Our Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is intended to provide a reader of our financial statements
with a narrative from the perspective of management on our financial condition,
results of operations, liquidity and certain other factors that may affect our
future results. In addition, unless expressly stated otherwise, the comparisons
presented in this MD&A refer to the same period in the prior year. Our MD&A is
presented in seven sections:
· Overview
· Portfolio and Investment Activity
· Results of Operations
· Financial Condition
· Critical Accounting Estimates
· Off-Balance Sheet Arrangements
· Forward Looking Statements
OVERVIEW
Mill City Ventures III, Ltd. was incorporated in the State of Minnesota on
January 10, 2006. In this report, we generally refer to Mill City Ventures III,
Ltd. in the first person "we." On occasion, we refer to our company in the third
person as "Mill City Ventures" or the "company."
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 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.
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for
the year ended December 31, 2021, as well as our reports on Forms 10-Q and 8-K
and other publicly available information. All amounts herein are unaudited. 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 nine months ended September 30, 2022, we made $13,924,333 of
investments and loans and had $10,076,483 of redemptions and repayments,
resulting in net investments at amortized cost of $17,913,927 at the end of the
period.
During the nine months ended September 30, 2021, we made $18,133,352 of
investments and loans and had $16,363,964 of redemptions and repayments,
resulting in net investments at amortized cost of $10,562,451 at the end of that
period.
- 19 -
Table of Contents
Our investment composition by major class, based on fair value at September 30,
2022, was as follows:
Investments at Percentage of
Fair Value Fair Value
Short-term Non-banking Loans $ 16,040,748 88.8 %
Preferred Stock 1,200,000 6.6
Other Equity 822,500 4.6
Total $ 18,063,248 100.0 %
RESULTS OF OPERATIONS
Our operating results for the three and nine months ended September 30, 2022 and
September 30, 2021 were as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
Investment Income: $ 1,115,224 $ 755,601 $ 3,351,935 $ 1,977,992
Operating Expenses: (1,179,792 ) (239,582 ) (2,227,865 ) (1,023,596 )
Net Investment Gain (Loss) $ (64,568 ) $ 516,019 $ 1,124,070 $ 954,396
Investment Income
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. 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 nine months ended September 30, 2022, interest earned on our
loan portfolio was $1,053,714 and $2,840,425, respectively, and our fees charged
in connection with the loans was $61,510 and $511,510, respectively. For the
three and nine months ended September 30, 2021, interest earned on our loan
portfolio was $663,101 and $1,756,492, respectively, and our fees charged in
connection with the loans was $92,500 and $221,500, 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
interest rate on the loans of 26%.
Professional Fees
For the three and nine months ended September 30, 2022, we had $916,359 and
$1,309,348 professional fees expense, respectively. For the three and nine
months ended September 30, 2021, we had $79,950 and $300,297 professional fees
expense, respectively. The increase for the nine months in 2022 is due to legal
costs incurred to close on several new short-term banking loans, to obtain our
listing on the Nasdaq exchange,and our efforts to seek additional financing
through a public offering of our common stock to grow our business.
Net Realized Gain from Investments
For the three and nine months ended September 30, 2022, we had $2,098,585 and
$10,076,483, respectively, of sales of investments, resulting in $0 and $133,020
of realized gains, respectively. 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.
Net Change in Unrealized Appreciation (Depreciation) on Investments
For the three and nine months ended September 30, 2022, our investments had $0
of unrealized appreciation and $16,297 of unrealized depreciation, respectively.
For the three and nine months ended September 30, 2021, our investments had
$774,169 and $1,204,319 of unrealized depreciation, respectively.
- 20 -
Table of Contents
Changes in Net Assets from Operations
For the three and nine months ended September 30, 2022, we recorded a net
decrease in net assets from operations of $36,126 and a net increase in net
assets from operations of $893,993, respectively. Based on the weighted-average
number of shares of common stock outstanding for the three and nine months ended
September 30, 2022, our per-share net decrease in net assets from operations was
$0.01 and our per share net increase from operations was $0.18, respectively.
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 $0.01 and $0.53,
respectively.
Cash Flows for the Nine months Ended September 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 nine months ended September 30, 2022, net cash used in
operating activities was $6,429,293. Cash flows used in operating activities for
the nine months ended September 30, 2022 were primarily related to the funding
of our short-term loans and purchases of investments aggregating $13,924,333,
offset mostly by redemptions and repayments of short-term loans and investments
totaling $10,076,483. 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 the funding of our short-term loans and purchases of investments aggregating
$18,133,352, offset mostly by redemptions and repayments of short-term loans and
investments totaling $16,363,964.
For the nine months ended September 30, 2022, net cash provided in financing
activities was $6,354,795. Cash flows provided in financing activities for the
nine months ended September 30, 2022 were primarily related to our public
offering and our draw on the available line of credit, offset by payments
against the line of credit. For the nine months ended September 30, 2021, net
cash used in financing activities was $539,296. Cash flows used in financing
activities for the nine months ended September 30, 2021 were related to the
payment of our stock dividend to investors.
FINANCIAL CONDITION
As of September 30, 2022, we had cash of $1,861,650, a decrease of $74,498 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 August 9, 2022, we effected a stock combination (reverse stock split) of our
common shares on a 1-for-2.25 basis such that every 2.25 shares of common stock
issued and outstanding on that date were combined into one share of common
stock. Any fractional share resulting from the reverse stock split was rounded
up to the nearest whole share. The reverse stock split was approved by our
Board of Directors in accordance with Minnesota law, and resulted in a
proportionate reduction in the number of authorized shares of capital stock
available for issuance under our articles of incorporation. On a
post-reverse-split basis, we are authorized to issue up to 111,111,111 shares of
capital stock.
On August 11, 2022, we completed a public offer and sale of 1,250,000 common
shares pursuant to a registration statement filed with the SEC and declared
effective on August 9, 2022. We sold these shares at $4.00 per share, resulting
in gross proceeds of $5,000,000. As part of the registered public offering, we
granted the underwriters a 45-day option to purchase up to 187,500 additional
common shares at the offering price, less underwriting discounts, which option
was not exercised. In connection with the offering, we issued the underwriter a
five-year warrant to purchase up to 75,000 common shares at the per-share price
of $5.00. Our net proceeds after the payment of underwriting discounts,
underwriting expenses, and offering-related expenses we incurred were otherwise
obligated to pay, were approximately $4,041,000.
CRITICAL ACCOUNTING ESTIMATES
Our financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America, or U.S. GAAP, which requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Critical accounting
policies are those that require the application of management's most difficult,
subjective or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and that may change in
subsequent periods.
In preparing the financial statements, management will make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. In preparing the financial statements,
management also will utilize available information, including our past history,
industry standards and the current economic environment, among other factors, in
forming its estimates and judgments, giving due consideration to materiality.
Actual results will almost certainly differ from these estimates. In addition,
other companies may utilize different estimates, which may impact the
comparability of our results of operations to those of companies in similar
businesses. 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 portfolio
investments, and revenue recognition. For more information, refer to our Annual
Report on Form 10-K for the year ended December 31, 2021.
- 21 -
Table of Contents
OFF-BALANCE-SHEET ARRANGEMENTS
During the nine months ended September 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
Some of the statements made in this section of our report are forward-looking
statements based on our management's current expectations for our company. These
expectations involve assumptions and are subject to substantial risks and
uncertainties that could cause actual results to differ materially from the
results expressed in, or implied by, these forward-looking statements.
Forward-looking statements relate to future events or our future financial
performance, and can ordinarily be identified by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "could," "intends,"
"targets," "projects," "contemplates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other similar
words. Important assumptions include our ability to identify and consummate new
investments, achieve certain margins and levels of profitability, the
availability of any needed additional capital, and the ability to maintain
compliance with regulations applicable to us. Some of the forward-looking
statements contained in this report relate to, and are based our current
assumptions regarding, the following:
· our future operating results;
· the success of our investments;
· our relationships with third parties;
· the dependence of our success on the general economy and its impact on the
industries in which we invest;
· the ability of our portfolio companies to achieve their objectives;
· our expected financings and investments;
· our regulatory structure and tax treatment;
· the adequacy of our cash resources and working capital; and
· the timing of cash flows, if any, we receive from our investments.
The foregoing list is not exhaustive. For a more complete summary of the risks
and uncertainties facing our company and its business and relating to our
forward-looking statements, please refer to our Annual Report on Form 10-K filed
on March 10, 2021 (related to our year ended December 31, 2021) and in
particular the section thereof entitled "Risk Factors." Because of the
significant uncertainties inherent in forward-looking statements pertaining to
our company, the inclusion of those statements should not be regarded as a
representation or warranty by us or any other person that our objectives, plans,
expectations or projections that are contained in this filing will be achieved
in any specified time frame, if ever. We undertake no obligation to update any
forward-looking statement to reflect events or circumstances occurring after the
date of this filing. The forward-looking statements made in this report relate
only to events as of the date on which the statements are made, and are excluded
from the safe harbor protection provided by Section 21E of the Securities
Exchange Act of 1934.
© Edgar Online, source Glimpses