By Brad Sorensen, CFA
Given the volatility seen in the stock market this year, I was overjoyed to come across Mill City Ventures MCVT. Mill City is what I would consider an "old-fashioned" company that provides a valuable service to clients looking for an answer to their problems—and makes high returns on invested capital in return. With so many companies now seeming to provide "services" people didn't know they needed or worrying about ten other things before they get around to the issue of profitability, it is refreshing to find companies such as Mill City and I believe investors looking into it will find the same.
Old-fashioned certainly doesn't mean boring! The inner workings of Mill City, while thankfully not overly complicated, are extremely exciting to us and should be exciting to investors as well. Mill City Ventures is in the business of providing short-term specialty finance solutions to a variety of entities including private businesses, micro-cap companies and high-net-worth individuals. From our experience, many businesses need short-term funding to finance such things as expansion projects or maintaining operations until major payments come in, and our analysis concludes that the demand for such funding is surprisingly strong.
One thing that comes to mind when talking about short-term financing may be that those kinds of arrangements may come with an increased level of risk—a concern which may contribute to the lack of creditors in this marketplace. After digging into the details of how Mill City Ventures evaluates and consummates its transactions, however, we don't believe those concerns are warranted in this case. As mentioned, the principal specialty finance solutions Mill City provides are high-interest short-term lending arrangements. According to our conversations with company management, these lending arrangements involve obtaining collateral as security for the borrower's repayment of funds. Company management also notes that, due to the nature of their financing, substantially all of their loans mature within nine months of the lending date. This short-term nature can help to further limit credit risk.
Examples of the kinds of loans the company has provided in the past, and will likely provide in the future include:
• Short-term secured loans for real estate development (with a mortgage serving as security)
• 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.
The company notes that it is looking to other areas such as expanding their efforts to purchase adjudicated settlements, the purchase receivables owed on professionals due to workers' compensation claims and short-term consumer finance lending.
A couple of real-life examples may provide a bit more color to the kind of creative financing the company can provide. Management told me of a recent client that needed capital to close on a land purchase and work toward final development approvals. Mill City designed a loan of approximately $3 million at a very attractive interest rate of 4% per month, and included an extensive collateral package. In the end, the client paid the loan off early, leaving Mill City with interest payments and closing fees that netted an almost 60% return, while exposing the firm to limited risk. It's these kinds of solid, yet creative, financing arrangements that I kept running into that made my appreciation for the business of Mill City grow.
A big piece of that appreciation comes from the understanding of the talents of the two founding partners of Mill City—Douglas Polinsky, who serves as CEO, and Joseph Geraci, who is the CFO of Mill City. These two have the history, knowledge and vision that I believe more companies should have at the helm, leading to my further confidence in the growing success of Mill City. And while that is nice to have, as an old-fashioned analyst looking into the company, the ability of the borrower to repay is a critical factor in determining whether the lender, Mill City in this case, is able to meet their financial objectives. That's why I was very interested in the general criteria used by Mill City to help ensure success in that arena and I was impressed by the following criteria:
• Existing Liquidity Source—The majority of transactions involve short-term maturities; therefore the company typically looks to identify a liquidity source for the borrower. Examples of sources of potential liquidity may include accounts receivable, another valuable asset, or a pending payment (e.g., a tax refund, or a litigation judgment or settlement payment) that is reasonably expected to pay out prior to the maturity of the credit.
• Collateral Value—The company often seeks to collateralize the obligations. The ability to identify valuable collateral is a significant factor, according to the company, in credit analysis and determination of the attractiveness of a potential transaction.
• Experienced and Capable Management—In transactions involving business borrowers, the company looks for businesses that have an experienced, knowledgeable and capable management team.
• Competitive Position—In transactions involving business borrowers, management notes that it looks to invest in transactions with businesses that have developed, or appear poised to develop, a strong competitive position within their respective industry sector or niche.
• Cash Flow—In transactions involving business borrowers, the company looks to invest in businesses that are profitable or nearly profitable on an operating cash flow basis.
The success of these criteria is illustrated by the increase in revenue the company is seeing. For the first quarter of 2022, Mill City almost doubled its revenues from $546,000 to over $1 million, while operating expenses remained roughly flat. We were also extremely pleased to see the expense management of the company, with three permanent employees on the payroll including the two executives mentioned above, while bringing in contracted expertise when needed, leaving the company able to manage expenses as business needs change. Additionally, the company's loan sizes are growing, from an average of just over $800,000 in 2020, to over $1 million in 2021 and now running at around $2 million—allowing the company to earn more on each transaction and expand its ability to grow its business. The company also had a recent public offering that netted them approximately $4.0 million, providing Mill City with additional capital with which to work. As an old-fashioned analyst, it's also refreshing to see a company that manages its balance sheet in a conservative, and in our view, responsible way. Despite the recent public offering, the company has maintained its share count at a fairly consistent level over the past couple of years and, in our discussions with management, are conscious of not diluting existing shareholders by a massive new share issuance. Also, the company shows only one loan on its books—a $5 million line of credit bearing interest at 8% per annum.
As we said at the beginning, Mill City is a breath of fresh air in a volatile stock market—a company with rising revenue, an experienced and talented management team that focuses on profitability and efficiency, that has a market with seeming insatiable demand. It's a relatively simple story, but often those are the best kind of investment stories—those without all the frivolous activities that distract from what companies should be about—making money for shareholders. As such, we encourage investors to take a look at MCVT and consider whether a profitable, growing and well-run business might be a good addition to the small cap portion of a portfolio—we believe it may very well prove to be so.
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