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Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2021-11-12 · 40 added, 61 removed, 69 unchanged (59% of the section changed)

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Our MD&A is presented in seven sections:

● Investment Activity

● Portfolio and Investment Activity

● Results of Operations

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in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “company.”

The principal specialty finance solutions we provide are high-interest short-term lending arrangements.

On occasion, these lending arrangements involve us obtaining collateral as security for the borrower’s repayment of funds to us.

In some circles, short-term high-interest collateralized lending is referred to as “hard-money lending.”

We believe we are generally able to charge high interest for our specialty finance solutions because (i) banks and other traditional providers of credit may have neither the expertise nor the infrastructure needed to evaluate creditworthiness and risks in a timeframe suitable for a potential borrower, preferring instead to process transactions and structures that present few novel issues or risks;

and (ii) we will often be able to devote time and attention to transactions involving a smaller dollar amount than an institutional lender will view as worthwhile.

These beliefs essentially explain why we refer to our business as “specialty finance”— financing that may involve structures that are unique, creative, and often bespoke;

and that may involve dollar amounts that are not suitable for institutional lenders.

We generally provide specialty finance solutions that are short-term in nature.

By this, we mean lending arrangements that mature or come due within nine months of the lending date.

We view the provision of short-term finance as desirable for two principal reasons.

First, short-term lending requires a potential borrower to identify for us a near-term source of repayment for the funds they borrow from us.

This permits us to evaluate that source of repayment clearly and carefully, thus helping identify the potential risks involved in a particular transaction and how we may be able to include structural terms that mitigate these risks.

Second, short-term lending permits us to avail ourselves of a court-recognized exception for treating promissory notes (evidencing a loan) as “investment securities” under federal securities law.

In sum, this exception generally applies to promissory notes with short-term maturities of nine months.

Our ability to avail ourselves of this exception, and to more generally structure our transactions in such a way as to avoid them being properly considered as “investment securities” under federal securities laws, is important to our ability to avoid once again becoming subject to regulation under the 1940 Act.

Examples of the kinds of the specialty finance solutions we have considered or provided to date, and may continue to provide in the future, include:

● Short-term secured loans for real estate development

● Short-term unsecured loans (with an option to acquire collateral security) to a business

● Short-term secured loans to a business for operating capital

● Short-term secured loans to an individual owed a forthcoming tax refund

We provide non-bank lending and specialty finance to companies and individuals on both a secured and unsecured basis.

The loans we provide typically have maturities that range from 9 to 12 months and may 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, other real estate projects, title loans, cash inventory needs, inventory financing, or for other purposes.

We intend to remain opportunistic, however, and may engage in transactions that involve 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, dividends and other fees associated with lending such as origination fees, closing fees or exit fees.

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All amounts herein are unaudited.

In addition, the discussion of our results of operations and financial condition should be read in the context of this overview.

Furthermore, we are including a full description of our business in this report.

INVESTMENT ACTIVITY

During the nine months ended September 30, 2021, we made $18,133,352 of investments and had $16,363,964 of sales and repayments, resulting in net investments at amortized cost of $10,562,451 at the end of the period.

During the nine months ended September 30, 2020, we made $7,655,802 of investments and had $1,858,011of sales and repayments, resulting in net investments at amortized cost of $8,309,325 at the end of the period.

Our investment composition by major class, based on fair value at September 30, 2021, was as follows:

In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview.

PORTFOLIO AND INVESTMENT ACTIVITY

During the three months ended March 31, 2022, we made $7,025,000 of investments in portfolio companies and had $1,152,898 of redemptions and repayments, resulting in net investments at amortized cost of $19,943,929 as of March 31, 2022.

During the three months ended March 31, 2021, we made $9,430,664 of investments in portfolio companies and had $5,036,657 of redemptions and repayments, resulting in net investments at amortized cost of $12,276,332 as of March 31, 2021.

Our portfolio composition by major class, based on fair value at March 31, 2022, was as follows:

Investments at

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RESULTS OF OPERATIONS

Our operating results for the three and nine months ended September 30, 2021 and September 30, 2021 were as follows:

Our operating results for the three months ended March 31, 2022 and March 31, 2021 were as follows:

For the Three Months Ended

For the Nine Months Ended

September 30,

Investment Income:

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Investment Income

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt instruments we own.

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt securities we own.

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.

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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.

We may also generate revenue in the form of commitment, origination, structuring, diligence, or consulting fees.

Finally, we may also generate revenue in the form of commitment, origination, structuring, diligence, or consulting fees.

Any such fees will be recognized as earned.

For the three and nine months ended September 30, 2021, our total investment income was $755,601 and $1,977,992, respectively.

For the three and nine months ended September 30, 2020, our total investment income was $287,034 and $755,469, respectively.

The increase is due to the change in our business structure which now focuses on short-term non-bank lending.

For the three months ended March 31, 2022 and 2021, our total investment income was $1,000,206 and $546,842, respectively.

The increase is due to the increase in our short-term non-bank lending activity.

Our loan portfolio generates interest income, with an average rate on the loans of 22.4%.

Professional Fees

For the three and nine months ended September 30, 2021, we had $79,950 and $300,297 professional fees expense, respectively.

For the three and nine months ended September 30, 2020, we had $58,719 and $133,016 professional fees expense, respectively.

The increase is due to legal costs incurred to close on several new short-term banking loans.

In 2020, we received a refund during the first quarter of $59,957 relating to certain audit expenses incurred during 2018 and 2019.

For the three months ended March 31, 2022 and 2021, we had $198,518 and $142,808 of professional fees expense, respectively.

The increase in 2022 is due to an increase in our short-term non-bank lending activity and the legal costs incurred to close those deals.

Net Realized Gain from Investments

For the three and nine months ended September 30, 2021, we had $6,474,137 and $16,363,964, respectively, of sales of investments, resulting in $289,138 and $3,818,737, respectively, of realized gains.

For the three and nine months ended September 30, 2020, we had $665,187 and $1,858,011, respectively, of sales of investments, resulting in $335,440 and $535,164, respectively, of realized gains.

For the three months ended March 31, 2022, we had $1,152,898 of proceeds from sale of investments, resulting in $138,770 of realized gains.

For the three months ended March 31, 2021, we had $5,036,657 of proceeds from sale of investments, resulting in $2,907,999 of realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three and nine months ended September 30, 2021, our investments had $774,169 and $1,204,319 of unrealized depreciation, respectively.

For the three and nine months ended September 30, 2020, our investments had $141,816 and $104,411 of unrealized appreciation, respectively.

For the three months ended March 31, 2022, our investments included $22,047 of unrealized depreciation.

For the three months ended March 31, 2021, our investments included $513,250 of unrealized depreciation.

Changes in Net Assets from Operations

For the three and nine months ended September 30, 2021, we recorded a net increase in net assets from operations of $31,288 and $2,557,836, respectively.

Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2021, our per-share net increase in net assets from operations was $0.00 and $0.24, respectively.

For the three and nine months ended September 30, 2020, we recorded a net increase in net assets from operations of $583,344 and $894,796, respectively.

Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2020, our per-share net increase in net assets from operations was $0.05 and $0.08, respectively.

Cash Flows for the Nine months Ended September 30, 2021 and 2020

The level of cash flows used in or provided by operating activities is affected by the purchases of investments, redemptions and repayments of investments, among other factors.

For the nine months ended September 30, 2021, net cash used in operating activities was $1,306,775.

Cash flows used in operating activities for the nine months ended September 30, 2021 were primarily related to purchases of investments of $18,133,352, offset mostly by redemptions and repayments of investments totaling $16,363,964.

For the nine months ended September 30, 2020, net cash used in operating activities was $5,788,000.

Cash flows used in operating activities for the nine months ended September 30, 2020 were primarily related to purchases of investments of $7,655,802, offset mostly by redemptions and repayments of investments totaling $1,858,011.

For the three months ended March 31, 2022, we recorded a net increase in net assets from operations of $412,111.

Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2022, our per-share net increase in net assets from operations was $0.04.

For the three months ended March 31, 2021, we recorded a net increase in net assets from operations of $1,745,042.

Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2021, our per-share net increase in net assets from operations was $0.16.

Cash Flows for the Three Months Ended March 31, 2022 and 2021

The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions and repayments of portfolio investments, among other factors.

For the three months ended March 31, 2022, net cash used in operating activities was $7,190,128.

Cash flows used in operating activities for the three months ended March 31, 2022 were primarily related to purchases of investments totaling $7,025,000.

For the three months ended March 31, 2021, net cash used in operating activities was $4,402,126.

Cash flows provided in operating activities for the three months ended March 31, 2021 were primarily related to purchases of investments totaling $9,430,664, offset by repayments of investments totaling $5,036,657.

FINANCIAL CONDITION

As of September 30, 2021, we had cash of $3,594,508, a decrease of $1,846,071 from December 31, 2020.

The primary use of our existing funds and any funds raised in the future is expected to be for investments, cash distributions to our shareholders 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, our investments may consist of cash, cash equivalents, U.S.

government securities or high-quality debt and loan securities maturing in one year or less from the time of investment.

To the extent our Board of Directors determines in the future, based on our financial condition and capital market conditions, that additional capital would allow us to take advantage of additional investment opportunities, we may seek to raise additional equity capital or to engage in borrowing.

As of March 31, 2022, we had cash of $71,020, a decrease of $1,865,128 from December 31, 2021.

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.” As of the date of this filing, we expect that substantially all of our temporary investments will be redeployed into portfolio company investments by December 31, 2022.

On April 26, 2022, we filed a registration statement on Form S-1 with the U.S.

Securities and Exchange Commission seeking to register an offer and sale of shares of our common stock in a firm-commitment underwritten offering.

CRITICAL ACCOUNTING ESTIMATES

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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 investments and revenue recognition.

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, 2021.

OFF-BALANCE-SHEET ARRANGEMENTS

During the nine months ended September 30, 2021, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.

During the three months ended March 31, 2022, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.

FORWARD-LOOKING STATEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis