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2021

Percentage

of Net

Investment / Industry

    

Cost

    

Fair Value

    

Assets

 

Short-Term Non-banking Loans

  

  

  

 

Consumer - 15% secured loans

AirDog Supplies, Inc.

$

1,250,000

$

1,250,000

9.32

%

Financial - 52% secured loans

 

500,000

 

500,000

 

3.73

%

Financial - 12% secured loans

 

500,000

 

500,000

 

3.73

%

Litigation Financing - 23% secured loans

The Cross Law Firm, LLC

1,805,750

1,800,000

13.42

%

Real Estate - 15% secured loans

 

700,000

 

700,000

 

5.22

%

Tailwinds, LLC

3,000,000

3,000,000

22.36

%

Real Estate - 12% secured loans

Alatus Development, LLC

 

3,900,000

 

3,900,000

 

29.07

%

Total Short-Term Non-Banking Loans

 

11,655,750

 

11,650,000

 

86.85

%

Common Stock

 

  

 

  

 

  

Financial Services

414,128

436,175

3.25

%

Preferred Stock

Consumer

 

  

 

  

 

  

Wisdom Gaming, Inc

900,000

900,000

6.71

%

Information Technology

 

150,000

 

300,000

 

2.24

%

Total Other Equity

1,050,000

1,200,000

8.95

%

Warrants

 

  

 

  

 

  

Healthcare

 

679

 

 

0.00

%

Other Equity

 

 

 

Consumer

212,500

212,500

1.58

%

Financial

600,000

600,000

4.47

%

Total Other Equity

812,500

812,500

6.05

%

Total Investments

$

13,933,057

$

14,098,675

 

105.10

%

Total Cash

 

1,936,148

 

1,936,148

 

14.43

%

Total Investments and Cash

$

15,869,205

$

16,034,823

 

119.53

%

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Table of Contents

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 that files periodic reports with the SEC. We engaged in the business of providing short-term specialty finance solutions 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 condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The condensed balance sheet as of December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

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

Cash deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.

Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by our Board of Directors, 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.

Under our valuation policies and procedures, we evaluate the source of inputs, including any markets in which our investments are trading, and then apply the resulting information in determining fair value. For our Level 1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter market, to average the last quoted bid and ask price on the most active market on which the security is quoted. In the case of traded debt securities the prices for which are not readily available, we may value those securities using a present value approach, at their weighted-average yield to maturity.

The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors, pursuant to our written valuation policy and procedures. These policies and procedures generally require that we value our Level 3 equity investments at cost plus any accrued interest, unless circumstances warrant a different approach. An example of such circumstances may include 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 situations identified in our valuation policy and procedures that may serve as input supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party valuation conducted by an independent and qualified professional.

When valuing preferred equity investments, we generally view intrinsic value as a key input. Intrinsic value means the value of any conversion feature (if the preferred investment is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to be a key input, to account for resale restrictions applicable to the securities issuable upon conversion.

When valuing warrants, our valuation policy and procedures indicate that value will generally be the difference between closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above. Generally, “out-of-the-money” warrants will be valued at cost or zero.

For non-traded (Level 3) debt securities with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. The fair value for short-term non-banking loans is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent to those cash flows. The applied discount ranges from 12% to 53% and approximate rates currently observed in publicly traded debt markets for debt of similar terms issued by companies with comparable credit risk.

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On a quarterly basis, our management provides members of our Board of Directors with (i) valuation updates for each investment and loan we hold; (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; (iii) quarter- or period-end statements from custodial firms holding any of our investments; and (iv) recommendations to change any existing valuations of our investments or loans, or hierarchy levels, for purposes of determining the fair value of such investments or loans based upon the foregoing. The board 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.

Income taxes:

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

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

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. 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, 2019 through 2021, which were the tax years that remain subject to examination by major tax jurisdictions as of June 30, 2022.

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

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

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

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

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Table of Contents

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

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

NOTE 3 – INVESTMENTS AND LOANS

The following table shows the composition of our investments and loans by major class, at amortized cost and fair value, as of June 30, 2022 (together with the corresponding percentage of the fair value of our total investments):

As of June 30, 2022

    

Investments at

    

Percentage of

    

Investments at 

    

Percentage of 

 

    

Amortized Cost

    

Amortized Cost

 

Fair Value

    

Fair Value

Short-term Non-banking Loans

$

13,328,580

 

87.7

%

$

13,328,580

 

86.9

%

Preferred Stock

 

1,050,000

 

6.9

 

1,200,000

 

7.8

Warrants

 

679