Business Context and Reporting Period
Company: Mill City Ventures III, Ltd. (formerly Poker Magic, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2019
Business Status: The Company withdrew its election to be treated as a Business Development Company (BDC) under the Investment Company Act of 1940 on December 27, 2019. It is now a public reporting company seeking opportunities to invest in or acquire businesses, structured to avoid reclassification as an investment company (limiting investment securities to less than 40% of total assets). Pending a new business plan, the Company holds the majority of its assets in cash and cash equivalents.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total Assets | $10,138,504 | $11,320,014 |
| Cash and Cash Equivalents | $8,066,656 | $966,121 |
| Investments (Fair Value) | $1,740,897 | $9,960,192 |
| Total Investment Income | $161,662 | $150,722 |
| Total Operating Expenses | $834,430 | $681,046 |
| Net Investment Loss | $(672,768) | $(530,324) |
| Net Realized Gain on Investments | $3,252,620 | $(581,252) |
| Net Change in Unrealized Appreciation | $(3,236,838) | $2,761,250 |
| Net Increase (Decrease) in Net Assets | $(656,986) | $1,649,674 |
| Net Asset Value (NAV) per Share | $0.91 | $1.02 |
| Dividends Paid | $0.05 per share | None |
Material Changes vs. Prior Period
- Portfolio Liquidation: The Company disposed of a substantial portion of its portfolio in 2019, selling investments with an aggregate cost of approximately $9.1 million. This resulted in a significant increase in cash holdings from $966,121 in 2018 to $8,066,656 in 2019.
- Investment Valuation: Total investment fair value dropped from $9.96 million in 2018 to $1.74 million in 2019 due to dispositions and unrealized depreciation on remaining holdings.
- Operating Expenses: Expenses increased by approximately $153,000 (22.5%) year-over-year. Increases were driven by higher executive management compensation (due to a one-time bonus), increased director fees, and legal/accounting costs associated with withdrawing the BDC election.
- Regulatory Status: The Company ceased operations as a BDC effective December 27, 2019, altering its tax status from a Regulated Investment Company (RIC) to a C-Corporation.
Outlook, Risks, and Management Commentary
- Strategic Direction: Management is industry-agnostic and seeking to acquire a new operating business or make limited investments. The Company intends to keep assets in cash or short-term securities until a new business plan is executed.
- Liquidity: Management believes current cash reserves ($8.1 million) are sufficient to fund operations through fiscal 2020. No credit facilities are in place.
- Risks:
- Uncertainty of Business Model: Investors face significant risk as the Company has no definitive operating history for its new strategy.
- Stock Liquidity: Common stock is thinly traded on the OTC Pink Sheets, which may depress market prices and make it difficult for shareholders to sell.
- Key Personnel: Operations are highly dependent on CEO Douglas M. Polinsky and CFO Joseph A. Geraci, II.
- Valuation Uncertainty: A significant portion of remaining investments (Level 3 assets) are valued using unobservable inputs, creating potential volatility.
- Subsequent Events: In early 2020, the Company made two new short-term promissory note investments totaling $3.25 million in real estate-related projects. Additionally, the Company noted potential negative impacts from the COVID-19 pandemic on investment valuations.
Investor Verification Checklist
- Verify BDC Withdrawal Status: Confirm the Company is no longer subject to the Investment Company Act of 1940 and understand the implications for future investment restrictions.
- Assess Cash Utilization Plan: Review management's specific criteria and timeline for deploying the $8.1 million cash reserve into a new business or acquisition.
- Review Related-Party Transactions: Examine the $250,000 note receivable from a significant shareholder (Elizabeth Zbikowski) and investments in companies where executives hold personal interests (e.g., Southern Plains Resources, Creative Realities).
- Validate Level 3 Valuations: Scrutinize the fair value assumptions for the remaining $834,200 in Level 3 investments, which rely on unobservable inputs.
- Monitor Stock Liquidity: Evaluate the risk of holding a thinly traded OTC security with limited market depth.