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 ~~June 30, 2021~~March 31, 2022

☐

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 814-00991

MILL CITY VENTURES III, LTD.

(Exact name of registrant as specified in its charter)

Minnesota

		90-0316651
~~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)~~ (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. x☒ 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). x☒ 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 x☒	Smaller reporting company x☒
	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 x☒ No

As of ~~August~~May 13, ~~2021,~~2022, Mill City Ventures III, Ltd. had ~~10,790,413~~10,855,413 shares of common stock, and no other classes of capital stock, outstanding.

Table of Contents

~~- 2 -~~

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended ~~June 30, 2021~~March 31, 2022

~~PART I.~~	~~FINANCIAL INFORMATION~~			~~Page No.~~
PART I.	FINANCIAL INFORMATION			Page No.

Item 1.1.	Financial Statements (unaudited)

	Condensed Balance Sheets – ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021		��	3

	Condensed Statements of Operations – Three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and March 31, 2021 ~~and June 30, 2020~~			4

	Condensed Statements of Shareholders’ Equity – Three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and March 31, 2021 ~~and June 30, 2020~~			5

	Condensed Statements of Cash Flows – ~~Six~~Three months ended ~~June 30,~~March 31, 2022 and March 31, 2021 ~~and June 30, 2020~~			7 6

	Condensed Schedule of Investments – ~~June 30, 2021~~March 31, 2022 and Schedule of Investments – December 31, ~~2020~~2021			8 7

	Condensed Notes to Financial Statements – ~~June 30, 2021~~March 31, 2022			10 9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			18 19

Item 4.	Controls and Procedures			25 22

PART ~~II.~~II.	OTHER INFORMATION

Item 6.6.	Exhibits			26 23

~~SIGNATURES~~		SIGNATURES			27 24

- 32 -

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

June 30, 2021
(unaudited) December 31, 2020
ASSETS
Investments, at fair value: $ 13,133,933 $ 6,667,897
Non-control/non-affiliate investments (cost: $11,864,762 and $4,968,576 respectively)
Cash 1,515,005 5,440,579
Note receivable 250,000 250,000
Prepaid expenses 188,838 43,838
Receivable for sale of investments 94,778 19,313
Interest and dividend receivables 331,415 65,911
Right-of-use lease asset 14,279 23,345
Total Assets $ 15,528,248 $ 12,510,883

LIABILITIES
Accounts payable $ 40,687 $ 32,917
Dividend payable — 539,296
Lease liability 15,973 26,061
Accrued income tax expense 920,000 13,722
Deferred taxes 363,000 258,000
Total Liabilities 1,339,660 869,996
Commitments and Contingencies

SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (250,000,000 authorized; 10,790,413 and 10,785,913 outstanding) 10,790 10,786
Additional paid-in capital 10,694,163 10,673,014
Accumulated deficit (1,159,665 ) (1,159,665 )
Accumulated undistributed investment loss (2,697,320 ) (2,124,419 )
Accumulated undistributed net realized gains on investment transactions 6,071,449 2,541,850
Net unrealized appreciation in value of investments 1,269,171 1,699,321
Total Shareholders' Equity (Net Assets) 14,188,588 11,640,887
Total Liabilities and Shareholders' Equity $ 15,528,248 $ 12,510,883
Net Asset Value Per Common Share $ 1.31 $ 1.08


	March 31, 2022
	(unaudited)			December 31, 2021
ASSETS
Investments, at fair value:	$	20,087,500	$	14,098,675
Non-control/non-affiliate investments (cost: $19,943,929 and $13,933,057 respectively)
Cash		71,020		1,936,148
Note receivable		250,000		250,000
Prepaid expenses		29,658		83,674
Interest and dividend receivables		562,993		324,350
Right-of-use lease asset		—		4,984
Total Assets	$	21,001,171	$	16,697,831

LIABILITIES
Line of credit	$	5,325,000	$	—
Accounts payable		104,911		64,028
Dividend payable		100		100
Payable for purchase of investments		—		1,900,000
Lease liability		—		5,654
Deferred interest income		272,000		—
Accrued income tax		1,434,000		1,269,000
Deferred taxes		39,000		45,000
Total Liabilities		7,175,011		3,283,782

SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (250,000,000 authorized; 10,790,413 outstanding)		10,790		10,790
Additional paid-in capital		10,694,163		10,694,163
Accumulated deficit		(1,159,665)		(1,159,665)
Accumulated undistributed investment loss		(1,582,279)		(1,877,667)
Accumulated undistributed net realized gains on investment transactions		5,719,580		5,580,810
Net unrealized appreciation in value of investments		143,571		165,618
Total Shareholders’ Equity (net assets)		13,826,160		13,414,049
Total Liabilities and Shareholders’ Equity	$	21,001,171	$	16,697,831
Net Asset Value Per Common Share	$	1.28	$	1.24

See accompanying Notes to Financial Statements

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Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Ended Six Months Ended
June 30,
2021 June 30,
2020 June 30,
2021 June 30,
2020
Investment Income
Interest income $ 675,549 $ 276,425 $ 1,222,391 $ 454,670
Dividend income — 7,031 — 13,765
Total Investment Income 675,549 283,456 1,222,391 468,435
Operating Expenses
Professional fees 77,539 90,529 220,347 74,297
Payroll 85,346 58,080 387,426 116,577
Insurance 27,854 20,668 52,133 41,121
Occupancy 16,337 16,569 33,026 33,131
Director's fees 30,000 22,500 60,000 45,000
Depreciation and amortization — 644 — 1,287
Other general and administrative 13,080 4,920 31,082 7,889
Total Operating Expenses 250,156 213,910 784,014 319,302
Net Investment Gain 425,393 69,546 438,377 $ 149,133
Realized and Unrealized Gain on Investments
Net realized gain on investments 621,600 175,222 3,529,599 199,724
Net change in unrealized appreciation (depreciation) on investments 83,100 348,602 (430,150 ) (37,405 )
Net Realized and Unrealized Gain on Investments 704,700 523,824 3,099,449 162,319
Net Increase in Net Assets Resulting from Operations Before Taxes $ 1,130,093 $ 593,370 $ 3,537,826 $ 311,452
Provision for Income Taxes 348,587 — 1,011,278 —
Net Increase in Net Assets Resulting from Operations $ 781,506 $ 593,370 $ 2,526,548 311,452
Net Increase in Net Assets Resulting from Operations per share:
Basic and diluted $ 0.07 $ 0.05 $ 0.23 $ 0.03
Weighted-average number of common shares outstanding - basic and diluted 10,790,413 10,882,039 10,788,175 10,974,721


	Three Months Ended
	March 31,		March 31,
	2022		2021
Investment Income
Interest income	$	1,000,206	$	546,842
Total Investment Income		1,000,206		546,842

Operating Expenses
Professional fees		198,518		142,808
Payroll		196,442		302,080
Insurance		30,097		24,279
Occupancy		16,812		16,689
Director’s fees		30,000		30,000
Interest expense		66,939		—
Other general and administrative		7,010		18,002
Total Operating Expenses		545,818		533,858
Net Investment Gain		454,388		12,984

Realized and Unrealized Gain (Loss) on Investments
Net realized gain on investments		138,770		2,907,999
Net change in unrealized depreciation on investments		(22,047)		(513,250)
Net Realized and Unrealized Gain on Investments		116,723		2,394,749
Net Increase in Net Assets Resulting from Operations Before Taxes	$	571,111	$	2,407,733
Provision for Income Taxes		159,000		662,691
Net Increase in Net Assets Resulting from Operations	$	412,111	$	1,745,042

Net Increase in Net Assets Resulting from Operations per share:
Basic and diluted	$	0.04	$	0.16
Weighted-average number of common shares outstanding - basic and diluted		10,790,413		10,785,913

See accompanying Notes to Financial Statements

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Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended June 30, 2021 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 March 31, 2021 10,786,913 $ 10,787 $ 10,678,763 $ (1,159,665 ) $ (2,774,126 ) $ 5,449,849 $ 1,186,071 $ 13,391,679
Common shares issued in consideration for expense payment 3,500 3 15,400 — — 15,403
Undistributed net investment gain — — — 76,806 — — 76,806
Undistributed net realized gain on investment transactions — — — — 621,600 — 621,600
Appreciation in value of investments — — — — — 83,100 83,100
Balance as of June 30, 2021 10,790,413 $ 10,790 $ 10,694,163 $ (1,159,665 ) $ (2,697,320 ) $ 6,071,449 $ 1,269,171 $ 14,188,588


										Accumulated		Net Unrealized
								Accumulated		Undistributed		Appreciation
				Additional				Undistributed		Net Realized Gain		(Depreciation)		Total
	Common			Paid In		Accumulated		Net Investment		on Investments		in Value of		Shareholders’
Three Months Ended March 31, 2022	Shares	Par Value		Capital		Deficit		Loss		Transactions		Investments		Equity
Balance as of December 31, 2021	10,790,413	$	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	10,790,413	$	10,790	$	10,694,163	$	(1,159,665)	$	(1,582,279)	$	5,719,580	$	143,571	$	13,826,160

Three Months Ended June 30, 2020 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 March 31, 2020 11,067,402 $ 11,067 $ 10,774,653 $ (1,159,665 ) $ (2,318,278 ) $ 3,100,318 $ (621,480 ) $ 9,786,615
Repurchase of shares (370,667 ) (371 ) (157,896 ) — — (158,267 )
Undistributed net investment loss — — — 69,546 — — 69,546
Undistributed net realized gain on investment transactions — — — — 175,222 — 175,222
Appreciation in value of investments — — — — — 348,602 348,602
Balance as of June 30, 2020 10,696,735 $ 10,696 $ 10,616,757 $ (1,159,665 ) $ (2,248,732 ) $ 3,275,540 $ (272,878 ) $ 10,221,718


										Accumulated		Net Unrealized
								Accumulated		Undistributed		Appreciation
				Additional				Undistributed		Net Realized Gain		(Depreciation)		Total
	Common			Paid In		Accumulated		Net Investment		on Investments		in Value of		Shareholders’
Three Months Ended March 31, 2021	Shares	Par Value		Capital		Deficit		Loss		Transactions		Investments		Equity
Balance as of December 31, 2020	10,785,913	$	10,786	$	10,673,014	$	(1,159,665)	$	(2,124,419)	$	2,541,850	$	1,699,321	$	11,640,887
Issuance of shares	1,000		1		5,749		—		—		—		—		5,750
Net investment loss, net of tax of $662,691	—		—		—		—		(649,707)		—		—		(649,707)
Net realized gain on investment transactions	—		—		—		—		—		2,907,999		—		2,907,999
Depreciation in value of investments	—		—		—		—		—		—		(513,250)		(513,250)
Balance as of March 31, 2021	10,786,913	$	10,787	$	10,678,763	$	(1,159,665)	$	(2,774,126)	$	5,449,849	$	1,186,071	$	13,391,679

~~- 6 -~~

Six Months Ended June 30, 2021 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
in value of
Investments Total
Shareholders'
Equity
Balance as of December 31, 2020 10,785,913 $ 10,786 $ 10,673,014 $ (1,159,665 ) $ (2,124,419 ) $ 2,541,850 $ 1,699,321 $ 11,640,887
Issuance of shares 4,500 4 21,149 — — 21,153
Undistributed net investment loss — — — (572,901 ) — — (572,901 )
Undistributed net realized loss on investment transactions — — — — 3,529,599 — 3,529,599
Depreciation in value of investments — — — — — (430,150 ) (430,150 )
Balance as of June 30, 2021 10,790,413 $ 10,790 $ 10,694,163 $ (1,159,665 ) $ (2,697,320 ) $ 6,071,449 $ 1,269,171 $ 14,188,588

Six Months Ended June 30, 2020 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
in value of
Investments Total
Shareholders'
Equity
Balance as of December 31, 2019 11,067,402 $ 11,067 $ 10,774,653 $ (1,159,665 ) $ (2,397,865 ) $ 3,075,816 $ (235,473 ) $ 10,068,533
Repurchase of shares (370,667 ) (371 ) (157,896 ) — — (158,267 )
Undistributed net investment loss — — — 149,133 — — 149,133
Undistributed net realized loss on investment transactions — — — — 199,724 — 199,724
Depreciation in value of investments — — — — — (37,405 ) (37,405 )
Balance as of June 30, 2020 10,696,735 $ 10,696 $ 10,616,757 $ (1,159,665 ) $ (2,248,732 ) $ 3,275,540 $ (272,878 ) $ 10,221,718

See accompanying Notes to Financial Statements

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Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended
June 30, 2021 June 30, 2020
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations $ 2,526,548 $ 311,452
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided (used) in operating activities:
Net change in unrealized depreciation on investments 430,150 37,405
Net realized gain on investments (3,529,599 ) (199,724 )
Purchases of investments (13,250,664 ) (6,217,296 )
Proceeds from sales of investments 9,889,827 1,192,824
Depreciation & amortization expense — 1,287
Deferred income taxes 1,011,278 —
Common shares issued as consideration for expense payment 15,403 —
Changes in operating assets and liabilities:
Prepaid expenses and other assets (135,934 ) (32,007 )
Interest and dividends receivable (265,504 ) (62,644 )
Receivable for investment sales (75,465 ) (158,649 )
Payable for investment purchase — 1,680,000
Accounts payable and other liabilities (2,318 ) (10,047 )
Deferred interest income — —
Payable for investment purchase — —
Net cash used in operating activities (3,386,278 ) (3,457,399 )
Cash flows from financing activities:
Payments for repurchase of common stock — (158,267 )
Payments for common stock dividend (539,296 ) —
Net cash used by financing activities (539,296 ) (158,267 )
Net decrease in cash (3,925,574 ) (3,615,666 )
Cash, beginning of period 5,440,579 8,066,656
Cash, end of period $ 1,515,005 $ 4,450,990

Non-cash financing activities:
Common shares issued as consideration for investment $ 5,750 —


	Three Months Ended
	March 31, 2022		March 31, 2021
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	412,111	$	1,745,042

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided (used) in operating activities:
Net change in unrealized depreciation on investments		22,047		513,250
Net realized gain on investments		(138,770)		(2,907,999)
Purchases of investments		(7,025,000)		(9,430,664)
Proceeds from sales of investments		1,152,898		5,036,657
Deferred income taxes		(6,000)		662,691

Changes in operating assets and liabilities:
Prepaid expenses and other assets		59,000		(62,043)
Interest and dividends receivable		(238,643)		(144,136)
Receivable for investment sales		—		19,313
Accounts payable and other liabilities		35,229		21,763
Deferred interest income		272,000		144,000
Accrued income taxes		165,000		—
Payable for investment purchase		(1,900,000)		—
Net cash used in operating activities		(7,190,128)		(4,402,126)

Cash flows from financing activities:
Proceeds from line of credit		5,325,000		—
Payments for common stock dividend		—		(539,296)
Net cash provided (used) by financing activities		5,325,000		(539,296)
Net decrease in cash		(1,865,128)		(4,941,422)
Cash, beginning of period		1,936,148		5,440,579
Cash, end of period	$	71,020	$	499,157

Non-cash financing activities:
Common shares issued as consideration for investment	$	—	$	5,750

See accompanying Notes to Financial Statements

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Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

~~JUNE 30, 2021~~MARCH 31, 2022

Investment / Industry Cost Fair Value Percentage
of Net
Assets
Short-Term Non-banking Loans
Consumer - 20% secured loans $ 400,000 $ 400,000 2.82 %
Financial - 47% secured loans
Benton Financial, LLC 1,133,333 1,133,333 7.99 %
Financial - 44% secured loans
Benton Financial, LLC 840,000 840,000 5.92 %
Financial - 42% secured loans 313,333 313,333 2.21 %
Financial - 40% secured loans
Benton Financial, LLC 1,333,334 1,333,334 9.40 %
Financial - 34% secured loans 293,333 293,333 2.07 %
Financial - 12% secured loans 500,000 500,000 3.52 %
Litigation Financing - 23% secured loans
The Cross Law Firm, LLC 1,805,750 1,800,000 12.68 %
Real Estate - 15% secured loans
Alatus Development, LLC 1,250,000 1,250,000 8.81 %
Real Estate - 12% secured loans
Tailwinds, LLC 3,000,000 3,000,000 21.14 %
Total Short-Term Non-Banking Loans 10,869,083 10,863,333 76.56 %

Common Stock
Consumer
Ammo, Inc. 245,000 1,370,600 9.66 %

Preferred Stock
Information Technology 150,000 300,000 2.11 %

Warrants
Healthcare 679 — 0.00 %

Other Equity
Financial 600,000 600,000 4.23 %

Total Investments $ 11,864,762 $ 13,133,933 92.56 %

Total Cash 1,515,005 1,515,005 10.68 %

Total Investments and Cash $ 13,379,767 $ 14,648,938 103.24 %


					Percentage
					of Net
Investment / Industry	Cost		Fair Value		Assets
Short-Term Non-banking Loans
Consumer - 15% secured loans
AirDog Supplies, Inc.	$	1,250,000	$	1,250,000	9.04	%
Intelligent Mapping, LLC		2,500,000		2,500,000	18.08	%
Financial - 33.33% secured loans
Benton Financial, LLC		1,125,000		1,125,000	8.14	%
Financial - 12% secured loans		500,000		500,000	3.61	%
Litigation Financing - 23% secured loans
The Cross Law Firm, LLC		1,805,750		1,800,000	13.02	%
Real Estate - 15% secured loans		600,000		600,000	4.34	%
Tailwinds, LLC		3,000,000		3,000,000	21.70	%
Real Estate - 12% secured loans
Alatus Development, LLC		3,900,000		3,900,000	28.21	%
Real Estate - 48% secured loans
Villas at 79th, LLC		3,400,000		3,400,000	24.59	%
Total Short-Term Non-Banking Loans		18,080,750		18,075,000	130.73	%

Preferred Stock
Consumer
Wisdom Gaming, Inc		900,000		900,000	6.51	%
Information Technology		150,000		300,000	2.17	%
Total Other Equity		1,050,000		1,200,000	8.68	%

Warrants
Healthcare		679		—	0.00	%

Other Equity
Consumer		212,500		212,500	1.54	%
Financial		600,000		600,000	4.34	%
Total Other Equity		812,500		812,500	5.88	%

Total Investments	$	19,943,929	$	20,087,500	145.29	%

Total Cash		71,020		71,020	0.51	%

Total Investments and Cash	$	20,014,949	$	20,158,520	145.80	%

~~See accompanying Notes to the Financial Statements~~

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Table of Contents

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, ~~2020~~2021

Investment / Industry Cost Fair Value Percentage
of Net
Assets
Short-Term Non-banking Loans
Consumer - 20% secured loans $ 400,000 $ 400,000 3.44 %
Financial - 44% secured loans 400,000 400,000 3.44 %
Financial - 36% secured loans 500,000 500,000 4.30 %
Real Estate - 15% secured loans
Alatus Development, LLC 1,250,000 1,250,000 10.74 %
Other 239,000 239,000 2.05 %
Total Short-Term Non-Banking Loans 2,789,000 2,789,000 23.97 %

Common Stock
Consumer
Ammo, Inc. 1,750,000 3,300,000 28.34 %

Preferred Stock
Information Technology 150,000 300,000 2.58 %

Warrants
Healthcare 679 — 0.00 %

Other Equity
Leisure & Hospitality 278,897 278,897 2.40 %

Total Investments $ 4,968,576 $ 6,667,897 57.30 %

Total Cash 5,440,579 5,440,579 46.74 %

Total Investments and Cash $ 10,409,155 $ 12,108,476 104.04 %


					Percentage
					of Net
	Cost		Fair Value		Assets
Short-Term Non-banking Loans
Consumer - 15% secured loans
AirDog Supplies, Inc.	$	1,250,000	$	1,250,000	9.32	%
Financial - 52% secured loans		500,000		500,000	3.73	%
Financial - 12% secured loans		500,000		500,000	3.73	%
Litigation Financing - 23% secured loans
The Cross Law Firm, LLC		1,805,750		1,800,000	13.42	%
Real Estate - 15% secured loans		700,000		700,000	5.22	%
Tailwinds, LLC		3,000,000		3,000,000	22.36	%
Real Estate - 12% secured loans
Alatus Development, LLC		3,900,000		3,900,000	29.07	%
Total Short-Term Non-Banking Loans		11,655,750		11,650,000	86.85	%

Common Stock
Financial Services		414,128		436,175	3.25	%

Preferred Stock
Consumer
Wisdom Gaming, Inc		900,000		900,000	6.71	%
Information Technology		150,000		300,000	2.24	%
Total Other Equity		1,050,000		1,200,000	8.95	%

Warrants
Healthcare		679		—	0.00	%

Other Equity
Consumer		212,500		212,500	1.58	%
Financial		600,000		600,000	4.47	%
Total Other Equity		812,500		812,500	6.05	%

Total Investments	$	13,933,057	$	14,098,675	105.10	%

Total Cash		1,936,148		1,936,148	14.43	%

Total Investments and Cash	$	15,869,205	$	16,034,823	119.53	%

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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 on December 27, 2019. As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC. We offer short-term specialty finance solutions primarily to private businesses, small-cap public companies and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “investment securities” for purposes of federal securities law, and we monitor our investments as a whole to ensure that no more than 40% of our total assets may consist of investment securities.

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 ~~June 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~

2022.

The condensed balance sheet as of December 31, ~~2020~~2021 has been derived from the audited ~~consolidated~~ 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 for the year ended December 31, ~~2020.~~2021.

Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our Board of Directors 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, and the differences could be material. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below. The Company is 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, ~~or by the Valuation Committee of 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 ana portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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 present value 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, pursuant to our written Valuation Policy and Procedures. These policies and procedures generally require that we value our Level 3 equity investments at ~~fair market value,~~cost plus any accrued interest, unless circumstances warrant a different approach. Our Valuation Policy and Procedures provide examples of these circumstances, such as when a portfolio company ~~in which we have invested~~ 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 situations identified in our Valuation Policy and Procedures that may serve as 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 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 ~~investments~~securities with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. The fair value for short-term non-banking loans is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent to those cash flows. The discount ranges from ~~14%~~12% to ~~47%~~48% and approximate rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk.

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

On a quarterly basis, our management provides members of our Board of Directors with (i) valuation ~~reports~~updates for each investment (which reports include our cost, the most recent prior valuation and any current proposed valuation, and an indication of the valuation methodology used, together with any other supporting materials);portfolio investment; (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; (iii) quarter- or period-end statements from our custodial firms holding any of our portfolio investments; and (iv) recommendations 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. The board ~~or committee~~ then discusses 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 other than to have our entire Board of Directors involved in implementing and discharging those policies and procedures.

~~- 12 -~~

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.

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. ~~The Company does~~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, ~~2017~~2019 through ~~2020,~~2021, which are the tax years that remain subject to examination by major tax jurisdictions as of ~~June 30, 2021.~~March 31, 2022.

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 ~~or other instruments~~ 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 athe portfolio company ~~in which we have invested~~ 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 in 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.

~~Recently adopted accounting pronouncements~~

~~In December 2019, the FASB issued ASU No. 2019-12,~~ ~~Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes~~. ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is fiscal 2021 for us, with early adoption permitted. The adoption of the ASU effective January 1, 2021 did not have a material impact on the Company’s financial statements.

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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.

NOTE 3 – INVESTMENTS

The following table shows the composition of our ~~investments~~investment portfolio by major class, at amortized cost and fair value, as of ~~June 30,~~March 31, 2022 (together with the corresponding percentage of the fair value of our total portfolio of investments):


	Investments at		Percentage of		Investments at		Percentage of
	Amortized Cost		Amortized Cost		Fair Value		Fair Value
Short-term Non-banking Loans	$	18,080,750	90.6	%	$	18,075,000	90.0	%
Preferred Stock		1,050,000	5.3			1,200,000	5.9
Warrants		679	—			—	—
Other Equity		812,500	4.1			812,500	4.1
Total	$	19,943,929	100.0	%	$	20,087,500	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, 2021 (together with the corresponding percentage of the fair value of our total portfolio of investments):

	As of June 30, 2021
	Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value

											Investments at		Percentage of		Investments at		Percentage of
											Amortized Cost		Amortized Cost		Fair Value		Fair Value
Short-term Non-banking Loans	$	10,869,083		91.6	%	$	10,863,333		82.7	%	$	11,655,750	83.7	%	$	11,650,000	82.6	%
Preferred Stock		150,000		1.3			300,000		2.3			1,050,000	7.5			1,200,000	8.5
Common Stock		245,000		2.1			1,370,600		10.4			414,128	3.0			436,175	3.1
Warrants		679		—			—		—			679	—			—	—
Other Equity		600,000		5.0			600,000		4.6			812,500	5.8			812,500	5.8
Total	$	11,864,762		100.0	%	$	13,133,933		100.0	%	$	13,933,057	100.0	%	$	14,098,675	100.0	%

The following table shows the composition of our ~~investments~~investment portfolio by ~~major class, at amortized cost and~~industry grouping, based on fair value as of ~~December~~March 31, ~~2020 (together with the corresponding percentage of the fair value of our total investments):~~2022:


	As of March 31, 2022
	Investments at		Percentage of
	Fair Value		Fair Value
Consumer	$	4,862,500	24.2	%
Financial		4,025,000	20.0
Information Technology		300,000	1.5
Real Estate		10,900,000	54.3
Total	$	20,087,500	100.0	%

As of December 31, 2020
Investments at
Amortized Cost Percentage of
Amortized Cost Investments at
Fair Value Percentage of
Fair Value
Short-term Non-banking Loans $ 2,789,000 56.2 % $ 2,789,000 41.8 %
Preferred Stock 150,000 3.0 300,000 4.5
Common Stock 1,750,000 35.2 3,300,000 49.5
Warrants 679 — — —
Other Equity 278,897 5.6 278,897 4.2
Total $ 4,968,576 100.0 % $ 6,667,897 100.0 %

The following table shows the composition of our ~~investments by industry grouping, based on fair value as of June 30, 2021:~~

As of June 30, 2021
Investments at
Fair Value Percentage of
Fair Value
Consumer $ 1,770,600 13.5 %
Financial 6,813,333 51.8
Information Technology 300,000 2.3
Real Estate 4,250,000 32.4
— —
Total $ 13,133,933 100.0 %

~~The following table shows the composition of our investments~~investment portfolio by industry grouping, based on fair value as of December 31, ~~2020:~~2021:

	As of December 31, 2020
	Investments at Fair Value		Percentage of Fair Value

						As of December 31, 2021
						Investments at		Percentage of
						Fair Value		Fair Value
Consumer	$	3,700,000		55.5	%	$	2,362,500	16.8	%
Financial		900,000		13.5			3,836,175	27.2
Information Technology		300,000		4.5			300,000	2.1
Leisure & Hospitality		278,897		4.2
Real Estate		1,489,000		22.3			7,600,000	53.9
Total	$	6,667,897		100.0	%	$	14,098,675	100.0	%

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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 ~~investments~~investment portfolio as of ~~June 30, 2021~~March 31, 2022 may differ materially from values that would have been used had a readily available market for ~~the securities or~~those investments existed.

The following table presents the fair value measurements of our portfolio investments by major class, as of ~~June 30, 2021,~~March 31, 2022, according to the fair value hierarchy:

	As of June 30, 2021
	Level 1		Level 2		Level 3		Total

									As of March 31, 2022
									Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	10,863,333	$	10,863,333	$	—	$	—	$	18,075,000	$	18,075,000
Preferred Stock						300,000		300,000		—		—		1,200,000		1,200,000
Common Stock		1,370,600		—		—		1,370,600
Warrants		—		—		—		—
Other Equity		—		—		600,000		600,000		—		—		812,500		812,500
Total	$	1,370,600	$	—	$	11,763,333	$	13,133,933	$	—	$	—	$	20,087,500	$	20,087,500

The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, ~~2020,~~2021, according to the fair value hierarchy:

	As of December 31, 2020
	Level 1		Level 2		Level 3		Total

									As of December 31, 2021
									Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	2,789,000	$	2,789,000	$	—	$	—	$	11,650,000	$	11,650,000
Preferred Stock		—		—		300,000		300,000		—		—		1,200,000		1,200,000
Common Stock		3,300,000		—		—		3,300,000		436,175		—		—		436,175
Warrants		—		—		—		—
Other Equity		—		—		278,897		278,897		—		—		812,500		812,500
Total	$	3,300,000	$	—	$	3,367,897	$	6,667,897	$	436,175	$	—	$	13,662,500	$	14,098,675

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the ~~six~~three months ended ~~June 30, 2021:~~March 31, 2022:

	For the six months ended June 30, 2021
	ST Non-banking Loans			Preferred Stock		Common Stock		Warrants		Other Equity
Balance as of January 1, 2021	$	2,789,000		$	300,000	$	—	$	—	$	278,897

													For the three months ended March 31, 2022
													ST Non-banking				Common
													Loans		Preferred Stock		Stock		Warrants		Other Equity
Balance as of January 1, 2022													$	11,650,000	$	1,200,000	$	—	$	—	$	812,500
Net change in unrealized appreciation		—			—		—		—		—			—		—		—		—		—
Purchases and other adjustments to cost		12,513,333			—		—		—		600,000			7,025,000		—		—		—		—
Sales and redemptions		(4,439,000	)		—		—		—		(278,897	)		(600,000)		—		—		—		—
Net realized loss		—			—		—		—		—			—		—		—		—		—
Balance as of June 30, 2021	$	10,863,333		$	300,000	$	—	$	—	$	600,000
Balance as of March 31, 2022													$	18,075,000	$	1,200,000	$	—	$	—	$	812,500

The net change in unrealized ~~appreciation~~depreciation for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 attributable to Level 3 portfolio investments still held as of ~~June 30, 2021 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement~~March 31, 2022 was $0.

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Table of ~~operations.~~Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

The following table lists our Level 3 investments held as of ~~June 30, 2021~~March 31, 2022 and the unobservable inputs used to determine their valuation:


Security Type	3/31/22 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	18,075,000	discounted cash flow	determining private company credit rating	12-48	%
Other Equity		812,500	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
	$	20,087,500

Security Type 6/30/21 FMV Valuation Technique Unobservable Inputs Range
ST Non-banking Loans $ 10,863,333 discounted cash flow determining private company interest rate based on credit 12-47%
Other Equity 600,000 last secured funding known by company economic changes since last funding
Preferred Stock 300,000 last funding secured by company economic changes since last funding
$ 11,763,333

~~- 15 -~~

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the ~~year~~period ended December 31, ~~2020:~~2021:

	For the year ended December 31, 2020
	ST Non-banking Loans			Preferred Stock		Common Stock		Warrants		Other Equity
Balance as of January 1, 2020	$	—		$	300,000	$	—	$	—	$	534,200

													For the year ended December 31, 2021
													ST
													Non-banking		Preferred		Common
													Loans		Stock		Stock		Warrants		Other Equity
Balance as of January 1, 2021													$	2,789,000	$	300,000	$	—	$	—	$	278,897
Net change in unrealized appreciation		—			—		—		—		486,018			—		—		—		—		—
Purchases and other adjustments to cost		7,543,000			—		—		—		—			24,765,333		900,000		—		—		812,500
Sales and redemptions		(4,754,000	)		—		—		—		(91,313	)		(15,904,333)		—		—		—		(278,897)
Net realized loss		—			—		—		—		(650,008	)		—		—		—		—		—
Balance as of December 31, 2020	$	2,789,000		$	300,000	$	—	$	—	$	278,897
Balance as of December 31, 2021													$	11,650,000	$	1,200,000	$	—	$	—	$	812,500

The net change in unrealized depreciation for the year ended December 31, ~~2020~~2021 attributable to Level 3 portfolio investments still held as of December 31, ~~2020 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.~~

2021 was $0.

The following table lists our Level 3 investments held as of December 31, ~~2020~~2021 and the unobservable inputs used to determine their valuation:

Security Type

12/31/20 FMV

Valuation Technique

Unobservable Inputs

Range

12/31/21 FMV

Valuation Technique

Unobservable Inputs

Range

ST Non-banking Loans

2,789,000

discounted cash flow

determining private company interest rate based on credit

14-44%

11,650,000

discounted cash flow

determining private company credit rating

12-44

Other Equity

278,897

last secured funding known by company

economic changes since purchase

812,500

last secured funding known by company

economic changes since last funding

Preferred Stock

300,000

last funding secured by company

economic changes since last funding

1,200,000

last funding secured by company

economic changes since last funding

3,367,897

13,662,500

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a ~~Code of Ethics and certain other policies relating to~~ conflicts of interest and related-party transactions ~~as well as policies and procedures relating to what regulations applicable.~~policy. Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested. ~~Our Board of Directors has adopted a policy to require our disclosure of these instances in our periodic filings with~~In this regard, during the ~~SEC. Our only related-party transaction requiring disclosure under~~period covered by this ~~policy relates to an August 10, 2018 loan transaction~~report we entered into ~~with Elizabeth Zbikowski. Ms. Zbikowski, along with her husband Scott Zbikowski, owns approximately 1,765,000 shares of our common stock. In~~ the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory note was subsequently amended such that it matures in August 2021. The note bears interest payable monthly at the rate of 10% per annum and is secured by the debtors’ pledge to us of 625,000 shares of our common stock. The pledged shares are held in physical custody for us by our custodial agent Millennium Trust Company.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 1,765,000 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 in August 2022. 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 625,000 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 7 for further details.

NOTE 6 – INCOME TAXES

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

As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, we have a net deferred tax liability of ~~$363,000~~$39,000 and ~~$258,000,~~$45,000, respectively. 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. In the event the actual results differ from these estimates in future periods, we may need to ~~adjust the~~record a valuation allowance, which could materially impact our financial position and results of operations. We will continue to assess the need for a valuation allowance in future periods.

~~- 16 -~~

As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 we had accrued income taxes of ~~$920,000~~$1,434,000 and ~~$13,722~~$1,269,000, respectively. We recorded income taxes of ~~approximately $349,000 (28.9~~$159,000 (28 percent effective tax rate) and ~~$0 (0~~$662,691 (29 percent effective tax rate) during the three months ended ~~June 20,~~March 31, 2022 and March 31, 2021, respectively. $1,362,000 of federal and ~~June 30, 2020, respectively. We recorded income taxes of approximately $1,011,000 (28.8 percent effective~~state tax ~~rate) and $0 (0 percent effective tax rate) during the six months ended June 30, 2021 and June 30, 2020, respectively. Due to the full valuation allowances in periods prior to December~~payments were made after March 31, ~~2020, our effective tax rate was expected to be near zero percent, therefore income tax accruals and expense were not material for those prior periods presented.~~

2022.

As of December 31, 2020, we had a federal NOL of approximately ~~$371,000.~~$350,000. The remaining federal NOL ~~is expected~~was used in its entirety to ~~be completely used and~~ offset taxable income ~~by June 30, 2021. The~~during the 2021 tax year. At March 31, 2022, we have no federal ~~NOL may be carried forward~~or state NOLs available to offset ~~future~~ taxable income, ~~subject to applicable provisions of the Internal Revenue Code.~~all NOLs have been exhausted. Due to tax reform enacted in 2017, any newly created NOLs ~~created after 2017~~will carry forward indefinitely. ~~The estimated federal NOL that does not expire included~~

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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 ~~total above~~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 ~~$356,000. States may vary~~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.

The Loan Agreement provides 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 ~~their treatment~~the form of ~~post-2017 NOLs. We lost some state NOL carryforwards when we filed final 2019 tax returns in several states.~~shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The ~~remaining state NOLs are expected~~Loan Agreement grants the Lenders piggyback registration rights subject to ~~be completely used~~customary terms, conditions and ~~offset taxable income by June 30, 2021. The remaining state NOL carryforwards may expire in 2036 and 2037 if not used.~~exceptions.

At March 31, 2022, the balance outstanding on the line was $5,325,000 with a maturity date of January 3, 2027.

NOTE 7 8 – SHAREHOLDERS’ EQUITY

At ~~June 30, 2021,~~March 31, 2022, we had 10,790,413 shares of common stock issued and ~~outstanding.~~outstanding.

On December 8, 2020 we announced that our Board of Directors had approved a cash dividend of $0.05 per common share. The dividend was paid on January 4, 2021 to shareholders of record as of the close of business on December 21, 2020.

NOTE 89 – 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 June 30,
2021 2020
Numerator: Net increase (decrease) in net assets resulting from operations $ 781,506 $ 593,370
Denominator: Weighted-average number of common shares outstanding 10,790,413 10,882,039
Basic and diluted net gain (loss) per common share $ 0.07 $ 0.05


	For the Three Months Ended
	March 31,
	2022		2021
Numerator: Net increase (decrease) in net assets resulting from operations	$	412,111	$	1,745,042
Denominator: Weighted-average number of common shares outstanding		10,790,413		10,785,913
Basic and diluted net gain (loss) per common share	$	0.04	$	0.16

For the Six Months Ended June 30,
2021 2020
Numerator: Net increase (decrease) in net assets resulting from operations $ 2,526,548 $ 311,452
Denominator: Weighted-average number of common shares outstanding 10,788,175 10,974,721
Basic and diluted net gain (loss) per common share $ 0.23 $ 0.03

NOTE 910 – OPERATING LEASES

We ~~are~~were subject to ~~two~~2 non-cancelable operating leases for office space ~~expiring~~which expired March 31, 2022. ~~These~~The leases dodid not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases dodid not contain contingent rent provisions. ~~The leases do not include options to renew.~~

Because our lease does 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~~weighted average discount rate as of December 31, ~~2020~~2021 was 4.5% ~~and the weighted-average remaining lease term is one year.~~.

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

Under ASC 840, rent expense for office facilities for the three months ended ~~June 30,~~March 31, 2022 and March 31, 2021 was $16,812 and ~~June 30, 2020 was $16,337 and $16,569,~~$16,689, respectively.

~~- 17 -~~

The components of our operating lease were as follows for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021:

	Three Months Ended		Six Months Ended
	June 30, 2021		June 30, 2021

					Three Months Ended
					March 31, 2022		March 31, 2021
Operating lease costs	$	4,779	$	9,558	$	4,779	$	4,779
Variable lease cost		4,125		8,603		4,601		4,478
Short-term lease cost		7,433		14,865		7,432		7,432
Total	$	16,337	$	33,026	$	16,812	$	16,689

~~Supplemental balance sheet information consisted of~~On March 22, 2022, we signed an extension to our operating lease for office space which begins April 2, 2022 and expires October 2, 2023. The lease does not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the ~~following at June 30, 2021:~~

Operating Lease
Right-of-use assets $ 14,279

Operating Lease Liability $ 15,973
Less: short term portion (15,973 )
Long term portion $ —

lease does not contain contingent rent provisions.

Maturity analysis under this lease ~~agreements consisted~~extension agreement consists of the following as of ~~June 30, 2021:~~March 31, 2022:

	Operating Leases
2021	$	10,581

				Operating
				Leases
2022		5,449		$	18,164
2023					14,859
Total lease payments		16,030			33,023
Less: interest		(57	)		(1,035)
Present value of lease liabilities	$	15,973		$	31,988

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

NOTE 1011 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 through ~~2017:~~2018:

Six Months Ended June 30,
2021 2020 2019 2018 2017
Per Share Data ⁽¹⁾
Net asset value at beginning of period $ 1.08 0.91 1.02 0.87 0.77
Net investment income (loss) 0.04 0.01 (0.03 ) (0.02 ) (0.02 )
Net realized and unrealized gains (losses) 0.28 0.02 0.02 0.09 0.04
Provision for income taxes (0.09 ) 0.00 0.00 0.00 0.00
Repurchase of common stock 0.00 0.02 0.00 0.00 0.00
Payment of common stock dividend 0.00 0.00 (0.05 ) 0.00 0.00
Net asset value at end of period $ 1.31 0.96 0.96 0.94 0.79

Ratio / Supplemental Data
Per share market value of investments at end of period $ 1.22 0.65 0.70 0.82 0.51
Shares outstanding at end of period 10,790,413 10,696,735 11,067,402 11,067,402 12,151,493
Average weighted shares outstanding for the period 10,788,175 10,974,721 11,067,402 11,067,402 12,151,493
Net assets at end of period $ 14,188,588 10,221,718 10,588,689 11,278,889 9,555,551
Average net assets ⁽²⁾ $ 13,073,718 10,025,622 12,304,975 9,955,674 9,504,851
Total investment return 21.30 % 3.30 % (5.88 )% 8.05 % 2.60 %
Portfolio turnover rate (3) 75.65 % 11.90 % 7.11 % 11.55 % 11.87 %
Ratio of operating expenses to average net assets ⁽³⁾ (11.72 )% (9.41 )% (7.70 )% (6.98 )% (7.38 )%
Ratio of net investment income (loss) to average net assets ⁽³⁾ 6.88 % 3.02 % (6.40 )% (5.53 )% (5.89 )%
Ratio of realized gains (losses) to average net assets ⁽³⁾ 61.92 % 4.06 % 57.36 % (12.79 )% 16.51 %


	Three Months Ended March 31,
	2022			2021		2020		2019		2018
Per Share Data ⁽¹⁾
Net asset value at beginning of period	$	1.24		1.08		0.91		1.02		0.87
Net investment income (loss)		0.04		0.00		0.00		(0.02)		(0.01)
Net realized and unrealized gains (losses)		0.01		0.22		(0.03)		0.12		0.06
Provision for income taxes		(0.01)		(0.06)		0.00		0.00		0.00
Payment of common stock dividend		0.00		0.00		0.00		(0.05)		0.00
Net asset value at end of period	$	1.28		1.24		0.88		1.07		0.92

Ratio / Supplemental Data
Per share market value of investments at end of period	$	1.86		1.25		0.41		0.78		0.76
Shares outstanding at end of period		10,790,413		10,786,913		11,067,402		11,067,402		11,067,402
Average weighted shares outstanding for the period		10,790,413		10,785,913		11,067,402		11,067,402		11,863,392
Net assets at end of period	$	13,826,160		13,391,679		9,786,615		11,890,188		9,783,191
Average net assets ⁽²⁾	$	13,620,104		12,516,283		9,927,574		12,911,895		9,770,410
Total investment return		3.23	%	14.81	%	(3.30)	%	4.90	%	5.75	%
Portfolio turnover rate (3)		8.46	%	40.24	%	0.75	%	0.93	%	0.80	%
Ratio of operating expenses to average net assets ⁽³⁾		(15.28)	%	(16.20)	%	(7.82)	%	(6.06)	%	(7.52)	%
Ratio of net investment income (loss) to average net assets ⁽³⁾		14.24	%	0.42	%	0.87	%	(4.87)	%	(6.16)	%
Ratio of realized gains (losses) to average net assets ⁽³⁾		4.20	%	133.32	%	1.00	%	137.57	%	2.17	%

~~- 18 -~~

(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 11~~ ~~– General Uncertainty~~

On March 11, 2020, the World Health Organization declared the outbreak of the coronavirus (COVID-19) a pandemic. As a result, economic uncertainties and market volatility have arisen which are likely to negatively impact our investment valuations and net increase or decrease in net assets resulting from operations. Other financial impacts could occur though such potential impact is difficult to determine at this time.

NOTE 12 – Subsequent Events

On April 11, 2022, we issued 15,000 shares of restricted common stock to each of our three independent directors, and 10,000 shares of restricted common stock to our two non-independent directors. The shares are subject to forfeiture in the event the recipients are terminated from their board positions or employment, if applicable, on or prior to January 23, 2023.

On ~~August 2, 2021, Tailwind Real Estate, LLC pre-paid~~April 12, 2022 we received $3,900,000 in ~~full all~~advanced principal repayment of ~~their obligations owing~~a short-term loan that had a maturity date of September 27, 2022. The note bore interest at a rate of 12%.

On April 18, 2022 we received $1,800,000 in advanced principal repayment of a short-term loan that had a maturity date of September 30, 2022. The note bore interest at a rate of 23%.

On April 26, 2022, we filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission seeking to ~~us, including $3,000,000~~register an offer and sale of ~~loan principal provided at March 31, 2021, and $18,500~~shares of ~~accrued but unpaid interest thereon.~~our common stock in a firm-commitment underwritten offering.

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Table of Contents

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 provide non-bank lending and specialty finance to companies and individuals on both a secured and unsecured basis. The ~~significant majority by dollar amount of~~ loans we provide typically have maturities that range from 9 to 12 months and may 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;~~sale, other real estate ~~projects;~~projects, title ~~loans;~~loans, cash inventory ~~needs: receivables financing (e.g., factoring or similar);~~needs, inventory financing, or for other purposes. We intend to remain opportunistic, however, and may engage in transactions that involve 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.

~~- 19 -~~

Our principal sources of income are interest, dividends and other fees associated with lending such as origination fees, closing fees or exit fees. We may also receive reimbursement of legal costs associated with loan documentation. Our statement of operations also reflect increases and decreases in the carrying value of our asset and investments (i.e., unrealized appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview. ~~Furthermore, we are including a full description of our business in this report.~~

~~BUSINESS~~

~~Overview~~

Mill City 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 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.

~~Descriptions~~

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. First, short-term lending requires a potential borrower to identify for us a near-term source of repayment for 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 that mitigate these risks. Second, 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 [Tailwind]~~

~~Short-term unsecured loans (with an option to acquire collateral security) to a business [DCP]~~

~~Short-term secured loans to a business for operating capital [Alatus]~~

~~Short-term secured loans to an individual owed a forthcoming tax refund~~

- 2019 -

~~In addition, we are presently evaluating our ability to enter into other kinds~~Table 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 investment 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.

~~Competition~~

The market for specialty finance is competitive, largely as a result of the participation of various types of professionally managed pooled investment funds (e.g., hedge funds, debt/mezzanine debt funds, private equity funds) seeking the high returns that are possible in specialty finance and hard-money lending.

Nevertheless, we believe we are well positioned to compete successfully due to our flexibility and creativity with our transactional structures and terms. We expect to continue to have significant flexibility in selecting and structuring our transactions. In part, this is because we will not be subject to many of the regulatory limitations that govern traditional or institutional lenders. We believe this will afford us broad latitude as to the nature of the transactions in which we may participate, and the specific terms to which we may agree. We believe that this flexible approach to structuring our transactions and investments will facilitate positive, long-term relationships with our borrowers. In addition, the freedom afforded to us through the lack of substantive regulation governing the types of transactions we enter into and our methods of operation in general permits us to allocate resources to those types of transactions that we believe may lead to the highest risk-adjusted returns or the steadiest stream of such returns.

The only significant limitation on our ability to flexibly structure transactions arises from our desire to remain outside the regulations 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.

~~Finally, we believe we are able to manage the evaluation and due-diligence process swiftly and efficiently, largely as a result of our management team’s diverse experience in transactional finance.~~

~~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.

Contents

~~- 21 -~~

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~~

~~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, and~~

~~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.

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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 U.S. Securities and Exchange Commission, 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. Ct. 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.

~~In our financial statements for the year ended December 31, 2019, revenues from our operations (as a BDC) relate to the earnings we received from our portfolio investments.~~

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~~Our Management and Employees~~

Currently, Mr. Douglas M. 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 the Company.

PORTFOLIO AND INVESTMENT ACTIVITY

During the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, we made ~~$13,250,664~~$7,025,000 of investments in portfolio companies and had ~~$9,889,827~~$1,152,898 of redemptions and repayments, resulting in net investments at amortized cost of ~~$11,864,762 at the end~~$19,943,929 as of ~~the period.~~

March 31, 2022.

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, we made ~~$6,217,296~~$9,430,664 of investments in portfolio companies and had ~~$1,192,824~~$5,036,657 of redemptions and repayments, resulting in net investments at amortized cost of ~~$7,200,566 at the end~~$12,276,332 as of ~~the period.~~

March 31, 2021.

Our ~~investment~~portfolio composition by major class, based on fair value at ~~June 30, 2021,~~March 31, 2022, was as follows:

	Investments at Fair Value		Percentage of Fair Value

						Investments at		Percentage of
						Fair Value		Fair Value
Short-term Non-banking Loans	$	10,863,333		82.7	%	$	18,075,000	90.0	%
Equity/Other		2,270,600		17.3			2,012,500	10.0
Total	$	13,133,933		100.0	%	$	20,087,500	100.0	%

RESULTS OF OPERATIONS

Our operating results for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~June 30,~~March 31, 2021 were as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021				2020

													For the Three Months Ended
													March 31,
													2022			2021
Investment Income:	$	675,549		$	283,456		$	1,222,391		$	468,435			$	1,000,206		$	546,842
Operating Expenses:		(250,156	)		(213,910	)		(784,014	)		(319,302	)			(545,818)			(533,858)
Net Investment Gain	$	425,393		$	69,546		$	438,377		$	149,133			$	454,388		$	12,984

Investment Income

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt ~~instruments~~securities we own. 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. In some cases, the interest on our investments 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. WeFinally, we may also generate revenue in the form of commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, our total investment income was ~~$675,549~~$1,000,206 and ~~$1,222,391, respectively. For the three and six months ended June 30, 2020, our total investment income was $283,456 and $468,435,~~$546,842, respectively. The increase is due to the ~~change~~increase in our ~~business structure which now focuses on~~ short-term non-bank ~~lending.~~lending activity. Our loan portfolio generates interest income, with an average rate on the loans of ~~25%~~22.4%.

Professional Fees

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, we had ~~$77,539~~$198,518 and ~~$220,347~~$142,808 of professional fees expense, respectively. ~~For the three and six months ended June 30, 2020, we had $90,529 and $74,297 professional fees expense, respectively~~ The increase ~~for the six months~~ in ~~2021~~2022 is due to an increase in our short-term non-bank lending activity and the legal costs incurred to close ~~on several new short-term banking loans. In 2020, we received a refund during the first quarter of $59,957 relating to certain audit expenses incurred during 2018 and 2019.~~those deals.

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Net Realized Gain from Investments

For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, we had ~~$4,853,170 and $9,889,827, respectively,~~$1,152,898 of ~~sales~~proceeds from sale of investments, resulting in ~~$621,600 and $3,529,599, respectively,~~$138,770 of realized gains. For the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, we had ~~$971,044 and $1,192,824, respectively,~~$5,036,657 of ~~sales~~proceeds from sale of investments, resulting in ~~$175,222 and $199,724, respectively,~~$2,907,999 of realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2022, our investments included $22,047 of unrealized depreciation. For the three months ended March 31, 2021, our investments ~~had $83,100~~included $513,250 of unrealized ~~appreciation and $430,150~~depreciation.

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Table of ~~unrealized depreciation, respectively. For the three and six months ended June 30, 2020, our investments had $348,602 of unrealized appreciation and $37,405 of unrealized depreciation, respectively.~~Contents

Changes in Net Assets from Operations

For the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, we recorded a net increase in net assets from operations of ~~$781,506 and $2,526,548, respectively.~~$412,111. Based on the weighted-average number of shares of common stock outstanding for the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, our per-share net increase in net assets from operations was ~~$0.07 and $0.23, respectively.~~$0.04. For the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, we recorded a net increase in net assets from operations of ~~$593,370 and $311,452, respectively.~~$1,745,042. Based on the weighted-average number of shares of common stock outstanding for the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, our per-share net increase in net assets from operations was ~~$0.05 and $0.03, respectively.~~$0.16.

Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~

The level of cash flows used in or provided by operating activities is affected by the ~~purchases~~timing of ~~investments,~~purchases, redemptions and repayments of portfolio investments, among other factors. For the ~~six~~three months ended ~~June 30,~~March 31, 2022, net cash used in operating activities was $7,190,128. Cash flows used in operating activities for the three months ended March 31, 2022 were primarily related to purchases of investments totaling $7,025,000. For the three months ended March 31, 2021, net cash used in operating activities was ~~$3,401,681.~~$4,402,126. Cash flows ~~used~~provided in operating activities for the ~~six~~three months ended ~~June 30,~~March 31, 2021 were primarily related to purchases of investments ~~of $13,250,664,~~totaling $9,430,664, offset ~~mostly~~ by ~~redemptions and~~ repayments of investments totaling $9,889,827. For the six months ended June 30, 2020, net cash used in operating activities was $3,457,399. Cash flows provided in operating activities for the six months ended June 30, 2020 were primarily related to purchases of investments of $6,217,296, offset mostly by redemptions and repayments of investments totaling $1,192,824.$5,036,657.

FINANCIAL CONDITION

As of ~~June 30, 2021,~~March 31, 2022, we had cash of ~~$1,515,005,~~$71,020, a decrease of ~~$3,925,574~~$1,865,128 from December 31, ~~2020.~~2021. The primary use of our existing funds and any funds raised in the future is expected to be for our investments ~~cash distributions to our shareholders~~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.~~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, 2022.

On April 26, 2022, we filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission seeking to register an offer and sale of shares of our common stock in a firm-commitment underwritten offering. To the extent our Board of Directors determines in the future, based on our financial condition and capital market conditions, that additional capital would allow us to take advantage of additional investment opportunities, we may seek to raise additional equity capital or to engage in borrowing.

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, ~~2020.~~2021.

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OFF-BALANCE-SHEET ARRANGEMENTS

During the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.

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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.

~~our future operating results;~~

~~the success of our investments;~~

~~our relationships with third parties;~~

~~the dependence of our success on the general economy and its impact on the industries in which we invest;~~

~~the ability of our portfolio companies to achieve their objectives;~~

~~our expected financings and investments;~~

~~our regulatory structure and tax treatment;~~

~~the adequacy of our cash resources and working capital; and~~

~~the timing of cash flows, if any, we receive from our investments.~~

The foregoing list is not exhaustive. For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on March 10, 2021 (related to our year ended December 31, ~~2020)~~2021) and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.

~~ITEM 4.~~

~~CONTROLS AND PROCEDURES~~

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 ~~June 30, 2021,~~March 31, 2022, 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 are effective as of ~~June 30, 2021.~~

March 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

~~ITEM 6.~~

~~EXHIBITS~~

	~~Exhibit~~ ~~Number~~		~~Description~~
Exhibit Number	~~3.1~~	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	~~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	~~31.1~~ *	*	Section 302 Certification of the Chief Executive Officer
31.2	~~31.2~~ *	*	Section 302 Certification of the Chief Financial Officer
32.1	~~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
101.INS	*	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	*	Inline XBRL Taxonomy Extension Schema Document
101.CAL	*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	*	Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	*	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	*	Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)

* 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: ~~August~~May 13, ~~2021~~2022	By:	/s/ Douglas M. Polinsky
		~~Douglas~~ DOUGLAS M. ~~Polinsky~~POLINSKY
		Chief Executive Officer


Date: ~~August~~May 13, ~~2021~~2022	By:	/s/ Joseph A. Geraci, II
		~~Joseph~~ JOSEPH A. ~~Geraci,~~GERACI, II
		Chief Financial Officer

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