Mill City Ventures III(MCVT) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed financial statements, management's discussion, and controls and procedures for Mill City Ventures III, Ltd Item 1. Financial Statements (unaudited) Unaudited condensed financial statements, including balance sheets, operations, equity, cash flows, and investment schedules, with explanatory notes Condensed Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, as of June 30, 2025, and December 31, 2024 | Metric | June 30, 2025 (unaudited) ($) | December 31, 2024 ($) | Change (2025 vs 2024) ($) | | :--------------------------------------- | :------------------------ | :------------------ | :-------------------- | | Investments, at fair value | $17,854,961 | $13,453,561 | +$4,401,400 | | Cash and cash equivalents | $1,497,009 | $6,026,110 | -$4,529,101 | | Total Assets | $20,447,425 | $20,473,436 | -$26,011 | | Total Liabilities | $191,091 | $715,447 | -$524,356 | | Total Shareholders' Equity (Net Assets) | $20,256,334 | $19,757,989 | +$498,345 | | Net Asset Value Per Common Share | $3.34 | $3.09 | +$0.25 | Condensed Statements of Operations Details the company's revenues, expenses, and net income for the three and six months ended June 30, 2025 and 2024 | Metric | 3 Months Ended June 30, 2025 ($) | 3 Months Ended June 30, 2024 ($) | 6 Months Ended June 30, 2025 ($) | 6 Months Ended June 30, 2024 ($) | | :------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Investment Income | $948,034 | $888,629 | $1,726,061 | $1,721,296 | | Total Operating Expenses | $316,183 | $398,059 | $695,966 | $759,146 | | Net Investment Gain | $631,851 | $490,570 | $1,030,095 | $962,150 | | Net realized gain (loss) on investments | $(31) | $346,745 | $205 | $371,240 | | Net change in unrealized appreciation (depreciation) on investments | $314,515 | $(289,641) | $476,781 | $(237,890) | | Net Increase in Net Assets Resulting from Operations | $677,035 | $412,936 | $1,128,781 | $795,039 | | Basic EPS | $0.11 | $0.06 | $0.18 | $0.12 | | Diluted EPS | $0.11 | $0.06 | $0.18 | $0.12 | Condensed Statements of Shareholders' Equity Outlines changes in shareholders' equity, including common shares and total equity, for the periods ended June 30, 2025 and 2024 | Metric | Balance as of Dec 31, 2024 ($) | Repurchase of common shares ($) | Undistributed net investment gain ($) | Undistributed net realized gain on investment transactions ($) | Appreciation in value of investments ($) | Balance as of June 30, 2025 ($) | | :-------------------------------- | :------------------------- | :-------------------------- | :-------------------------------- | :------------------------------------------------------- | :--------------------------------- | :-------------------------- | | Common Shares (Units) | 6,385,255 | (322,482) | — | — | — | 6,062,773 | | Total Shareholders' Equity | $19,757,989 | $(630,436) | $651,795 | $205 | $476,781 | $20,256,334 | Condensed Statements of Cash Flows Reports cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2025 and 2024 | Metric | Six Months Ended June 30, 2025 ($) | Six Months Ended June 30, 2024 ($) | | :------------------------------------------------- | :----------------------------- | :----------------------------- | | Net increase in net assets resulting from operations | $1,128,781 | $795,039 | | Net change in unrealized appreciation (depreciation) on investments | $(476,781) | $237,890 | | Purchases of investments | $(4,428,530) | $(973,438) | | Proceeds from sales of investments | $504,116 | $5,461,479 | | Net cash provided by (used in) operating activities | $(3,898,665) | $5,048,587 | | Payments for repurchase of common stock | $(630,436) | — | | Net increase (decrease) in cash | $(4,529,101) | $5,048,587 | | Cash, end of period | $1,497,009 | $5,424,611 | Condensed Schedule of Investments Provides a detailed breakdown of the company's investment portfolio by type and industry as of June 30, 2025, and December 31, 2024 | Investment / Industry | Fair Value (June 30, 2025) ($) | Percentage of Net Assets (June 30, 2025) (%) | Fair Value (Dec 31, 2024) ($) | Percentage of Net Assets (Dec 31, 2024) (%) | | :-------------------------------- | :------------------------- | :--------------------------------------- | :------------------------ | :-------------------------------------- | | Short-Term Non-banking Loans | $6,685,295 | 33.01% | $13,006,231 | 65.83% | | Commercial Business Loans | $10,314,787 | 50.92% | — | 0.00% | | Common Stock | $854,879 | 4.22% | $447,330 | 2.26% | | Other Equity | — | 0.00% | — | 0.00% | | Total Investments | $17,854,961 | 88.15% | $13,453,561 | 68.09% | | Total Cash and cash equivalents | $1,497,009 | 7.39% | $6,026,110 | 30.50% | | Industry Grouping | Fair Value (June 30, 2025) ($) | Percentage of Fair Value (June 30, 2025) (%) | Fair Value (Dec 31, 2024) ($) | Percentage of Fair Value (Dec 31, 2024) (%) | | :------------------------ | :------------------------- | :--------------------------------------- | :------------------------ | :-------------------------------------- | | Business Services | $10,314,787 | 57.8% | $9,985,925 | 74.2% | | Consumer | $1,400,515 | 7.8% | $508,774 | 3.8% | | Financial | $841,144 | 4.7% | $442,864 | 3.3% | | Real Estate | $5,284,780 | 29.6% | $2,515,998 | 18.7% | | Information Technology | — | 0.0% | — | 0.0% | | Technology | $13,735 | 0.1% | — | 0.0% | Condensed Notes to Financial Statements Provides detailed explanations and disclosures supporting the condensed financial statements for the period ended June 30, 2025 NOTE 1 – ORGANIZATION Describes the company's business model, focusing on short-term specialty finance and its regulatory compliance strategy - The company provides short-term specialty finance solutions, mainly secured loans to small businesses and high-net-worth individuals[19][102] - The company structures investments to ensure no more than 40% of total assets consist of "investment securities" to avoid regulation under the 1940 Act[21] NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Outlines the key accounting principles, including GAAP, investment valuation, and revenue recognition, applied in preparing financial statements - Financial statements conform to GAAP and ASC Topic 946 for investment companies, requiring estimates for assets and liabilities[22] - Investment valuation follows ASC Topic 820, using a fair value hierarchy (Level 1, 2, 3) based on market price observability, with Level 3 valuations determined quarterly by the Board of Directors[24][26][27] - Revenue recognition for interest income is on an accrual basis, with discounts/premiums amortized using the effective-yield method. Loans are placed on non-accrual status if payments are 30+ days past due or collectability is doubtful[40][41] NOTE 3 – INVESTMENTS Details the company's investment portfolio by class, amortized cost, and fair value for June 30, 2025, and December 31, 2024 | Investment Class | Amortized Cost (June 30, 2025) ($) | % of Amortized Cost (June 30, 2025) (%) | Fair Value (June 30, 2025) ($) | % of Fair Value (June 30, 2025) (%) | | :------------------------ | :----------------------------- | :---------------------------------- | :------------------------- | :-------------------------------- | | Short-term Non-banking Loans | $6,650,100 | 37.7% | $6,685,295 | 37.4% | | Commercial Business Loans | $10,000,000 | 56.7% | $10,314,787 | 57.8% | | Common Stock | $981,607 | 5.5% | $854,879 | 4.8% | | Other Equity | $10,000 | 0.1% | — | 0.0% | | Total | $17,641,707 | 100.0% | $17,854,961 | 100.0% | | Investment Class | Amortized Cost (Dec 31, 2024) ($) | % of Amortized Cost (Dec 31, 2024) (%) | Fair Value (Dec 31, 2024) ($) | % of Fair Value (Dec 31, 2024) (%) | | :------------------------ | :----------------------------- | :---------------------------------- | :------------------------- | :-------------------------------- | | Short-term Non-banking Loans | $13,000,000 | 94.8% | $13,006,231 | 96.7% | | Common Stock | $707,089 | 5.1% | $447,330 | 3.3% | | Other Equity | $10,000 | 0.1% | — | 0.0% | | Total | $13,717,089 | 100.0% | $13,453,561 | 100.0% | NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS Explains the fair value hierarchy and valuation techniques used for financial instruments, particularly Level 3 investments | Investment Class | Level 1 (June 30, 2025) ($) | Level 2 (June 30, 2025) ($) | Level 3 (June 30, 2025) ($) | Total (June 30, 2025) ($) | | :------------------------ | :------------------------ | :------------------------ | :------------------------ | :------------------------ | | Short-term Non-banking Loans | — | — | $6,685,295 | $6,685,295 | | Commercial Business Loans | — | — | $10,314,787 | $10,314,787 | | Common Stock | $854,879 | — | — | $854,879 | | Other Equity | — | — | — | — | | Total | $854,879 | — | $17,000,082 | $17,854,961 | - The net change in unrealized appreciation for Level 3 portfolio investments still held as of June 30, 2025, was $343,751[52] | Security Type | FMV (June 30, 2025) ($) | Valuation Technique | Unobservable Inputs | Range (%) | | :------------------------ | :------------------ | :------------------ | :-------------------------------------------------------------------------------- | :------ | | ST Non-banking Loans | $6,685,295 | discounted cash flow | determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness | 15-24% | | Commercial Business Loan | $10,314,787 | discounted cash flow | determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness | 20% | NOTE 5 – RELATED-PARTY TRANSACTIONS Discloses transactions with related parties, including a promissory note and a terminated loan agreement involving a director - A $250,000 promissory note with two shareholders, bearing 10% interest and secured by common stock, was paid in full on September 26, 2024[62] - A terminated loan agreement, as disclosed in Note 7, involved a company director[62] NOTE 6 – INCOME TAXES Provides details on deferred tax assets, accrued income tax, and changes in the deferred tax rate for the reporting periods | Metric | June 30, 2025 ($) | December 31, 2024 ($) | | :-------------------- | :-------------- | :---------------- | | Deferred tax asset | $641,000 | $770,000 | | Accrued income tax | $144,500 | $147,200 | - The deferred tax rate changed from 26.52% as of December 31, 2024, to 28.25% as of June 30, 2025, due to changes in state apportionment[60] NOTE 7 – LINE OF CREDIT Details the termination of a $5 million revolving line of credit in January 2024, which involved a company director - A $5 million revolving line of credit, secured by company assets and bearing 8% interest, was terminated in January 2024[61][63][64] - The loan agreement involved a company director, and all early termination fees were waived[62][64] NOTE 8 – STOCK-BASED COMPENSATION Reports on outstanding stock options, weighted average exercise price, and the absence of compensation expense for the period | Metric | June 30, 2025 | | :------------------------------------ | :------------ | | Options outstanding at end of period (Units) | 670,000 | | Weighted Average Exercise Price ($) | $2.11 | | Weighted Average Remaining Contractual Life (Years) | 7.42 years | - No stock-based compensation expense was recognized for the three and six months ended June 30, 2025 and 2024[67] NOTE 9 – SHAREHOLDERS' EQUITY Summarizes outstanding common shares, share repurchases, and details of a five-year warrant issued to an underwriter - As of June 30, 2025, 6,062,773 shares of common stock were outstanding[68] - The company repurchased 322,482 shares of common stock during the first quarter[69] - A five-year warrant for 75,000 common shares at $5.00 per share, issued to the underwriter in 2022, expires on August 8, 2027[69] NOTE 10 – PER-SHARE INFORMATION Presents basic and diluted net gain per common share and weighted-average shares outstanding for the reported periods | Metric | 3 Months Ended June 30, 2025 ($) | 3 Months Ended June 30, 2024 ($) | 6 Months Ended June 30, 2025 ($) | 6 Months Ended June 30, 2024 ($) | | :------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic Net Gain (Loss) Per Common Share | $0.11 | $0.06 | $0.18 | $0.12 | | Diluted Net Gain (Loss) Per Common Share | $0.11 | $0.06 | $0.18 | $0.12 | | Weighted-average number of common shares outstanding - basic (Units) | 6,062,773 | 6,385,255 | 6,190,941 | 6,385,255 | | Weighted-average number of common shares outstanding - diluted (Units) | 6,062,773 | 6,501,823 | 6,190,941 | 6,501,823 | - 670,000 stock options were excluded from diluted net gain per common share calculations for both periods due to their anti-dilutive effect[70] NOTE 11 – FINANCIAL HIGHLIGHTS Summarizes key financial performance metrics, including net asset value, investment income, and total investment return | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------- | :----------------------------- | :----------------------------- | | Net asset value at beginning of period ($) | $3.09 | $2.91 | | Net asset value at end of period ($) | $3.34 | $3.04 | | Net investment income (loss) per share ($) | $0.17 | $0.15 | | Net realized and unrealized gains (losses) per share ($) | $0.08 | $0.02 | | Repurchase of common stock per share ($) | $0.10 | $0.00 | | Total investment return (%) | 6.15% | 4.47% | | Ratio of net investment income (loss) to average net assets (%) | 10.73% | 10.46% | | Portfolio turnover rate (%) | 2.54% | 5.13% | NOTE 12 – SUBSEQUENT EVENTS Details significant events after the reporting period, including a private placement, new treasury policy, and executive changes - On July 31, 2025, the company completed a private placement of 75,881,625 common shares at $5.42/share and pre-funded warrants for 7,144,205 shares at $5.4199/share[74] - The company adopted a new treasury policy to allocate its principal treasury reserve to the native cryptocurrency of the Sui blockchain ("SUI"), acquiring SUI through market and direct purchases from the Sui Foundation[76] - The company entered into a Strategic Advisor Agreement with Karatage and an Asset Management Agreement with Galaxy Digital Capital Management LP to manage digital assets, primarily SUI, with a long-only investment strategy including staking[82][85][86] - New executive employment agreements were signed with the CEO and CFO, and two new directors with cryptocurrency experience were appointed to the Board, with Mr. Lyle Berman resigning[90][92][93] - The company entered into a Common Stock Purchase Agreement with A.G.P./Alliance Global Partners, granting the right to sell up to $500,000,000 or 19.99% of outstanding common stock at 95% of the volume-weighted average price[95][96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, and liquidity, highlighting the core lending business, investment activity, and post-period digital asset strategy Overview Describes the company's core business of secured short-term non-bank lending, its income sources, and principal operating expenses - The company provides secured short-term non-bank lending and specialty finance solutions, typically with maturities of nine months or shorter, often involving collateral or personal guarantees[102] - Principal income sources are interest and fees (origination, closing, exit fees) from loans, with occasional income from dividends and capital gains on equity investments[103] - Principal expenses include professional fees, payroll, occupancy, and insurance[103] Portfolio and Investment Activity Summarizes investment purchases, redemptions, and the composition of the investment portfolio by fair value for the period | Investment Activity (6 Months Ended June 30) | 2025 ($) | 2024 ($) | | :----------------------------------------- | :----------- | :----------- | | Investment purchases | $4,428,530 | $973,438 | | Redemptions and repayments | $504,116 | $5,461,479 | | Net investments at amortized cost (period end) | $17,641,707 | $14,460,679 | | Portfolio Composition (Fair Value, June 30, 2025) | Amount ($) | Percentage (%) | | :------------------------------------------------ | :----------- | :----------- | | Short-term Non-banking Loans | $6,685,295 | 37.4% | | Commercial Business Loans | $10,314,787 | 57.8% | | Common Stock | $854,879 | 4.8% | | Other Equity | — | — | | Total | $17,854,961 | 100.0% | Results of Operations Analyzes investment income, operating expenses, net investment gain, and net increase in net assets for the reported periods | Metric | 3 Months Ended June 30, 2025 ($) | 3 Months Ended June 30, 2024 ($) | 6 Months Ended June 30, 2025 ($) | 6 Months Ended June 30, 2024 ($) | | :------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Investment Income | $948,034 | $888,629 | $1,726,061 | $1,721,296 | | Operating Expenses | $(316,183) | $(398,059) | $(695,966) | $(759,146) | | Net Investment Gain | $631,851 | $490,570 | $1,030,095 | $962,150 | | Net realized gain (loss) from investments | $(31) | $346,745 | $205 | $371,240 | | Net change in unrealized appreciation (depreciation) on investments | $314,515 | $(289,641) | $476,781 | $(237,890) | | Net Increase in Net Assets from Operations | $677,035 | $412,936 | $1,128,781 | $795,039 | - Professional fees decreased due to reduced loan activity[110] - Interest expense decreased to $0 for the six months ended June 30, 2025, due to the termination of the line of credit agreement in January 2024[112] Financial Condition Examines the company's cash position, primary use of funds, and significant post-period financing activities and agreements | Metric | June 30, 2025 ($) | December 31, 2024 ($) | Change ($) | | :-------------------- | :-------------- | :---------------- | :----- | | Cash | $1,497,009 | $6,026,110 | -$4,529,101 | - The primary use of funds is for investments in portfolio companies or general corporate purposes, including operating expenses or debt service[118] - On July 31, 2025, the company closed a private placement of 75,881,625 common shares and pre-funded warrants for 7,144,205 shares, and issued various warrants (Lead Investor, Foundation Investor, Management, Advisor, Placement Agent)[118][119][120] - On August 1, 2025, the company entered into a Common Stock Purchase Agreement with A.G.P./Alliance Global Partners, allowing it to sell up to $500,000,000 or 19.99% of outstanding common stock[123][124] Critical Accounting Estimates Highlights management's subjective judgments in valuing portfolio investments and recognizing revenue as critical accounting policies - Critical accounting policies involve management's difficult, subjective, or complex judgments, especially for the valuation of portfolio investments and revenue recognition[127][128] Off-Balance Sheet Arrangements Confirms the absence of off-balance sheet arrangements during the six months ended June 30, 2025 - No off-balance sheet arrangements were engaged in during the six months ended June 30, 2025[129] Forward-Looking Statements Addresses the inherent risks and uncertainties in forward-looking statements, emphasizing no obligation to update them post-filing - Forward-looking statements are based on management's current expectations and involve substantial risks and uncertainties, including the ability to identify new investments, achieve profitability, and maintain regulatory compliance[130] - Key areas of forward-looking statements include future operating results, investment success, relationships with third parties, economic dependence, portfolio company objectives, expected financings, regulatory structure, cash resources, and timing of cash flows[131] - The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances occurring after the filing date[132] Item 4. Controls and Procedures Reports that disclosure controls were ineffective due to a material weakness, with remediation efforts underway and no significant changes in controls - Disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting[134] - Remediation efforts include retaining an accounting firm and implementing new disclosure procedures, with full remediation expected after sufficient effective operation and testing of controls[134] - No significant changes in internal controls over financial reporting occurred during the fiscal quarter[135] PART II. OTHER INFORMATION This section includes additional information such as exhibits and signatures related to the Form 10-Q filing Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including bylaws, employment agreements, and regulatory certifications - Exhibits include amended bylaws, executive employment agreements for the CEO and CFO, certifications under Sarbanes-Oxley Act Sections 302 and 906, and Inline XBRL documents[138] SIGNATURES Confirms the official signing of the report by the Chief Executive Officer and Chief Financial Officer on August 14, 2025 - The report was signed on August 14, 2025, by Douglas M. Polinsky (CEO) and Joseph A. Geraci, II (CFO)[142]