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Item 1. Business

2022-03-14 compared with 2021-03-10 · 126 added, 82 removed, 1 unchanged (100% of the section changed)

Ventures III, Ltd, (the “Company”

or “we”), is a Minnesota corporation that was incorporated in January 2006.

From our inception until December 13, 2012, we were a development-stage company focused on promoting and placing a proprietary

poker game online and into casinos and entertainment facilities nationwide.

In 2013, we elected to become a business development

company (“BDC”) under the Investment Company Act of 1940 (the “19440 Act”).

We operated as a BDC until

we withdrew our BDC election by filing a Form N-54C with SEC on December 27, 2019.

Presently, we are engaged in the business

of providing short-term specialty finance on an opportunistic basis.

Nevertheless, we manage our investments to ensure that no

more than 40% of our total assets consist of investment securities so as to avoid the regulatory requirements of the 1940 Act.

we primarily focused on investing in or lending to private and small-capitalization public companies and making managerial assistance

available to such companies.

Our investments included stock of or membership interests (typically referred to as units) in private

companies, small-cap public company stocks, and promissory notes.

In some cases the stock or membership interests we acquired was

preferred stock or units, and in other cases the stock or membership interests acquired was common stock or units.

In connection

with our investments in promissory notes, we also obtained warrants to purchase common stock.

from our operations as a BDC relate to the earnings we received from our portfolio investmenst.

2020 Portfolio

December 31, 2020, we held investments in eight portfolio companies, which had an aggregate amortized cost of $4,968,576 and

a fair value of $6,667,897 .

At December 31, 2019, we held investments in eight eligible portfolio investments, which

had an aggregate amortized cost of $1,976,370 and a fair value of $1,740,897.

Our portfolio investments at December 31, 2020

were as follows:

1,000,000 common shares of Ammo, Inc.

At December 31, 2020, our cost for this holding

was $1,750,000 and the fair value was $3,300,000.

300,000 shares of Series B Convertible Preferred Stock of Kwikbit, Inc.

At December 31,

2020, our cost for this holding was $150,000 and the fair value was $300,000.

$278,897 Membership Interest in DBR Enclave U.S.

Investors, LLC.

At December 31, 2020, our

cost and fair value for this holding was $278,897.

Warrants to purchase 566 shares of common stock of Reshape Life Sciences, Inc.

At December 31,

2020, our aggregate cost for this holding was $679 and the fair value was $0.

$400,000 principal amount promissory note due April 24, 2021.

At December 31, 2020, our

cost and fair value for this holding was $400,000.

$239,000 principal amount promissory note due June 9, 2021.

At December 31, 2020, our

cost and fair value for this holding was $239,000.

$400,000 principal amount promissory note due March 15, 2021.

At December 31, 2020, our

cost and fair value for this holding was $400,000.

$500,000 principal amount promissory note due March 24, 2021.

At December 31, 2020, our

cost and fair value for this holding was $500,000.

$1,250,000 principal amount promissory note due December 31, 2021.

At December 31, 2020,

our cost and fair value for this holding was $1,250,000.

Dispositions of Investments

In 2019, we disposed of a substantial

portion of the investments we had earlier made as a BDC.

These dispositions were effected by management in an orderly fashion,

at prices management believed to be fair, and at times management believed to advantageous.

In all, we disposed of $9,110,237 in

investments (measured at fair value) in 2019.

Polinsky, the Chief Executive Officer and Chairman of our Board of Directors, and Joseph A.

our Chief Financial Officer and a director of the Company, serve as our senior management team.

the time of this filing, we remain a public reporting company and file periodic reports with the SEC.

Since the withdrawal of our

BDC election, we have focused our business on the provision of short-term specialty financing to small business, small-cap public

companies and high-net-worth individuals.

We structure these investments carefully so as to avoid them, to the extent possible,

from being characterized as “investment securities”

under federal securities laws.

In this regard, we generally seek

to provide financing solutions that mature in nine months or less.

Because of the short-term nature of our investments, and our

ability to manage the due-diligence process swiftly and efficiently, our finance solutions typically involve high rates of interest

and premiums, as well as other terms advantageous to us.

In addition, to avoid becoming subject to the regulatory requirements

of the 1940 Act, we monitor our investment holdings as a whole to ensure that investments and other holdings which may be considered

“investment securities”

do not comprise more than 40% of our total assets.

the consummation of investments, we intend to keep the majority of our assets in cash, cash equivalents such as money-market investments,

ITEM 1 BUSINESS

Mill City Ventures III, Ltd.

is a Minnesota corporation that was incorporated in January 2006.

From our inception until December 13, 2012, we were a development-stage company involved in the gaming and entertainment industry.

In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”).

We operated as a BDC until we withdrew our BDC election on December 27, 2019.

Since that time, we have engaged in the business of providing short-term specialty finance solutions primarily to private businesses, micro- and small-cap public companies and high-net-worth individuals.

To avoid again becoming subject to regulation under the 1940 Act, we generally seek to structure our transactions so they do not constitute “investment securities” for purposes of federal securities law, and we monitor our holdings as a whole to ensure that no more than 40% of our total assets may consist of investment securities.

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:

(i) it helps minimize the risk of non-performance;

and (ii) it helps minimize regulatory risk.

In terms of non-performance risk, short-term lending requires us to focus upon, and a potential borrower to identify to us, us a near-term source of liquidity for repayment of 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, such as specific collateral and collateral arrangements, guarantees, or other types of covenants that mitigate these risks.

In terms of regulatory risk, 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.

Below we discuss our process for evaluating transactional terms and structures with a view to remaining outside of the regulatory regime of the 1940 Act (please refer to “Investment Process” below).

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

In addition, we are presently exploring and evaluating our ability to enter into other kinds of short-term specialty finance transactions.

Examples include the expansion of our efforts to purchase adjudicated settlements, the purchase (at discounted rates) of receivables owing to professionals on account of certain workers’ compensation claim, and short-term consumer finance lending.

Sourcing Transactions

We believe that our management’s strong combination of experience and contacts in the securities and investment finance sector, including the experience and contacts of our independent directors, should be sufficient to continue attracting suitable prospective investment opportunities.

To date, the network of contacts of our management and directors has been successful thus far in sourcing all of the transactions in which we have participated.

Accordingly, we presently do not have any plans to hire any business development professionals to assist us with transactional volume.

The market for specialty finance is competitive, largely as a result of the participation of various types of professionally managed pooled investment funds such as private equity funds, debt and mezzanine-debt funds, and other types of professional finance companies seeking the high returns that are possible in specialty finance and hard-money lending.

Nevertheless, we believe we are well positioned to compete successfully in this market because of our entrepreneurial, creative and flexible approach to specialty finance opportunities, and our management’s experience in entrepreneurial ventures and finance.

Throughout our history and in particular after ceasing to be a BDC, we have approached investment opportunities flexibly and creatively in terms of transactional structures and terms.

In part, we are able to be flexible and creative because we are not subject to many of the regulatory limitations that govern our other more traditional or institutional competitors.

Those competitors are often subject to limitations on the type transactions they undertake, the amount that may be invested in a specific transaction or a particular type of transaction, the markets in they operate, the maturity or time horizon of their investment, uses of proceeds, or otherwise.

These limitations are often imposed by the agreements and documents governing the pooled investment vehicles, or otherwise self-imposed in order to facilitate the investment vetting and diligence process, and the documentation and structuring process.

More rarely, these limitations may arise from governing regulations or interpretations thereof.

For our part, we believe that approaching investment opportunities flexibly expands our overall transactional opportunities, diversifies our risk by avoiding dependence in any material way on a particular borrower, type of transaction, or market or industry niche, and permits us to avail ourselves of the maximum number of relationships from which we source investment opportunities.

Moreover, we believe that this flexible approach to structuring our transactions and investments will facilitate the development of positive long-term relationships with our borrowers.

We believe that the only significant limitation on our ability to flexibly structure transactions arises from our desire to remain outside the regulation of the 1940 Act.

In order to meet this goal, we intend and aim to structure the vast majority of our transactions (by dollar amount) in ways such that they are not properly considered “investment securities” under federal securities laws, including the 1940 Act.

For our investors, the freedom afforded to us through the lack of substantive regulation governing the types of transactions we enter into and our methods of operation permits us to allocate our resources, at any given point in time, to those types of transactions that we believe may lead to the highest risk-adjusted returns or the steadiest stream of such returns.

Our management team and Board of Directors has significant experience in a variety of entrepreneurial ventures, including service as management and directors for small and large public companies, private businesses, start-up and development-stage businesses, and the securities and finance industries.

As a result of this diverse general experience and particular experience in transactional finance, we believe we are able to manage the evaluation and due-diligence process involved in our investment opportunities swiftly and efficiently, by collaborating with our professional advisers and focusing on high-level and material issues.

Other Matters

We do not believe that we are dependent in any material way on any particular borrower, type of specialty finance transaction, or industry.

We do not own or use through license any patents, trademarks, or other intellectual properties and we do not believe that any such assets would be material to our business.

Sometimes the types of transactions we engage in are governed by particular laws, regulations, or rules.

For example, lending transactions in which high-net-worth individuals are the borrower will nearly always involve state law usury limitations.

Transactions in which we seek and obtain collateral as security for obligations owed to us involve legal issues arising under the Uniform Commercial Code or its various state law iterations.

To date, we have not engaged in transactions that require us to obtain licensure or a permit prior to entering into the transaction—e.g., brokering transactions or engaging in licensed consumer finance activities.

Pending the consummation of transactions and deployment of cash, we generally keep the majority of our assets in cash, cash equivalents such as money-market investments, U.S.

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

Our Investment Process

We have identified several criteria that we believe are generally important guidelines for us to meet our financial objectives.

These criteria are, however, only general guidelines for our investment decisions and, in the case of some transactions in which we invest, fewer than all—or even none—of these criteria will be met.

● Existing Liquidity Source .

Because the vast majority of our transactions involve short-term maturities, we typically seek to identify a liquidity source for the borrower to repay us.

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 we provide.

● Collateral Value .

We will often, but not always, seek to collateralize the obligations owing to us.

Our ability to identify valuable collateral is a significant factor in our credit analysis and determination of the attractiveness of a potential transaction.

This analysis will often involve legal counsel, both to assist in the identification of potential collateral assets, and to better understand the ease with a security interest in the collateral may be granted, perfected and, if necessary, foreclosed upon and the relevant jurisdiction(s) involved.

● Experienced and Capable Management .

In transactions involving business borrowers, we seek businesses that have an experienced, knowledgeable and capable management team.

● Competitive Position .

In transactions involving business borrowers, we will seek 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, we will seek to invest in businesses that are profitable or nearly profitable on an operating cash flow basis, principally so that the business’ operating cash flow may serve as another source of liquidity from which we may ultimately be repaid.

If we believe a potential transaction generally meets the characteristics described above or if we otherwise determine that a potential transaction may be desirable to enter into, we may perform a more rigorous due-diligence examination of the prospective borrower, the likely source or sources of liquidity for their repayment to us, and other aspects of the borrower or its assets (e.g., assets of the borrower that may serve as collateral security for the obligations that may be owing to us).

Our due-diligence examination for each transaction will necessarily be unique and tailored to the specific transaction, but will generally be undertaken in light of the following facts and circumstances:

● our familiarity with the borrower (or, in the case of a business borrower, our familiarity with management or other persons such as directors involved with the borrower);

● in the case of a business borrower, our review and assessment of the potential borrower’s financing history, as well as the likely need for additional financings after our transaction;

● the industry in which the borrower operates, our knowledge and familiarity with that industry, our assessment of the complexity of the business, any regulatory matters or other unique aspects presenting special risks, and the competitive landscape faced by the borrower;

● the amount of potential dollars involved in the potential transaction;

● where the borrower is located, how it is organized as an entity, as well as its management and ownership structure and profile;

● whether we might have been involved with a transaction of the same or similar kind before;

● the ease with which we can evaluate the borrower’s source or sources of liquidity;

● the ease with which we can apprehend the process involved with taking collateral security in some or all of the borrower’s assets;

● the ease with which we could realize on that collateral if repayment were not otherwise forthcoming.

The assessments described above outlines our general approach for our investment decisions, although not all of such activities will be followed in each instance, or some may be stressed moreso than others depending on facts and circumstances.

Upon successful completion of this preliminary evaluation, we will typically (1) evaluate our own regulatory concerns (i.e., to what extent the potential transaction may properly be considered an investment in an “investment security” for purposes of the 1940 Act and, if necessary, consider alternative structures to alleviate any risks to our company relating thereto), and (2) decide whether to move forward towards negotiating a letter of intent and, thereafter, definitive documentation for our transaction.

Depending on timing, we may not use a letter of intent and will instead proceed directly to definitive documentation.

As indicated above, to avoid becoming subject to the regulatory requirements of the 1940 Act, we monitor our investment holdings as a whole to ensure that investments and other holdings which may be considered “investment securities” do not comprise more than 40% of our total assets.

We undertake this analysis (1) on a quarterly basis and in connection with the review and preparation of our financial statements filed as part of our quarterly and annual reports with the SEC, and (2) at other times when we are considering how to structure a new transaction that is of a significant size—with “significance” largely based on the outcome of our most recent quarterly review.

This review is generally undertaken by our Chief Financial Officer and may involve our outside legal counsel, in particular in a case where we are considering the structure of a potential new transaction.

In general, our analysis starts with the length or duration of a potential new transaction.

Although federal securities laws define “investment securities” in such a way as to include promissory notes, the U.S.

Supreme Court held in Reves v.

Ernst & Young , 110 S.

945 (1990), that certain kinds of promissory notes are not properly considered securities.

Over time, court precedent has developed to identify these kinds of promissory notes as generally not constituting investment securities:

● notes that mature in nine months or less;

● notes secured by a mortgage or lien on a home;

● notes secured by a small business or business assets;

● so-called “character loans” made to a bank customer;

● notes delivered or borrowings entered into through consumer finance;

● commercial loans made to businesses;

● loans secured by accounts receivable (e.g., factoring);

In addition to the types of financing arrangements noted above, court precedent indicates that there may be facts and circumstances surrounding the transaction that may cause other promissory notes to not be considered investment securities under federal securities laws.

For example, it is presumed that a promissory note which matures in more than nine months is a “security,” but this presumption may be rebutted (with the conclusion that such a promissory note is not a properly considered a security) upon an evaluation of the following factors:

● whether the borrower’s motivation is to raise money for general business use, and whether the lender’s motivation is to make a profit, including interest;

● whether the borrower’s plan of distribution for the promissory note resembles the plan of distribution of a security;

● whether the investing public reasonably expects that the note is a security;

● whether there is a regulatory scheme that protects the investor other than the securities laws (e.g., Federal Deposit Insurance).

While the application of these factors can be helpful in some instances, often the factors and the proper manner of weighting them are unclear.

As a result, the analyses we periodically undertake focuses on the more bright-line types of lending arrangements enumerated above—i.e., promissory notes maturing in nine months or less, etc.

Our Prior Business as a BDC

The analysis of our transactions and transactional holdings is undertaken with a view to ensuring that we do not become subject to the 1940 Act.

Generally from 2013 through 2019, we were governed by the 1940 Act.

During that time, we were a business development company under the 1940 Act, or “BDC,” primarily focused on investing in or lending to private and small-cap public companies and making managerial assistance available to such companies.

As a BDC, our investments included stock of or membership interests (typically referred to as units) in private companies, small-cap public company stocks, and promissory notes.

In some cases, the stock or membership interests we acquired were preferred stock or units, and in other cases the stock or membership interests acquired were common stock or units.

In connection with our investments in promissory notes, we frequently obtained warrants to purchase common stock.

Our Management and Employees

Currently, Mr.

Polinsky, the Chief Executive Officer and Chairman of our Board of Directors, and Joseph A.

Geraci, II, our Chief Financial Officer and a director of the company, serve as our senior management team.

These are also the only two persons who are employees of our company.

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-K

Item 1. Business