Mill City Ventures III(MCVT) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents Mill City Ventures III, Ltd.'s unaudited condensed financial statements and detailed notes for Q1 2025 and Q4 2024 Condensed Balance Sheets Balance sheets show decreased total assets and equity from Q4 2024 to Q1 2025, due to reduced cash despite increased investments Condensed Balance Sheet Highlights | Metric | March 31, 2025 | December 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Investments, at fair value | $16,978,160 | $13,453,561 | +$3,524,599 | +26.19% | | Cash and cash equivalents | $1,749,089 | $6,026,110 | -$4,277,021 | -70.98% | | Total Assets | $19,849,016 | $20,473,436 | -$624,420 | -3.05% | | Total Liabilities | $269,717 | $715,447 | -$445,730 | -62.29% | | Total Shareholders' Equity | $19,579,299 | $19,757,989 | -$178,690 | -0.90% | | Net Asset Value Per Common Share | $3.23 | $3.09 | +$0.14 | +4.53% | Condensed Statements of Operations Net assets from operations increased in Q1 2025 vs Q1 2024, driven by unrealized appreciation despite lower investment income Condensed Statements of Operations Highlights | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Total Investment Income | $778,027 | $832,667 | -$54,640 | -6.56% | | Total Operating Expenses | $379,783 | $361,087 | +$18,696 | +5.18% | | Net Investment Gain | $398,244 | $471,580 | -$73,336 | -15.55% | | Net realized gain on investments | $236 | $24,495 | -$24,259 | -99.04% | | Net change in unrealized appreciation on investments | $162,266 | $51,751 | +$110,515 | +213.55% | | Net Increase in Net Assets Resulting from Operations | $451,746 | $382,103 | +$69,643 | +18.22% | | Basic Net Increase in Net Assets Resulting from Operations per share | $0.07 | $0.06 | +$0.01 | +16.67% | Condensed Statements of Shareholders' Equity Shareholders' equity slightly decreased from Q4 2024 to Q1 2025, mainly due to share repurchases, partially offset by gains Changes in Shareholders' Equity (Three Months Ended March 31, 2025) | Metric | Balance as of Dec 31, 2024 | Repurchase of common shares | Undistributed net investment gain | Undistributed net realized gain on investment transactions | Appreciation in value of investments | Balance as of Mar 31, 2025 | |---|---|---|---|---|---|---| | Common Shares | 6,385,255 | (322,482) | — | — | — | 6,062,773 | | Total Shareholders' Equity | $19,757,989 | $(630,436) | $289,244 | $236 | $162,266 | $19,579,299 | - The company repurchased 322,482 shares of common stock for $630,436 during the three months ended March 31, 2025[15][64] Condensed Statements of Cash Flows Net cash decreased significantly in Q1 2025 due to investment purchases and share repurchases, contrasting with prior year cash generation Condensed Statements of Cash Flows Highlights | Cash Flow Activity | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |---|---|---| | Net cash provided by (used in) operating activities | $(3,646,585) | $128,701 | | Net cash used by financing activities | $(630,436) | $0 | | Net increase (decrease) in cash | $(4,277,021) | $128,701 | | Cash, end of period | $1,749,089 | $504,725 | - Cash flows used in operating activities for Q1 2025 were primarily related to purchasing investments totaling $3,366,196[16][85] - Cash flows used in financing activities during Q1 2025 were due to the repurchase of 322,482 common shares for $630,436[16][85] Condensed Schedule of Investments Investment portfolio shifted from Q4 2024 to Q1 2025, increasing Commercial Business Loans and decreasing Short-Term Non-banking Loans Investment Portfolio Composition by Major Class (Fair Value) | Investment / Industry | Fair Value (Mar 31, 2025) | % of Net Assets (Mar 31, 2025) | Fair Value (Dec 31, 2024) | % of Net Assets (Dec 31, 2024) | |---|---|---|---|---| | Short-Term Non-banking Loans | $6,232,660 | 31.84% | $13,006,231 | 65.83% | | Commercial Business Loans | $10,247,854 | 52.34% | $0 | 0.00% | | Common Stock | $497,646 | 2.54% | $447,330 | 2.26% | | Total Investments | $16,978,160 | 86.72% | $13,453,561 | 68.09% | Investment Portfolio Composition by Industry Grouping (Fair Value) | Industry Grouping | Fair Value (Mar 31, 2025) | % of Fair Value (Mar 31, 2025) | Fair Value (Dec 31, 2024) | % of Fair Value (Dec 31, 2024) | |---|---|---|---|---| | Business Services | $10,247,854 | 60.4% | $9,985,925 | 74.2% | | Real Estate | $5,235,521 | 30.8% | $2,515,998 | 18.7% | | Consumer | $997,180 | 5.9% | $508,774 | 3.8% | | Financial | $497,605 | 2.9% | $442,864 | 3.3% | | Information Technology | $0 | 0.0% | $0 | 0.0% | | Total | $16,978,160 | 100.0% | $13,453,561 | 100.0% | Condensed Notes to Financial Statements Notes detail the company's business, accounting policies, investment composition, fair value, related parties, taxes, credit, stock, and highlights NOTE 1 – ORGANIZATION Mill City Ventures III, Ltd. provides short-term secured finance solutions, avoiding 1940 Act regulation, incorporated in 2006 - Mill City Ventures III, Ltd. was incorporated in Minnesota in January 2006[21] - The company provides short-term specialty finance solutions, typically secured loans, to small businesses and high-net-worth individuals[21] - The company monitors its investments to ensure no more than 40% of total assets consist of 'investment securities' to avoid regulation under the 1940 Act[21] NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Financial statements follow GAAP and ASC Topic 946, using fair value hierarchy for investments and accrual-based revenue recognition - The company follows accounting and reporting guidance in ASC Topic 946 'Financial Services – Investment Companies'[20][22] - Investments are carried at fair value in accordance with ASC Topic 820, using a hierarchal disclosure framework (Level 1, 2, 3) based on market price observability[24][26][27] - Interest income is recorded on an accrual basis, with loans generally placed on non-accrual status when payments are past due 30 days or more, or collectability is doubtful[40] NOTE 3 – INVESTMENTS Investment portfolio shifted from Q4 2024 to Q1 2025, with Commercial Business Loans becoming 60.4% and Short-term Non-banking Loans decreasing Investment Portfolio Composition by Major Class | Investment Class | Fair Value (Mar 31, 2025) | % of Fair Value (Mar 31, 2025) | Fair Value (Dec 31, 2024) | % of Fair Value (Dec 31, 2024) | |---|---|---|---|---| | Short-term Non-banking Loans | $6,232,660 | 36.7% | $13,006,231 | 96.7% | | Commercial Business Loans | $10,247,854 | 60.4% | — | 0.0% | | Common Stock | $497,646 | 2.9% | $447,330 | 3.3% | | Other Equity | — | 0.0% | — | 0.0% | | Total | $16,978,160 | 100.0% | $13,453,561 | 100.0% | Investment Portfolio Composition by Industry Grouping | Industry Grouping | Fair Value (Mar 31, 2025) | % of Fair Value (Mar 31, 2025) | Fair Value (Dec 31, 2024) | % of Fair Value (Dec 31, 2024) | |---|---|---|---|---| | Business Services | $10,247,854 | 60.4% | $9,985,925 | 74.2% | | Real Estate | $5,235,521 | 30.8% | $2,515,998 | 18.7% | | Consumer | $997,180 | 5.9% | $508,774 | 3.8% | | Financial | $497,605 | 2.9% | $442,864 | 3.3% | | Information Technology | — | 0.0% | — | 0.0% | | Total | $16,978,160 | 100.0% | $13,453,561 | 100.0% | NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS Investment portfolio primarily Level 3 assets, totaling $16.48 million with $224,183 unrealized appreciation in Q1 2025 Fair Value Measurements by Hierarchy Level (March 31, 2025) | Investment Class | Level 1 (Mar 31, 2025) | Level 3 (Mar 31, 2025) | Total (Mar 31, 2025) | |---|---|---|---| | Short-term Non-banking Loans | $0 | $6,232,660 | $6,232,660 | | Commercial Business Loans | $0 | $10,247,854 | $10,247,854 | | Common Stock | $497,646 | $0 | $497,646 | | Total | $497,646 | $16,480,514 | $16,978,160 | - The net change in unrealized appreciation for Level 3 portfolio investments still held as of March 31, 2025, was $224,183[50] - Unobservable inputs for Level 3 ST Non-banking Loans and Commercial Business Loans include determining private company interest rates based on changes in market rates of instruments with comparable creditworthiness, ranging from 15-24% and 20% respectively[51] NOTE 5 – RELATED-PARTY TRANSACTIONS Related-party transactions policy requires disclosures; a $250,000 shareholder note was paid, and a director-involved loan terminated - The company has a conflicts of interest and related-party transactions policy requiring disclosures to the Board of Directors and in SEC reports[54] - A $250,000 promissory note with two shareholders, bearing 10% interest, was paid in full on September 26, 2024[57] - A component of the company's now-terminated loan agreement was with a director of the company[57] NOTE 6 – INCOME TAXES Deferred tax asset was $732,000 in Q1 2025, down from Q4 2024, with effective tax rate increasing to 28% due to apportionment Income Tax Balances | Metric | March 31, 2025 | December 31, 2024 | |---|---|---| | Deferred tax asset | $732,000 | $770,000 | | Accrued taxes | $218,200 | $147,200 | - The company recorded an increase of income taxes of $109,000 (28% effective tax rate) for the three months ended March 31, 2025, compared to $166,000 (26% effective tax rate) for the same period in 2024[58] - The deferred tax rate changed from 26.52% as of December 31, 2024, to 28.35% as of March 31, 2025, due to changes in state apportionment[58] NOTE 7 – LINE OF CREDIT The $5 million revolving line of credit, secured by assets and involving a director, was terminated in January 2024 - The company had a $5 million revolving line of credit with a third party and a director, accruing interest at 8% per annum[59] - The Loan Agreement was terminated in January 2024, and all applicable early termination fees were waived[60] NOTE 8 – STOCK-BASED COMPENSATION The 2022 Stock Incentive Plan authorized 900,000 shares; 670,000 options outstanding at $2.11 exercise price in Q1 2025 Stock Option Activity and Status | Metric | March 31, 2025 | |---|---| | Options outstanding at end of period | 670,000 | | Weighted-average exercise price | $2.11 | | Options exercisable at March 31, 2025 | 670,000 | | Weighted-average remaining contractual life | 7.67 years | - The 2022 Stock Incentive Plan authorized 900,000 shares, with 870,000 issued and 30,000 available for issuance[61] - No stock-based compensation expense was recognized for the three months ended March 31, 2025, or 2024[62] NOTE 9 – SHAREHOLDERS' EQUITY As of Q1 2025, 6,062,773 common shares were outstanding, with 322,482 repurchased and a 75,000-share warrant issued - As of March 31, 2025, the company had 6,062,773 shares of common stock issued and outstanding[63] - During the first quarter, 322,482 shares of common stock were repurchased[64] - A five-year warrant was issued to the underwriter in connection with the 2022 public offering, allowing purchase of up to 75,000 common shares at $5.00 per share, expiring August 8, 2027[65] NOTE 10 – PER-SHARE INFORMATION Basic and diluted net gain per common share increased to $0.07 in Q1 2025 from $0.06 in Q1 2024 Per-Share Information | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |---|---|---| | Net increase in net assets resulting from operations | $451,746 | $382,103 | | Weighted-average number of common shares outstanding - basic | 6,320,533 | 6,385,255 | | Weighted-average number of common shares outstanding - diluted | 6,371,849 | 6,501,823 | | Basic and diluted net gain per common share | $0.07 | $0.06 | NOTE 11 – FINANCIAL HIGHLIGHTS NAV per share increased to $3.23 in Q1 2025, with a total investment return of 2.27% and portfolio turnover of 0.37% Financial Highlights (Per Share and Ratios) | Metric | March 31, 2025 | March 31, 2024 | |---|---|---| | Net asset value at beginning of period | $3.09 | $2.91 | | Net asset value at end of period | $3.23 | $2.97 | | Net investment income (loss) per share | $0.06 | $0.07 | | Net realized and unrealized gains (losses) per share | $0.03 | $0.01 | | Repurchase of common stock per share | $0.10 | $0.00 | | Total investment return | 2.27% | 2.06% | | Portfolio turnover rate | 0.37% | 0.39% | | Ratio of operating expenses to average net assets | (7.60)% | (7.57)% | | Ratio of net investment income (loss) to average net assets | 8.47% | 10.58% | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses Q1 2025 financial performance, condition, and liquidity, covering business, investments, operations, and estimates OVERVIEW Mill City Ventures III, Ltd. provides secured short-term non-bank lending, generating revenue from interest and fees on illiquid loans - Mill City Ventures III, Ltd. provides short-term non-bank lending and specialty finance solutions, generally on a secured basis, to companies and individuals[69] - Loans typically have maturities of nine months or shorter, are highly illiquid, and involve collateral pledges or personal guarantees[69] - Principal income sources are interest and fees (origination, closing, exit fees) associated with loans, with occasional revenue from dividends and capital gains on equity investments[70] PORTFOLIO AND INVESTMENT ACTIVITY Q1 2025 saw significant investment purchases of $3.37 million, resulting in $17.08 million net investments at amortized cost Investment Activity | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |---|---|---| | Investment purchases | $3,366,196 | $73,438 | | Redemptions and repayments | $4,099 | $308,797 | | Net investments at amortized cost (period end) | $17,079,421 | $18,366,616 | Portfolio Composition by Major Class (Fair Value, March 31, 2025) | Investment Class | Fair Value (Mar 31, 2025) | % of Fair Value (Mar 31, 2025) | |---|---|---| | Short-term Non-banking Loans | $6,232,660 | 36.7% | | Commercial Business Loans | $10,247,854 | 60.4% | | Common Stock | $497,646 | 2.9% | | Other Equity | — | — | | Total | $16,978,160 | 100.0% | RESULTS OF OPERATIONS Q1 2025 operating results show a net increase in assets from operations to $451,746, driven by unrealized appreciation Operating Results Summary | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Investment Income | $778,027 | $832,667 | -$54,640 | -6.56% | | Operating Expenses | $(379,783) | $(361,087) | -$18,696 | +5.18% | | Net Investment Gain | $398,244 | $471,580 | -$73,336 | -15.55% | | Net Increase in Net Assets Resulting from Operations | $451,746 | $382,103 | +$69,643 | +18.22% | Investment Income Total investment income decreased to $778,027 in Q1 2025, with the loan portfolio yielding an average 20.25% interest rate Investment Income | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Total Investment Income | $778,027 | $832,667 | -$54,640 | -6.56% | - The loan portfolio generates interest income with an average rate of 20.25%[78] Professional Fees Professional fees expense slightly increased to $142,656 in Q1 2025 from $138,371 in the prior year Professional Fees Expense | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Professional fees expense | $142,656 | $138,371 | +$4,285 | +3.10% | Payroll and Directors Fees Payroll expense increased to $163,269 in Q1 2025, while director fees remained constant at $30,000 Payroll and Directors Fees Expense | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Payroll expense | $163,269 | $151,066 | +$12,203 | +8.08% | | Director's fees | $30,000 | $30,000 | $0 | 0.00% | Interest Expense Interest expense was $0 in Q1 2025, down from $320 in Q1 2024, due to the line of credit termination Interest Expense | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Interest expense | $0 | $320 | -$320 | -100.00% | - The decrease in interest expense is due to the termination of the line of credit agreement in January 2024[81] Net Realized Gain (Loss) from Investments Net realized gain on investments significantly decreased to $236 in Q1 2025 from $24,495 in Q1 2024 due to lower sales proceeds Net Realized Gain from Investments | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Proceeds from sale of investments | $4,099 | $308,797 | -$304,698 | -98.67% | | Net realized gain on investments | $236 | $24,495 | -$24,259 | -99.04% | Net Change in Unrealized Appreciation (Depreciation) on Investments Net unrealized appreciation on investments substantially increased to $162,266 in Q1 2025 from $51,751 in Q1 2024 Net Change in Unrealized Appreciation on Investments | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Net unrealized appreciation on investments | $162,266 | $51,751 | +$110,515 | +213.55% | Changes in Net Assets from Operations Net assets from operations increased to $451,746 in Q1 2025, resulting in a basic per-share net increase of $0.07 Changes in Net Assets from Operations | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Net increase in net assets from operations | $451,746 | $382,103 | +$69,643 | +18.22% | | Per-share net increase in net assets from operations | $0.07 | $0.06 | +$0.01 | +16.67% | FINANCIAL CONDITION Cash balance significantly decreased to $1.75 million in Q1 2025, primarily used for portfolio investments and corporate purposes Cash Position | Metric | March 31, 2025 | December 31, 2024 | Change | Percentage Change | |---|---|---|---|---| | Cash | $1,749,089 | $6,026,110 | -$4,277,021 | -70.98% | - The primary use of existing and future funds is for investments in portfolio companies or other general corporate purposes, including operating expenses or debt service[86] CRITICAL ACCOUNTING ESTIMATES Financial statements rely on critical estimates for investment valuation and revenue recognition, which are inherently uncertain - Critical accounting policies relate to the valuation of portfolio investments and revenue recognition[88] - Management's estimates and assumptions, based on past history, industry standards, and the economic environment, affect reported asset/liability amounts and revenues/expenses[87][88] OFF-BALANCE-SHEET ARRANGEMENTS The company had no off-balance sheet arrangements during the three months ended March 31, 2025 - The company did not engage in any off-balance sheet arrangements during the three months ended March 31, 2025[89] FORWARD-LOOKING STATEMENTS Forward-looking statements involve risks and uncertainties, based on assumptions about investments, profitability, capital, and compliance - Forward-looking statements are based on management's current expectations and involve assumptions, risks, and uncertainties that could cause actual results to differ materially[90] - Important assumptions include the ability to identify and consummate new investments, achieve profitability, secure additional capital, and maintain regulatory compliance[90] - The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances occurring after the filing date[91] ITEM 4. CONTROLS AND PROCEDURES Disclosure controls were ineffective as of Q1 2025 due to a material weakness in internal control over financial reporting - As of March 31, 2025, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were not effective[93] - The ineffectiveness is due to a material weakness in internal control over financial reporting, identified and disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024[93] - There were no significant changes in internal controls over financial reporting during the fiscal quarter covered by this report[94] PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Board authorized a $2 million stock repurchase program; 322,482 shares repurchased in March 2025 at $1.95 per share - On October 4, 2024, the Board authorized the repurchase of up to $2 million of outstanding common stock, ending December 31, 2025[97] Common Stock Repurchase Activity (Three Months Ended March 31, 2025) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares That May Yet be Purchased Under Program | |---|---|---|---|---| | January 2025 | — | $— | — | $2,000,000 | | February 2025 | — | $— | — | $2,000,000 | | March 2025 | 322,482 | $1.95 | 322,482 | $1,369,564 | ITEM 5. OTHER INFORMATION No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q1 2025 - None of the company's directors or officers adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the three months ended March 31, 2025[99] ITEM 6. EXHIBITS Exhibits filed with Form 10-Q include organizational documents, loan agreements, employment agreements, and officer certifications - Exhibits include Amended and Restated Articles of Incorporation and Bylaws, amendments to the Fourth Short-Term Loan Agreement with Mustang Funding, LLC, a Security Agreement, and Executive Employment Agreements for Douglas M. Polinsky and Joseph A. Geraci II[100] - Certifications from the Chief Executive Officer and Chief Financial Officer (Section 302 and Section 906) are filed herewith[100] SIGNATURES The report was signed on May 12, 2025, by the CEO and CFO, confirming compliance with the Securities and Exchange Act - The report was signed on May 12, 2025, by Douglas M. Polinsky, Chief Executive Officer, and Joseph A. Geraci, II, Chief Financial Officer[105]