UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________

FORM 10-Q

__________________________

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2023

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _______________________ to ___________________

Commission File Number 001-41472

MILL CITY VENTURES III, LTD.

(Exact name of registrant as specified in its charter)

Minnesota	90-0316651
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1907 Wayzata Blvd, #205, Wayzata, Minnesota	55391
(Address of principal executive offices)	(Zip Code)

(952) 479-1923

(Registrant’s telephone number, including area code)

__________________________

N/A

(Former name, former address and former fiscal year, if changed since last report)

__________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated Filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of May 15, 2023, Mill City Ventures III, Ltd. had 6,185,255 shares of common stock, and no other classes of capital stock, outstanding.

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended March 31, 2023

PART I.	FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements (unaudited)	3
	Condensed Balance Sheets – March 31, 2023 and December 31, 2022	3
	Condensed Statements of Operations – Three months ended March 31, 2023 and March 31, 2022	4
	Condensed Statements of Shareholders’ Equity – Three months ended March 31, 2023 and March 31, 2022	5
	Condensed Statements of Cash Flows – Three months ended March 31, 2023 and March 31, 2022	6
	Condensed Schedule of Investments – March 31, 2023 and Schedule of Investments – December 31, 2022	7
	Condensed Notes to Financial Statements – March 31, 2023	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 6.	Exhibits	23
SIGNATURES		24

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

	March 31, 2023 (unaudited)			December 31, 2022
ASSETS
Investments, at fair value:	$	19,712,356		$	16,708,432
Non-control/non-affiliate investments (cost: $19,715,304 and $17,359,804 respectively)
Cash		439,829			1,089,641
Note receivable, related party		250,000			250,000
Prepaid expenses		267,568			218,440
Interest and dividend receivables		366,391			250,879
Right-of-use operating lease asset		10,903			16,398
Deferred taxes		461,000			201,000
Total Assets	$	21,508,047		$	18,734,790
LIABILITIES
Accounts payable	$	91,038		$	776,514
Line of credit		2,750,000			—
Operating lease liability		11,067			16,562
Deferred interest income		42,217			70,154
Total Liabilities		2,894,322			863,230
SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (111,111,111 authorized; 6,185,255 outstanding)		12,215			12,215
Additional paid-in capital		15,043,291			15,043,291
Additional paid-in capital - stock options		1,460,209			—
Accumulated deficit		(1,159,665	)		(1,159,665	)
Accumulated undistributed investment loss		(1,853,206	)		(1,086,739	)
Accumulated undistributed net realized gains on investment transactions		5,113,829			5,713,829
Net unrealized appreciation (depreciation) in value of investments		(2,948	)		(651,371	)
Total Shareholders' Equity (net assets)		18,613,725			17,871,560
Total Liabilities and Shareholders' Equity	$	21,508,047		$	18,734,790
Net Asset Value Per Common Share	$	3.01		$	2.89

See accompanying Notes to Financial Statements

3

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended
	March 31, 2023			March 31, 2022
Investment Income
Interest income	$	864,028		$	1,000,206
Total Investment Income		864,028			1,000,206
Operating Expenses
Professional fees		129,851			198,518
Payroll		1,130,439			196,442
Insurance		27,000			30,097
Occupancy		19,043			16,812
Director's fees		532,968			30,000
Interest expense		34,667			66,939
Other general and administrative		15,827			7,010
Total Operating Expenses		1,889,795			545,818
Net Investment Gain (Loss)		(1,025,767	)		454,388
Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investments		(600,000	)		138,770
Net change in unrealized appreciation (depreciation) on investments		648,423			(22,047	)
Net Realized and Unrealized Gain on Investments		48,423			116,723
Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes	$	(977,344	)	$	571,111
Provision (Benefit) for Income Taxes		(259,300	)		159,000
Net Increase (Decrease) in Net Assets Resulting from Operations	$	(718,044	)	$	412,111
Net Increase (Decrease) in Net Assets Resulting from Operations per share:
Basic and diluted	$	(0.12	)	$	0.09
Weighted-average number of common shares outstanding - basic and diluted		6,185,255			4,795,739

See accompanying Notes to Financial Statements

4

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended March 31, 2023	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions			Net Unrealized Appreciation (Depreciation) in Value of Investments			Total Shareholders' Equity
Balance as of December 31, 2022		6,185,255	$	12,215	$	15,043,291	$	(1,159,665	)	$	(1,086,739	)	$	5,713,829		$	(651,371	)	$	17,871,560
Issuance of stock options				—		1,460,209		—			—			—			—			1,460,209
Net investment loss, net of tax benefit of $259,300				—		—		—			(766,467	)		—			—			(766,467	)
Net realized loss on investment transactions				—		—		—			—			(600,000	)		—			(600,000	)
Appreciation in value of investments				—		—		—			—			—			648,423			648,423
Balance as of March 31, 2023		6,185,255	$	12,215	$	16,503,500	$	(1,159,665	)	$	(1,853,206	)	$	5,113,829		$	(2,948	)	$	18,613,725
Three Months Ended March 31, 2022	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions			Net Unrealized Appreciation (Depreciation) in Value of Investments			Total Shareholders' Equity
Balance as of December 31, 2021		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(1,877,667	)	$	5,580,810		$	165,618		$	13,414,049
Net investment gain, net of tax of $159,000				—		—		—			295,388			—			—			295,388
Net realized gain on investment transactions				—		—		—			—			138,770			—			138,770
Depreciation in value of investments				—		—		—			—			—			(22,047	)		(22,047	)
Balance as of March 31, 2022		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(1,582,279	)	$	5,719,580		$	143,571		$	13,826,160

See accompanying Notes to Financial Statements

5

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended
	March 31, 2023			March 31, 2022
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations	$	(718,044	)	$	412,111
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided (used) in operating activities:
Net change in unrealized (appreciation) depreciation on investments		(648,423	)		22,047
Net realized (gain) loss on investments		600,000			(138,770	)
Purchases of investments		(6,900,500	)		(7,025,000	)
Proceeds from sales of investments		3,945,000			1,152,898
Issuance of stock options		1,460,209			—
Deferred income taxes		(260,000	)		(6,000	)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(43,633	)		59,000
Interest and dividends receivable		(115,512	)		(238,643	)
Accounts payable and other liabilities		(690,971	)		35,229
Deferred interest income		(27,938	)		272,000
Accrued income taxes		—			165,000
Payable for investment purchase		—			(1,900,000	)
Net cash used in operating activities		(3,399,812	)		(7,190,128	)
Cash flows from financing activities:
Proceeds from line of credit		2,750,000			5,325,000
Net cash provided by financing activities		2,750,000			5,325,000
Net decrease in cash		(649,812	)		(1,865,128	)
Cash, beginning of period		1,089,641			1,936,148
Cash, end of period	$	439,829		$	71,020

See accompanying Notes to Financial Statements

6

MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

MARCH 31, 2023

Investment / Industry	Cost		Fair Value		Percentage of Net Assets
Short-Term Non-banking Loans
Business Services - 15% secured loans
Mustang Litigation Funding	$	5,000,000	$	5,000,678		27.26	%
Consumer - 15% secured loans		408,000		406,994		2.22	%
Intelligent Mapping, LLC		2,900,000		2,892,010		15.77	%
Financial - 33% secured loans
Benton Financial, LLC		1,986,625		1,984,769		10.82	%
Financial - 34% secured loans
Benton Financial, LLC		1,165,000		1,163,911		6.35	%
Financial - 36% secured loans
Benton Financial, LLC		1,025,000		1,024,042		5.58	%
Financial - 12% secured loans		500,000		366,079		1.99	%
Information Technology - 15% convertible note		212,500		213,456		1.16	%
Real Estate - 18% secured loans		2,500,000		2,492,891		13.59	%
Real Estate - 15% secured loans		745,000		747,786		4.07	%
Real Estate - 12% secured loans
Alatus Development Corp		2,000,000		2,000,418		10.91	%
Total Short-Term Non-Banking Loans		18,442,125		18,293,034		99.72	%
Preferred Stock
Consumer
Wisdom Gaming, Inc		900,000		900,000		4.91	%
Information Technology		150,000		300,000		1.64	%
Total Preferred Stock		1,050,000		1,200,000		6.55	%
Common Stock
Consumer		212,500		209,322		1.14	%
Warrants
Healthcare		679		-		0.00	%
Other Equity
Financial		10,000		10,000		0.05	%
Total Investments	$	19,715,304	$	19,712,356		107.46	%
Total Cash		439,829		439,829		2.40	%
Total Investments and Cash	$	$20,155,133	$	$20,152,185		109.86	%

7

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2022

Investment / Industry	Cost		Fair Value		Percentage of Net Assets
Short-Term Non-banking Loans
Business Services - 18% secured loans
Liberated Syndication Inc.	$	2,250,000	$	2,255,625		12.62	%
Business Services - 15% secured loans
Mustang Litigation Funding		5,000,000		4,975,955		27.84	%
Consumer - 15% secured loans		400,000		398,635		2.23	%
Intelligent Mapping, LLC		2,900,000		2,873,893		16.08	%
Financial - 33% secured loans
Benton Financial, LLC		2,479,125		2,478,030		13.87	%
Financial - 12% secured loans		500,000		345,421		1.93	%
Information Technology - 15% convertible note		212,500		213,656		1.20	%
Real Estate - 15% secured loans		745,000		746,354		4.17	%
Real Estate - 12% secured loans
Alatus Development Corp		1,000,000		998,363		5.59	%
Total Short-Term Non-Banking Loans		15,486,625		15,285,932		85.53	%
Preferred Stock
Consumer
Wisdom Gaming, Inc		900,000		900,000		5.04	%
Information Technology		150,000		300,000		1.68	%
Total Preferred Stock		1,050,000		1,200,000		6.72	%
Warrants
Healthcare		679		-		0.00	%
Other Equity
Consumer		212,500		212,500		1.19	%
Financial		610,000		10,000		0.06	%
Total Other Equity		822,500		222,500		1.25	%
Total Investments	$	17,359,804	$	16,708,432		93.50	%
Total Cash		1,089,641		1,089,641		6.10	%
Total Investments and Cash	$	$18,449,445	$	$17,798,073		99.60	%

8

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 1 – ORGANIZATION

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.”  The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.

We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that 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 “1940 Act”). We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have remained a public reporting company filing periodic reports with the SEC. We engage 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 1940 Act, we generally seek to structure our investments so they do not constitute “securities” for purposes of federal securities laws, and we monitor our investments as a whole to ensure that no more than 40% of our total assets consist of “investment securities” as defined under the 1940 Act.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:  The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The condensed balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.  For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2022.

Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below. The Company presents its financial statements as an investment company following accounting and reporting guidance in ASC 946.

Cash deposits:  We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.

Valuation of portfolio investments:  We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by our Board of Directors, based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures.

Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.

9

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

Accounting guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the relative observability of inputs used in the valuation. The three levels are defined as follows:

· Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2: Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.

· Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.

Our valuation policy and procedures: Under our valuation policies and procedures, we evaluate the source of inputs, including any markets in which our investments are trading, and then apply the resulting information in determining fair value.  For our Level 1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter market, to average the last quoted bid and ask price on the most active market on which the security is quoted.  In the case of traded debt securities the prices for which are not readily available, we may value those securities using a discounted cash flows approach, at their weighted-average yield to maturity.

The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors. In general, we value our Level 3 equity investments at cost unless circumstances warrant a different approach.  Examples of these circumstances includes a situation in which a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors). Other facts and circumstances that may serve as an input supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party valuation conducted by an independent and qualified professional.

When valuing preferred equity investments, we generally view intrinsic value as a key input. Intrinsic value means the value of any conversion feature (if the preferred investment is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to be a key input, to account for resale restrictions applicable to the securities issuable upon conversion.

When valuing warrants, our valuation policy and procedures indicate that value will generally be the difference between the closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above. Generally, “out-of-the-money” warrants will be valued at cost or zero.

For non-traded (Level 3) debt instruments with a residual maturity less than or equal to 60 days, we will generally value such instruments based on a discounted cash flows approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. For level 3 non-banking loans with a maturity in excess of 60 days, fair value is determined based on the initial purchase price and adjusted as necessary to reflect any changes in the financial strength of the creditor and changes in interest rates in the high-yield credit markets.

On a quarterly basis, our management provides members of our Board of Directors with recommendations, if any, to change any existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing.  In such a case, the Board of Directors would then discuss these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.

We made no changes to our valuation policy and procedures during the reporting period.

Income taxes: 

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.   Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

10

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine we would be able to realize our deferred income tax assets in the future in excess of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.

We file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions.  We do not believe there will be any material changes in its unrecognized tax positions over the next 12 months.  Our evaluation was performed for the tax years ended December 31, 2020 through 2022, which are the tax years that remain subject to examination by major tax jurisdictions as of March 31, 2023. 

Revenue recognition:  Realized gains or losses on the sale of investments are calculated using the specific investment method.

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities purchased are accreted or amortized, as applicable, into interest income over the life of the related security using the effective-yield method. The amortized cost of investments represents the original cost, adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more, or when there is reasonable doubt that principal or interest will be collected in full. Loan origination fees are recognized when loans are issued. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and is in the process of collection.

Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.

Certain investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal or stated value of the investment on the respective interest- or dividend-payment dates rather than being paid in cash, and generally becomes due at maturity or upon being repurchased by the issuer. PIK interest or dividends is recorded as interest or dividend income, as applicable. If at any point we believe that PIK interest or dividends is not expected be realized, the PIK-generating investment will be placed on non-accrual status. Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment is placed on non-accrual status.

Allocation of net gains and losses:  All income, gains, losses, deductions and credits for any investment are allocated in a manner proportionate to the shares owned.

Stock-based compensation:  The Company’s stock-based compensation consists of stock options issued to certain employees and directors of the Company. The Company recognizes compensation expense based on an estimated grant date fair value using the Black Sholes option-pricing method. If the factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future. The Company recognizes stock-based compensation expense for these options on a straight-line basis over the requisite service period. The Company has elected to account for forfeitures as they occur.

Management and service fees:

We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities.

11

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 3 – INVESTMENTS

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of March 31, 2023 (together with the corresponding percentage of the fair value of our total portfolio of investments):

	Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value
Short-term Non-banking Loans	$	18,442,125		93.5	%	$	18,293,034		92.8	%
Preferred Stock		1,050,000		5.3			1,200,000		6.1
Common Stock		212,500		1.1			209,322		1.1
Warrants		679		—			—		—
Other Equity		10,000		0.1			10,000		—
Total	$	19,715,304		100.0	%	$	19,712,356		100.0	%

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2022 (together with the corresponding percentage of the fair value of our total portfolio of investments):

	Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value
Short-term Non-banking Loans	$	15,486,625		89.2	%	$	15,285,932		91.5	%
Preferred Stock		1,050,000		6.1			1,200,000		7.2
Warrants		679		—			—		—
Other Equity		822,500		4.7			222,500		1.3
Total	$	17,359,804		100.0	%	$	16,708,432		100.0	%

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of March 31, 2023:

	Investments at Fair Value		Percentage of Fair Value
Business Services	$	5,000,678		25.3	%
Consumer		4,408,326		22.4
Financial		4,548,801		23.1
Information Technology		513,456		2.6
Real Estate		5,241,095		26.6
Total	$	19,712,356		100.0	%

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2022:

	Investments at Fair Value		Percentage of Fair Value
Business Services	$	7,231,580		43.3	%
Consumer		4,385,028		26.2
Financial		2,833,451		17.0
Information Technology		513,656		3.1
Real Estate		1,744,717		10.4
Total	$	16,708,432		100.0	%

12

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investment portfolio as of March 31, 2023 may differ materially from values that would have been used had a readily available market for those investments existed.

The following table presents the fair value measurements of our portfolio investments by major class, as of March 31, 2023, according to the fair value hierarchy:

	As of March 31, 2023
	Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	18,293,034	$	18,293,034
Preferred Stock		—		—		1,200,000		1,200,000
Common Stock		61,645		147,677		—		209,322
Other Equity		—		—		10,000		10,000
Total	$	61,645	$	147,677	$	19,503,034	$	19,712,356

The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2022, according to the fair value hierarchy:

	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	15,285,932	$	15,285,932
Preferred Stock		—		—		1,200,000		1,200,000
Common Stock		—		—		—		—
Other Equity		—		—		222,500		222,500
Total	$	—	$	—	$	16,708,432	$	16,708,432

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the three months ended March 31, 2023:

	For the three months ended March 31, 2023
	ST Non-banking Loans			Preferred Stock		Common Stock		Warrants		Other Equity
Balance as of January 1, 2023	$	15,285,932		$	1,200,000	$	—	$	—	$	222,500
Net change in unrealized appreciation		51,602			—		—		—		600,000
Purchases and other adjustments to cost		6,900,500			—		—		—		—
Sales and redemptions		(3,945,000	)		—		—		—		—
Net realized loss		—			—		—		—		(600,000	)
Transfers out of level 3		—			—		—		—		(212,500	)
Balance as of March 31, 2023	$	18,293,034		$	1,200,000	$	—	$	—	$	10,000

The net change in unrealized appreciation for the three months ended March 31, 2023 attributable to Level 3 portfolio investments still held as of March 31, 2023 was $651,602.

13

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

The following table lists our Level 3 investments held as of March 31, 2023 and the unobservable inputs used to determine their valuation:

Security Type	3/31/23 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	18,293,034	discounted cash flow	determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness	12-36	%
Other Equity		10,000	last secured funding known by company	economic changes since last funding
Preferred Stock		1,200,000	last funding secured by company	economic changes since last funding
	$	19,503,034

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the period ended December 31, 2022:

	For the year ended December 31, 2022
	ST Non-banking Loans			Preferred Stock		Common Stock		Warrants		Other Equity
Balance as of January 1, 2022	$	11,650,000		$	1,200,000	$	—	$	—	$	812,500
Net change in unrealized depreciation		(200,693	)		—		—		—		(600,000	)
Purchases and other adjustments to cost		23,548,458			—		—		—		10,000
Sales and redemptions		(19,711,833	)		—		—		—		—
Balance as of December 31, 2022	$	15,285,932		$	1,200,000	$	—	$	—	$	222,500

The net change in unrealized depreciation for the year ended December 31, 2022 attributable to Level 3 portfolio investments still held as of December 31, 2022 was $651,371.

The following table lists our Level 3 investments held as of December 31, 2022 and the unobservable inputs used to determine their valuation:

Security Type	12/31/22 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	15,285,932	discounted cash flow	determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness	12-33	%
Other Equity		222,500	last secured funding known by company
Preferred Stock		1,200,000	last funding secured by company	economic changes since last funding
	$	16,708,432

NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a conflicts of interest and related-party transactions policy requiring (i) certain disclosures be made to our Board of Directors in relation to situations where officers, directors, significant shareholders, or any of their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with the SEC.  In this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions:

· On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owned and continues to own approximately 534,445 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000, which was subsequently amended such that the note presently matures on August 30, 2023. The promissory note bears interest payable monthly at the rate of 10% per annum. The note is secured by the debtors’ pledge to us of 277,778 shares of our common stock. The pledged shares are held in physical custody for us by Millennium Trust Company, as our custodial agent.

· On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. See note 8 above for further details.

14

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 6 – INCOME TAXES

Presently, we are a C-Corporation for tax purposes and have booked an income tax provision for the periods described below.

As of March 31, 2023 and December 31, 2022, we have a deferred tax asset of $461,000 and $201,000, respectively. As of March 31, 2023, our net deferred tax asset consists of net operating losses (NOLs), foreign tax credit carryforwards, unrealized investment gain/loss, future tax-deductible stock option expenses, and right of use assets.  Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes.

As of March 31, 2023 and December 31, 2022 we had prepaid income taxes of $178,600 and $179,300, respectively. We recorded a benefit from income taxes of $259,300 (26 percent effective tax rate) and a provision for income taxes of $159,000 (28 percent effective tax rate) during the three months ended March 31, 2023 and March 31, 2022, respectively.

As of March 31, 2023, we had a federal NOL of approximately $168,000.  The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely. The estimated federal NOL that does not expire included in the total above is $168,000. States may vary in their treatment of post-2017 NOLs. Minnesota is the only state carrying forward a NOL which was $100,000 at March 31, 2023.  The state NOL carryforwards may expire in 2043 if not used.

NOTE 7 – LINE OF CREDIT

On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company.  Under the Loan Agreement, the Lenders made available to us a $5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. Amounts drawn under the Loan Agreement accrue interest at the per annum rate of 8%, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets.

As a Lender, Mr. Berman is obligated to furnish only one-half of the aggregate $5 million available under the Loan Agreement. The Loan Agreement has a five-year term ending on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender’s right, including Mr. Berman, to terminate the Loan Agreement, solely with respect to such Lender’s obligation to provide further credit, at any time after January 3, 2023. In the event that a Lender, including Mr. Berman, terminates its lending obligations, the Loan Agreement requires that we repay such Lender, prior to the five-year maturity date, with the proceeds derived from specified investments.

During the period January 3 to June 30, 2022, the Loan Agreement provided for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement, and requires us to pay such fee in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions. Beginning July 1, 2022, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash.

At March 31, 2023 and December 31, 2022, the balance outstanding on the line was $2,750,000 and $0, respectively, with a maturity date of January 3, 2027.

15

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 8 – STOCK-BASED COMPENSATION

The Board approved a 2022 Stock Incentive Plan which authorized 900,000 shares of common stock available to be issued. To date, 870,000 shares were issued under the Plan, leaving 30,000 shares available for issuance.

The following table summarizes the activity for all stock options outstanding for the three months ended March 31, 2023:

	Shares		Weighted Average Exercise Price
Options outstanding at beginning of year		—	$	—
Granted		870,000		2.11
Exercised		—		—
Forfeited		—		—
Balance at March 31		870,000	$	2.11
Options exercisable at March 31:		870,000	$	2.11
Weighted Average Grant Date Fair Value for options granted during the period:			$	1,242,902

The following table summarizes additional information about stock options outstanding and exercisable at March 31, 2023:

Options Outstanding								Options Exercisable
Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Aggregate Intrinsic Value		Options Exercisable		Weighted Average Exercise Price		Aggregate Intrinsic Value
	870,000		9.85	$	2.11	$	175,100		870,000	$	2.11	$	175,100

The Company recognized stock-based compensation expense for stock options of $1,460,209 for the three months ended March 31, 2023.

The Black-Scholes option-pricing model was used to estimate the fair value of equity-based awards with the following weighted-average assumptions for the three months ended March 31, 2023:

	2023
Risk-free interest rate		3.48	%
Expected volatility		90.00	%
Expected life (years)		5.0
Expected dividend yield		—	%

The inputs for the Black-Scholes valuation model require management’s significant assumptions. The price per share of common stock is determined by using the closing market price on the Nasdaq Capital Market on the grant date. The risk-free interest rates are based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected life is based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos. 107 and 110. The expected volatility is estimated based on historical volatility information of peer companies that are publicly available in combination with the Company’s calculated volatility.

16

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 9 – SHAREHOLDERS’ EQUITY

At March 31, 2023, we had 6,185,255 shares of common stock issued and outstanding.

On August 9, 2022, the Company effected a stock combination (reverse stock split) of its 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 the Company's 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 the Company's articles of incorporation.  This reduction was affected pursuant to the filing of articles of amendment with the Minnesota Secretary of State indicating that the Company, on a post-reverse-split basis, is authorized to issue up to 111,111,111 shares of capital stock. All share and per share information has been retrospectively adjusted to reflect the reverse stock split.

NOTE 10 – PER-SHARE INFORMATION

Basic net gain per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period.  A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below:

	For the Three Months Ended March 31,
	2023			2022
Numerator:  Net increase (decrease) in net assets resulting from operations	$	(718,044	)	$	412,111
Denominator:  Weighted-average number of common shares outstanding		6,185,255			4,795,739
Basic and diluted net gain (loss) per common share	$	(0.12	)	$	0.09

NOTE 11 – OPERATING LEASES

We are a party to two non-cancelable operating leases for office space expiring April 2, 2023. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew. 

Because our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted-average discount rate as of March 31, 2023 and March 31, 2022 was 4.5% and the weighted-average remaining lease term is one year.

Rent expense for office facilities for the three months ended March 31, 2023 and 2022 was $19,043 and $16,812, respectively.

The components of our operating leases were as follows for the three months ended March 31: 

	Three Months Ended
	March 31, 2023		March 31, 2022
Operating lease costs	$	5,504	$	4,779
Variable lease cost		4,905		4,601
Short-term lease cost		8,634		7,432
Total	$	19,043	$	16,812

17

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

Supplemental balance sheet information consisted of the following at March 31:

Operating Lease	2023			2022
Right-of-use assets	$	10,903		$	—
Operating Lease Liability	$	11,067		$	—
Less: short term portion		(11,067	)		—
Long term portion	$	—		$	—

Maturity analysis under this lease extension agreement consists of the following as of March 31:

	2023			2022
2022	$	—		$	18,164
2023		11,226			14,859
Total lease payments		11,226			33,023
Less: Present value discount		(159	)		(1,035	)
Present value of lease liabilities	$	11,067		$	31,988

NOTE 12 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the three months ended March 31, 2023 through 2019:

	Three Months Ended March 31,
	2023			2022			2021			2020			2019
Per Share Data (1)
Net asset value at beginning of period	$	2.89			2.79			2.43			2.05			2.30
Net investment income (loss)		(0.17	)		0.09			0.00			0.00			(0.05	)
Net realized and unrealized gains (losses)		0.01			0.02			0.50			(0.07	)		0.27
Provision for income taxes		0.04			(0.02	)		(0.14	)		0.00			0.00
Issuance of stock options		0.24			0.00			0.00			0.00			0.00
Repurchase of common stock		0.00			0.00			0.00			0.00			0.00
Payment of common stock dividend		0.00			0.00			0.00			0.00			(0.11	)
Net asset value at end of period	$	3.01			2.88			2.79			1.98			2.41
Ratio / Supplemental Data
Per share market value of investments at end of period	$	3.19			4.19			2.81			0.92			1.76
Shares outstanding at end of period		6,185,255			4,795,739			4,794,184			4,918,845			4,918,845
Average weighted shares outstanding for the period		6,185,255			4,795,739			4,793,739			4,918,845			4,918,845
Net assets at end of period	$	18,613,725			13,826,160			13,391,679			9,786,615			11,890,188
Average net assets (2)	$	18,242,642			13,620,104			12,516,283			9,927,574			12,911,895
Total investment return		(4.15	)%		3.23	%		14.81	%		(3.30	)%		4.90	%
Portfolio turnover rate (3)		21.63	%		8.46	%		40.24	%		0.75	%		0.93	%
Ratio of operating expenses to average net assets (3)		(35.82	)%		(15.28	)%		(16.20	)%		(7.82	)%		(6.06	)%
Ratio of net investment income (loss) to average net assets (3)		(20.92	)%		14.24	%		0.42	%		0.87	%		(4.87	)%
Ratio of realized gains (losses) to average net assets (3)		(12.68	)%		4.20	%		133.32	%		1.00	%		137.57	%

(1)	Per-share data was derived using the ending number of shares outstanding for the period.
(2)	Based on the monthly average of net assets as of the beginning and end of each period presented.
(3)	Ratios are annualized.

NOTE 13 – SUBSEQUENT EVENTS

18

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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/A for the year ended December 31, 2022, 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 three months ended March 31, 2023, we made $6,900,500 of investments and loans and had $3,945,000 of redemptions and repayments, resulting in net investments at amortized cost of $19,715,304 as of March 31, 2023.

During the three months ended March 31, 2022, we made $7,025,000 of investments and loans 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.

Our portfolio composition by major class, based on fair value at March 31, 2023, was as follows:

	Investments at Fair Value		Percentage of Fair Value
Short-term Non-banking Loans	$	18,293,034		92.8	%
Equity/Other		1,419,322		7.2
Total	$	19,712,356		100.0	%

19

RESULTS OF OPERATIONS

Our operating results for the three months ended March 31, 2023 and March 31, 2022 were as follows:

	For the Three Months Ended March 31,
	2023			2022
Investment Income:	$	864,029		$	1,000,206
Operating Expenses:		(1,889,796	)		(545,818	)
Net Investment Gain (Loss)	$	(1,025,767	)	$	454,388

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-term 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 months ended March 31, 2023 and 2022, our total investment income was $864,028 and $1,000,206, respectively. The decrease is due to a decrease in our short-term non-bank lending activity. Our loan portfolio generates interest income, with an average rate on the loans of 18.9%.

Professional Fees

For the three months ended March 31, 2023 and 2022, we had $129,851 and $198,518 of professional fees expense, respectively. The decrease is due to the decrease in our short-term non-bank lending activity and the legal costs incurred to close those deals.

Payroll and Directors Fees

For the three months ended March 31, 2023 and 2022, we had $1,130,439 and $196,442 of payroll expense, respectively. In addition, director fees were $532,968 and $30,000 for the three months ended March 31, 2023 and 2022, respectively. The increase in the current period was due in large part to the company’s issuance of 870,000 10-year options to directors, officers and consultants to the company in November and December 2022 (which were issued subject to shareholder approval). On January 20, 2023 the company approved the options at a special meeting held for that purpose. These options generated a noncash expense of $1,460,209.

Interest Expense

For the three months ended March 31, 2023 and 2022, we had $34,667 and $66,939 of interest expense, respectively. The decrease is due less borrowing on the line of credit during the first quarter of 2023.

Net Realized Gain (Loss) from Investments

For the three months ended March 31, 2023, we had $3,945,000 of proceeds from sale of investments, resulting in $600,000 of realized losses. 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.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three months ended March 31, 2023, our investments included $648,423 of unrealized appreciation. For the three months ended March 31, 2022, our investments included $22,047 of unrealized depreciation.

20

Changes in Net Assets from Operations

For the three months ended March 31, 2023, we recorded a net decrease in net assets from operations of $718,044. Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2023, our per-share net decrease in net assets from operations was $0.12. 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 $0.09.

Cash Flows for the Three Months Ended March 31, 2023 and 2022

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, 2023, net cash used in operating activities was $3,399,812. Cash flows used in operating activities for the three months ended March 31, 2023 were primarily related to purchases of investments totaling $6,900,500, offset by redemptions and repayments totaling 3,945,000. For the three months ended March 31, 2022, net cash used in operating activities was $7,190,128. Cash flows provided in operating activities for the three months ended March 31, 2022 were primarily related to purchases of investments totaling $7,025,000.

FINANCIAL CONDITION

As of March 31, 2023, we had cash of $439,829, a decrease of $649,812 from December 31, 2022. 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, 2023.

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, 2022.

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OFF-BALANCE-SHEET ARRANGEMENTS

During the three months ended March 31, 2023, 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 April 17, 2023 (related to our year ended December 31, 2022) 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.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

As of March 31, 2023, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were not effective as of March 31, 2023 due to the material weakness in our internal control over financial reporting identified and disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022.

There were no significant changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect such controls.

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit Number		Description
3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 23, 2013)
3.2		Amended and Restated Bylaws of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10-SB filed on January 29, 2008)
31.1	*	Section 302 Certification of the Chief Executive Officer
31.2	*	Section 302 Certification of the Chief Financial Officer
32.1	*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 ___________

* Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MILL CITY VENTURES III, LTD.
Date:  May 22, 2023	By:	/s/ Douglas M. Polinsky
		DOUGLAS M. POLINSKY
		Chief Executive Officer
Date:  May 22, 2023	By:	/s/ Joseph A. Geraci, II
		JOSEPH A. GERACI, II
		Chief Financial Officer

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