Mill City Ventures III, Ltd. (MCVT) is a diversified non-bank lender and specialty finance company that has carved out a unique niche in the rapidly evolving financial services industry. Founded in 2006 and headquartered in Wayzata, Minnesota, the company has weathered multiple economic cycles and emerged as a nimble and adaptable player in the short-term lending market.
Business Overview and Chronology
Mill City Ventures III, Ltd. was initially incorporated in January 2006 as a development-stage company focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, the company elected to become a business development company (BDC) under the Investment Company Act of 1940, a decision that would shape its future trajectory. The company operated as a BDC until the end of December 2019, when it withdrew its BDC election and transitioned to its current focus as a public reporting company engaged in the business of providing short-term specialty finance solutions, typically in the form of short-term loans, primarily to small businesses, both private and public, and high-net-worth individuals.
To avoid regulation under the Investment Company Act of 1940, Mill City Ventures generally seeks to structure its investments so they do not constitute securities for purposes of federal securities laws. In December 2022, the company entered into a lending agreement with Mustang Funding, LLC, initially loaning $5 million, which was later increased to $10 million as Mill City Ventures continued working with Mustang on a potential definitive merger agreement. However, in August 2024, Mill City Ventures terminated the non-binding letter of intent with Mustang.
Despite this setback, Mill City Ventures has continued to grow its short-term lending business. In 2024, the company's short-term loan activity included $17.145 million in principal amount of loan extensions, $4.55 million in principal amount for four new short-term loans, and $8.5075 million in principal amount of maturities. The company has maintained a consistent and growing demand from potential and existing borrowers.
Financial Ratios and Liquidity
As of September 30, 2024, Mill City Ventures III, Ltd. reported a strong current ratio of 18.97, indicating a robust liquidity position and the ability to meet its short-term obligations. The company's quick ratio, a more stringent measure of liquidity, also stood at 18.97, further underscoring its financial flexibility. The company's debt ratio of 0.00 and debt-to-equity ratio of 0.00 demonstrate a conservative capital structure, with no outstanding debt on the balance sheet.
The company's cash position as of September 30, 2024, was $3.13 million. It's worth noting that Mill City Ventures had a $5 million revolving line of credit, which was terminated in January 2024, potentially impacting its future liquidity options.
Investment Portfolio and Performance
Mill City Ventures' investment portfolio is predominantly composed of short-term non-banking loans, which accounted for 97.00% of the fair value of its total investments as of September 30, 2024. These loans typically have maturities of nine months or less and are often secured by collateral or personal guarantees. The company's loans serve various purposes, including real estate acquisitions, renovations and sales, inventory financing, and addressing short-term liquidity needs.
The company's investment income, primarily derived from interest earned on these short-term loans, was $2.43 million for the nine-month period ended September 30, 2024, a slight decrease from the $2.50 million generated in the same period of the previous year. The average interest rate on the loans in Mill City Ventures' portfolio was 16.2% as of September 30, 2024.
During the nine months ended September 30, 2024, Mill City Ventures made $5.11 million in new investment purchases and had $6.61 million in redemptions and repayments, resulting in net investments at amortized cost of $17.21 million at the end of the period. The company's net realized and unrealized gains on investments during the nine-month period amounted to $431.46 thousand, compared to $70.86 thousand in the same period of 2023.
For the most recent quarter (Q3 2024), Mill City Ventures reported revenue of $711,022 and net income of $463,783. The company's operating cash flow (OCF) for the quarter was $2,196,307, with free cash flow (FCF) slightly higher at $2,196,311. Notably, the company saw a 2% decrease in investment income from lending operations in Q3 2024 compared to Q3 2023, attributed to slightly lower interest rates on the company's loan portfolio.
Operating Expenses and Profitability
Mill City Ventures' primary operating expenses include professional fees, payroll, occupancy, and insurance. For the three and nine months ended September 30, 2024, the company incurred $419,850 and $1.18 million in operating expenses, respectively. The largest components were professional fees of $190,370 and $502,840, and payroll expenses of $148,070 and $445,000, for the three and nine-month periods, respectively.
For the three and nine months ended September 30, 2024, Mill City Ventures recorded a net investment gain of $291,180 and $1.25 million, respectively. The company also recognized net realized and unrealized gains on its investments of $298,110 and $431,460 for the three and nine-month periods, respectively. This resulted in a net increase in net assets from operations of $463,780 and $1.26 million for the three and nine months ended September 30, 2024, respectively.
Navigating Challenges and Opportunities
Mill City Ventures' transformation from a development-stage company to a public reporting specialty finance firm has not been without its challenges. In 2023, the company disclosed a material weakness in its internal control over financial reporting, which it has been working to address. Additionally, the company's $10 million loan to Mustang Funding, LLC, a key investment, is subordinated to senior lenders, presenting a concentration risk that the company has sought to mitigate through ongoing negotiations and strategic adjustments.
Despite these challenges, Mill City Ventures has demonstrated resilience and agility in adapting to the changing landscape. The company has continued to expand its short-term lending portfolio, diversifying its risk and generating consistent interest income. In 2024, the company announced the funding of a $2 million short-term loan to Enchant Christmas, LLC, a leading holiday attraction, and a $1.15 million short-term loan to a fast-growing senior care provider, showcasing its ability to identify and capitalize on emerging opportunities.
Furthermore, in October 2024, Mill City Ventures' Board of Directors approved a $2 million stock repurchase program, underscoring the company's confidence in its long-term prospects and commitment to enhancing shareholder value.
Outlook and Conclusion
As Mill City Ventures III, Ltd. navigates the dynamic specialty finance market, the company's focus on short-term lending, prudent risk management, and strategic opportunism position it well for continued growth and success. The company's strong liquidity, debt-free balance sheet, and diversified investment portfolio provide a solid foundation for weathering potential headwinds and capitalizing on emerging opportunities.
While the company's exposure to Mustang Funding remains a significant risk factor, Mill City Ventures' proactive approach to managing this concentration and its track record of adaptability inspire confidence in its ability to navigate the challenges ahead. The company's consistent performance in generating net investment gains and increases in net assets from its lending and investment activities during the reported periods further reinforces its resilience.
The slight decrease in investment income observed in Q3 2024 compared to the previous year, attributed to lower interest rates on the loan portfolio, highlights the importance of maintaining a competitive edge in the dynamic lending market. As Mill City Ventures continues to execute its strategy and explore new avenues for growth, its ability to adapt to changing interest rate environments and maintain attractive returns for borrowers and shareholders alike will be crucial.
It's worth noting that Mill City Ventures operates exclusively in the United States, which may limit its exposure to international market risks but also constrain potential growth opportunities in other regions. As the company moves forward, expanding its geographical footprint could be a consideration for future growth strategies.
As Mill City Ventures continues to navigate the evolving landscape of specialty finance, investors and market observers should closely monitor the company's ability to maintain its strong liquidity position, especially in light of the terminated revolving credit line. The company's future success will likely depend on its continued ability to identify profitable lending opportunities, manage risk effectively, and adapt to changing market conditions in the non-bank lending sector.