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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-13 · 44 added, 41 removed, 68 unchanged (56% of the section changed)

13 unchanged sentences

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

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.

We are engaged in the business of providing short-term non-bank lending and specialty finance solutions to companies and individuals, generally on a secured basis.

The loans we provide typically have maturities that are nine months or shorter, highly illiquid, and ordinarily 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, or other projects relating to real estate, title loans, inventory needs, inventory financing, solve for short-term liquidity needs, or for other similar purposes.

We intend to remain opportunistic, however, and may occasionally engage in transactions that involve our acquisition of 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.

We may also receive reimbursement of legal costs associated with loan documentation.

Our statement of operations also reflect increases and decreases in the carrying value of our asset and investments (i.e., unrealized appreciation and depreciation).

Our principal sources of income are interest and fees associated with our loans such as origination fees, closing fees or exit fees.

In connection with the short-term non-bank specialty finance loans we provide, we may receive reimbursement of legal costs associated with loan documentation.

We occasionally derive income from dividends paid on equity securities we hold from time to time, or from the sale of our equity securities.

Our statement of operations also reflect increases and decreases in the carrying value of our assets and investments (i.e., unrealized appreciation and depreciation).

Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.

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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:

During the six months ended June 30, 2022, we made $9,103,580 of investments and loans and had $7,977,898 of redemptions and repayments, resulting in net investments at amortized cost of $15,191,759 at the end of the period.

During the six months ended June 30, 2021, we made $13,250,664 of investments and loans and had $9,889,827 of redemptions and repayments, resulting in net investments at amortized cost of $11,864,762 at the end of that period.

Our investment composition by major class, based on fair value at June 30, 2022, was as follows:

Investments at

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RESULTS OF OPERATIONS

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

Our operating results for the three and six months ended June 30, 2022 and June 30, 2021 were as follows:

For the Three Months Ended

For the Six Months Ended

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 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.

In some cases, the interest on our investments may accrue or be paid in the form of additional debt.

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.

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

We generate revenue primarily in the form of interest income derived from the short-term non-banking loans we provide, together with fees we charge in connection with those loans, such as commitment, origination, structuring, diligence, or consulting fees.

Any such fees will be recognized as earned.

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%.

In some cases, the interest payable to us on the short-erm loans we provide may accrue or be paid in the form of additional debt.

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.

On occasion, 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.

For the three and six months ended June 30, 2022, interest earned on our loan portfolio was $1,081,505 and $1,776,711, respectively, and our fees charged in connection with the loans was $155,000 and $450,000, respectively.

For the three and six months ended June 30, 2021, interest earned on our loan portfolio was $675,549 and $1,093,391, respectively, and our fees charged in connection with the loans was $0 and $129,000, respectively.

The increase in the most recent period is primarily due to a combination of strong demand for our short-term loans and our enhanced ability to satisfy that demand with the additional cash resources we have derived from prior loans that have been repaid to us.

Our loan portfolio generates interest income, with a weighted average rate on the loans of 25%.

Professional Fees

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.

For the three and six months ended June 30, 2022, we had $197,591 and $392,989 professional fees expense, respectively.

For the three and six months ended June 30, 2021, we had $77,539 and $220,347 professional fees expense, respectively.

The increase for the six months in 2022 is due to legal costs incurred to close on several new short-term banking loans and our efforts to seek additional financing to grow our business.

Net Realized Gain from Investments

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.

For the three and six months ended June 30, 2022, we had $6,825,000 and $7,977,898, respectively, of sales of investments, resulting in $5,750 of realized losses and $133,020 of realized gains, respectively.

For the three and six months ended June 30, 2021, we had $4,853,170 and $9,889,827, respectively, of sales of investments, resulting in $621,600 and $3,529,599, respectively, of realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments

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.

For the three and six months ended June 30, 2022, our investments had $5,750 of unrealized appreciation and $16,297 of unrealized depreciation, respectively.

For the three and six months ended June 30, 2021, our investments had $83,100 of unrealized appreciation and $430,150 of unrealized depreciation, respectively.

Changes in Net Assets from Operations

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.

For the three and six months ended June 30, 2022, we recorded a net increase in net assets from operations of $518,008 and $930,119, respectively.

Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2022, our per-share net increase in net assets from operations was $0.05 and $0.09, respectively.

For the three and six months ended June 30, 2021, we recorded a net increase in net assets from operations of $781,506 and $2,526,548, respectively.

Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2021, our per-share net increase in net assets from operations was $0.07 and $0.23, respectively.

Cash Flows for the Six Months Ended June 30, 2022 and 2021

The level of cash flows used in or provided by operating activities is affected primarily by our provision of short-term loans, purchases of other investments, redemptions and repayments of our loans or investments, and other related factors.

For the six months ended June 30, 2022, net cash used in operating activities was $3,381,576.

Cash flows used in operating activities for the six months ended June 30, 2022 were primarily related to the funding of our short-term loans and purchases of investments aggregating $9,103,580, offset mostly by redemptions and repayments of short-term loans and investments totaling $7,977,898.

For the six months ended June 30, 2021, net cash used in operating activities was $3,386,278.

Cash flows used in operating activities for the six months ended June 30, 2021 were primarily related to the funding of our short-term loans and purchases of investments aggregating $13,250,664, offset mostly by redemptions and repayments of short-term loans and investments totaling $9,889,827.

FINANCIAL CONDITION

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.

As of June 30, 2022, we had cash of $629,572, a decrease of $1,306,576 from December 31, 2021.

We expect that our existing funds, together with any funds raised in the future, will be used primarily to fund our provision of short-term non-bank loans and specialty finance solutions or for other general corporate purposes, including paying our operating expenses and servicing our existing debt.

Pending use of our cash as described, we may invest some portion of our cash in U.S.

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

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.

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 engage in borrowing.

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 grow our business or otherwise take advantage of additional opportunities, we may seek to raise additional equity capital or engage in borrowing.

CRITICAL ACCOUNTING ESTIMATES

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OFF-BALANCE-SHEET ARRANGEMENTS

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.

During the six months ended June 30, 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