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 ~~September 30, 2022~~March 31, 2023

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

Commission File Number 001-41472

~~__________________________~~

MILL CITY VENTURES III, LTD.

(Exact name of registrant as specified in its charter)

~~__________________________~~

Minnesota		90-0316651
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1907 Wayzata Blvd, #205, Wayzata, Minnesota		55391
(Address of principal executive offices)		(Zip Code)

(952) 479-1923

(Registrant’s telephone number, including area code)

__________________________

N/A

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

__________________________

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

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

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

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

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

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

As of ~~November 18, 2022,~~May 15, 2023, Mill City Ventures III, Ltd. had 6,185,255 shares of common stock, and no other classes of capital stock, outstanding.

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended ~~September 30, 2022~~March 31, 2023

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements (unaudited)	3

	Condensed Balance Sheets – ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	3

	Condensed Statements of Operations – Three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and March 31, 2022 ~~and September 30, 2021~~	4

	Condensed Statements of Shareholders’ Equity – Three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and March 31, 2022 ~~and September 30, 2021~~	5

	Condensed Statements of Cash Flows – ~~Nine~~Three months ended ~~September 30,~~March 31, 2023 and March 31, 2022 ~~and September 30, 2021~~	7 6

	Condensed Schedule of Investments – ~~September 30, 2022~~March 31, 2023 and Schedule of Investments – December 31, ~~2021~~2022	87

	Condensed Notes to Financial Statements – ~~September 30, 2022~~March 31, 2023	109

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

Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION	23

Item 6.	Exhibits	23

SIGNATURES		24

- 2 -

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

	September 30, 2022 (unaudited)			December 31, 2021			March 31, 2023 (unaudited)			December 31, 2022
ASSETS
Investments, at fair value:	$	18,063,248		$	14,098,675		$	19,712,356		$	16,708,432
Non-control/non-affiliate investments (cost: $17,913,927 and $13,933,057 respectively)
Non-control/non-affiliate investments (cost: $19,715,304 and $17,359,804 respectively)
Cash		1,861,650			1,936,148			439,829			1,089,641
Note receivable, related party		250,000			250,000			250,000			250,000
Prepaid expenses		116,307			83,674			267,568			218,440
Receivable for sale of investments		—			—
Interest and dividend receivables		939,299			324,350			366,391			250,879
Right-of-use lease asset		21,563			4,984
Right-of-use operating lease asset								10,903			16,398
Deferred taxes		4,000			—			461,000			201,000
Total Assets	$	21,256,067		$	16,697,831		$	21,508,047		$	18,734,790

LIABILITIES
Accounts payable							$	91,038		$	776,514
Line of credit	$	2,313,000		$	—			2,750,000			—
Accounts payable		134,000			64,028
Dividend payable		—			100
Payable for purchase of investments		—			1,900,000
Lease liability		21,672			5,654
Accrued income tax		128,800			1,269,000
Deferred taxes		—			45,000
Operating lease liability								11,067			16,562
Deferred interest income								42,217			70,154
Total Liabilities		2,597,472			3,283,782			2,894,322			863,230
Commitments and Contingencies

SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (111,111,111 authorized; 6,185,255 and 4,795,739 outstanding)		12,215			10,790
Common stock, par value $0.001 per share (111,111,111 authorized; 6,185,255 outstanding)								12,215			12,215
Additional paid-in capital		15,043,291			10,694,163			15,043,291			15,043,291
Additional paid-in capital - stock options								1,460,209			—
Accumulated deficit		(1,159,665	)		(1,159,665	)		(1,159,665	)		(1,159,665	)
Accumulated undistributed investment loss		(1,100,397	)		(1,877,667	)		(1,853,206	)		(1,086,739	)
Accumulated undistributed net realized gains on investment transactions		5,713,830			5,580,810			5,113,829			5,713,829
Net unrealized appreciation in value of investments		149,321			165,618
Total Shareholders’ Equity (Net Assets)		18,658,595			13,414,049
Total Liabilities and Shareholders’ Equity	$	21,256,067		$	16,697,831
Net unrealized appreciation (depreciation) in value of investments								(2,948	)		(651,371	)
Total Shareholders' Equity (net assets)								18,613,725			17,871,560
Total Liabilities and Shareholders' Equity							$	21,508,047		$	18,734,790
Net Asset Value Per Common Share	$	3.02		$	2.80		$	3.01		$	2.89

See accompanying Notes to Financial Statements

- 3 -

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021			March 31, 2023			March 31, 2022
Investment Income
Interest income	$	1,115,224		$	755,601		$	3,351,935		$	1,977,992		$	864,028		$	1,000,206
Dividend income		—			—			—			—
Total Investment Income		1,115,224			755,601			3,351,935			1,977,992			864,028			1,000,206
Operating Expenses
Professional fees		916,359			79,950			1,309,348			300,297			129,851			198,518
Payroll		122,477			80,840			433,461			468,266			1,130,439			196,442
Insurance		27,016			27,890			84,092			80,023			27,000			30,097
Occupancy		18,589			16,689			54,542			49,716			19,043			16,812
Director’s fees		30,000			30,000			147,073			90,000
Director's fees														532,968			30,000
Interest expense		46,779			—			164,632			—			34,667			66,939
Other general and administrative		18,572			4,213			34,717			35,294			15,827			7,010
Total Operating Expenses		1,179,792			239,582			2,227,865			1,023,596			1,889,795			545,818
Net Investment Gain (Loss)		(64,568	)		516,019			1,124,070			954,396			(1,025,767	)		454,388
Realized and Unrealized Gain (Loss) on Investments
Net realized gain on investments		—			289,138			133,020			3,818,737
Net realized gain (loss) on investments														(600,000	)		138,770
Net change in unrealized appreciation (depreciation) on investments		—			(774,169	)		(16,297	)		(1,204,319	)		648,423			(22,047	)
Net Realized and Unrealized Gain (Loss) on Investments		—			(485,031	)		116,723			2,614,418
Net Realized and Unrealized Gain on Investments														48,423			116,723
Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes		(64,568	)		30,988			1,240,793			3,568,814		$	(977,344	)	$	571,111

Provision For (Benefit From) Income Taxes		(28,442	)		(300	)		346,800			1,010,978
Provision (Benefit) for Income Taxes														(259,300	)		159,000
Net Increase (Decrease) in Net Assets Resulting from Operations	$	(36,126	)	$	31,288		$	893,993			2,557,836		$	(718,044	)	$	412,111

Net Increase (Decrease) in Net Assets Resulting from Operations per share:
Basic and diluted	$	(0.01	)	$	0.01		$	0.18		$	0.53		$	(0.12	)	$	0.09

Weighted-average number of common shares outstanding - basic and diluted		5,512,737			4,795,739			5,045,830			4,795,075			6,185,255			4,795,739

See accompanying Notes to Financial Statements

- 4 -

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended September 30, 2022

Common
Shares

Par
Value

Additional
Paid In
Capital

Accumulated
Deficit

Accumulated
Undistributed
Net
Investment
Loss

Accumulated
Undistributed
Net Realized
Gain on
Investments
Transactions

Net
Unrealized
Appreciation
(Depreciation)
in value of
Investments

Total
Shareholders’
Equity

Balance as of June 30, 2022

4,824,628

$ 10,855

$ 10,776,537

$ (1,159,665 )

$ (1,064,271 )

$ 5,713,830

$ 149,321

$ 14,426,607

Common shares issued in public offering

1,250,000

1,250

4,040,545

—

—

4,041,795

Common shares issued in reverse stock split rounding

735

—

—

—

Common shares issued in stock-based compensation

32,115

32

66,844

—

—

66,876

Common shares issued in consideration for expense payment

77,777

78

159,365

—

—

159,443

Undistributed net investment loss

—

—

—

(36,126 )

—

—

(36,126 )
Balance as of September 30, 2022

6,185,255

$ 12,215

$ 15,043,291

$ (1,159,665 )

$ (1,100,397 )

$ 5,713,830

$ 149,321

$ 18,658,595

Three Months Ended September 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 June 30, 2021

4,795,739

$ 10,790

$ 10,694,163

$ (1,159,665 )

$ (2,697,320 )

$ 6,071,449

$ 1,269,171

$ 14,188,588

Dividend Declared

—

—

—

—

(1,079,041 )

—

(1,079,041 )
Common shares issued in consideration for expense payment

—

—

—

—

—

Undistributed net investment gain

—

—

—

516,319

—

—

516,319

Undistributed net realized gain on investment transactions

—

—

—

—

289,138

—

289,138

Depreciation in value of investments

—

—

—

—

—

(774,169 )

(774,169 )
Balance as of September 30, 2021

4,795,739

$ 10,790

$ 10,694,163

$ (1,159,665 )

$ (2,181,001 )

$ 5,281,546

$ 495,002

$ 13,140,835

~~- 5 -~~

~~Table of Contents~~

Nine Months Ended September 30, 2022

Common
Shares

Par
Value

Additional
Paid In
Capital

Accumulated
Deficit

Accumulated
Undistributed
Net
Investment
Loss

Accumulated
Undistributed
Net Realized
Gain on
Investments
Transactions

Net
Unrealized
Appreciation
in value of
Investments

Total
Shareholders’
Equity

Balance as of December 31, 2021

4,795,739

$ 10,790

$ 10,694,163

$ (1,159,665 )

$ (1,877,667 )

$ 5,580,810

$ 165,618

$ 13,414,049

Common shares issued in public offering

1,250,000

1,250

4,040,545

—

—

4,041,795

Common shares issued in reverse stock split rounding

735

—

—

—

Common shares issued in stock-based compensation

31,248

97

149,218

—

—

149,315

Common shares issued in consideration for expense payment

107,533

78

159,365

—

—

—

—

159,443

Undistributed net investment gain

—

—

—

777,270

—

—

777,270

Undistributed net realized gain on investment transactions

—

—

—

—

133,020

—

133,020

Depreciation in value of investments

—

—

—

—

—

(16,297 )

(16,297 )
Balance as of September 30, 2022

6,185,255

$ 12,215

$ 15,043,291

$ (1,159,665 )

$ (1,100,397 )

$ 5,713,830

$ 149,321

$ 18,658,595

Nine Months Ended September 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

4,793,739

$ 10,786

$ 10,673,014

$ (1,159,665 )

$ (2,124,419 )

$ 2,541,850

$ 1,699,321

$ 11,640,887

Common shares issued in consideration for expense payment

2,000

4

21,149

—

—

21,153

Dividend declared

—

—

—

—

(1,079,041 )

—

(1,079,041 )
Undistributed net investment loss

—

—

—

(56,582 )

—

—

(56,582 )
Undistributed net realized gain on investment transactions

3,818,737

3,818,737

Depreciation in value of investments

—

—

—

—

—

(1,204,319 )

(1,204,319 )
Balance as of September 30, 2021

4,795,739

$ 10,790

$ 10,694,163

$ (1,159,665 )

$ (2,181,001 )

$ 5,281,546

$ 495,002

$ 13,140,835

Three Months Ended March 31, 2023	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions			Net Unrealized Appreciation (Depreciation) in Value of Investments			Total Shareholders' Equity
Balance as of December 31, 2022		6,185,255	$	12,215	$	15,043,291	$	(1,159,665	)	$	(1,086,739	)	$	5,713,829		$	(651,371	)	$	17,871,560
Issuance of stock options				—		1,460,209		—			—			—			—			1,460,209
Net investment loss, net of tax benefit of $259,300				—		—		—			(766,467	)		—			—			(766,467	)
Net realized loss on investment transactions				—		—		—			—			(600,000	)		—			(600,000	)
Appreciation in value of investments				—		—		—			—			—			648,423			648,423
Balance as of March 31, 2023		6,185,255	$	12,215	$	16,503,500	$	(1,159,665	)	$	(1,853,206	)	$	5,113,829		$	(2,948	)	$	18,613,725

Three Months Ended March 31, 2022	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions			Net Unrealized Appreciation (Depreciation) in Value of Investments			Total Shareholders' Equity
Balance as of December 31, 2021		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(1,877,667	)	$	5,580,810		$	165,618		$	13,414,049
Net investment gain, net of tax of $159,000				—		—		—			295,388			—			—			295,388
Net realized gain on investment transactions				—		—		—			—			138,770			—			138,770
Depreciation in value of investments				—		—		—			—			—			(22,047	)		(22,047	)
Balance as of March 31, 2022		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(1,582,279	)	$	5,719,580		$	143,571		$	13,826,160

See accompanying Notes to Financial Statements

~~- 6 -~~5

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended						Three Months Ended
	September 30, 2022			September 30, 2021			March 31, 2023			March 31, 2022
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	893,993		$	2,557,836
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Net change in unrealized appreciation on investments		16,297			1,204,319
Net realized gain on investments		(133,020	)		(3,818,737	)
Net increase (decrease) in net assets resulting from operations							$	(718,044	)	$	412,111
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided (used) in operating activities:
Net change in unrealized (appreciation) depreciation on investments								(648,423	)		22,047
Net realized (gain) loss on investments								600,000			(138,770	)
Purchases of investments		(13,924,333	)		(18,133,352	)		(6,900,500	)		(7,025,000	)
Proceeds from sales of investments		10,076,483			16,363,964			3,945,000			1,152,898
Stock-based compensation		308,758			15,403
Issuance of stock options								1,460,209			—
Deferred income taxes								(260,000	)		(6,000	)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(21,225	)		(71,160	)		(43,633	)		59,000
Interest and dividends receivable		(614,949	)		(405,429	)		(115,512	)		(238,643	)
Receivable for investment sales		—			(40,767	)
Accounts payable and other liabilities								(690,971	)		35,229
Deferred interest income								(27,938	)		272,000
Accrued income taxes								—			165,000
Payable for investment purchase		(1,900,000	)		30,689			—			(1,900,000	)
Accounts payable and other liabilities		53,903			(20,519	)
Income taxes payable		(1,185,200	)		1,010,978
Net cash used in operating activities		(6,429,293	)		(1,306,775	)		(3,399,812	)		(7,190,128	)
Cash flows from financing activities:
Proceeds from public offering		4,041,795			—
Proceeds from line of credit		8,414,000			—			2,750,000			5,325,000
Repayments on line of credit		(6,101,000	)		—
Payments for common stock dividend		—			(539,296	)
Net cash provided (used) by financing activities		6,354,795			(539,296	)
Net cash provided by financing activities								2,750,000			5,325,000
Net decrease in cash		(74,498	)		(1,846,071	)		(649,812	)		(1,865,128	)
Cash, beginning of period		1,936,148			5,440,579			1,089,641			1,936,148
Cash, end of period	$	1,861,650		$	3,594,508		$	439,829		$	71,020

Non-cash financing activities:
Common shares issued as consideration	$	308,758		$	5,750
Dividend declared to common stock shareholders		—			1,079,041

See accompanying Notes to Financial Statements

~~- 7 -~~6

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

~~SEPTEMBER 30, 2022~~MARCH 31, 2023

Investment / Industry	Cost		Fair Value		Percentage of Net Assets			Cost		Fair Value		Percentage of Net Assets

Short-Term Non-banking Loans
Business Services - 15% secured loans
Mustang Litigation Funding								$	5,000,000	$	5,000,678		27.26	%
Consumer - 15% secured loans	$	$400,000	$	$400,000		2.14	%		408,000		406,994		2.22	%
AirDog Supplies, Inc.		1,250,000		1,250,000		6.70	%
Intelligent Mapping, LLC		2,900,000		2,900,000		15.54	%		2,900,000		2,892,010		15.77	%
Financial - 53% secured loans		635,086		635,086		3.40	%
Financial - 33% secured loans
Benton Financial, LLC		1,976,667		1,976,667		10.59	%		1,986,625		1,984,769		10.82	%
Financial - 34% secured loans
Benton Financial, LLC									1,165,000		1,163,911		6.35	%
Financial - 36% secured loans		550,000		550,000		2.95	%
Benton Financial, LLC									1,025,000		1,024,042		5.58	%
Financial - 12% secured loans		500,000		500,000		2.68	%		500,000		366,079		1.99	%
Information Technology - 15% convertible note		212,500		212,500		1.14	%		212,500		213,456		1.16	%
Real Estate - 18% secured loans									2,500,000		2,492,891		13.59	%
Real Estate - 15% secured loans		216,495		216,495		1.16	%		745,000		747,786		4.07	%
Tailwinds, LLC		3,000,000		3,000,000		16.08	%
Real Estate - 12% secured loans
Alatus Development Corp		1,000,000		1,000,000		5.36	%		2,000,000		2,000,418		10.91	%
Real Estate - subordinated debt
Villas at 79th, LLC		3,400,000		3,400,000		18.22	%
Total Short-Term Non-Banking Loans		16,040,748		16,040,748		85.96	%		18,442,125		18,293,034		99.72	%

Preferred Stock
Consumer
Wisdom Gaming, Inc		900,000		900,000		4.82	%		900,000		900,000		4.91	%
Information Technology		150,000		300,000		1.61	%		150,000		300,000		1.64	%
Total Preferred Stock		1,050,000		1,200,000		6.43	%		1,050,000		1,200,000		6.55	%

Common Stock
Consumer									212,500		209,322		1.14	%

Warrants
Healthcare		679		-		0.00	%		679		-		0.00	%

Other Equity
Consumer		212,500		212,500		1.14	%
Financial		600,000		600,000		3.22	%		10,000		10,000		0.05	%
Financial		10,000		10,000		0.05	%
Total Other Equity		822,500		822,500		4.41	%

Total Investments		$17,913,927		$18,063,248		96.80	%	$	19,715,304	$	19,712,356		107.46	%

Total Cash		1,861,650		1,861,650		9.98	%		439,829		439,829		2.40	%

Total Investments and Cash	$	19,775,577	$	19,924,898		106.78	%	$	$20,155,133	$	$20,152,185		109.86	%

~~- 8 -~~7

Table of Contents

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, ~~2021~~2022

Investment / Industry	Cost		Fair Value		Percentage of Net Assets			Cost		Fair Value		Percentage of Net Assets

Short-Term Non-banking Loans
Business Services - 18% secured loans
Liberated Syndication Inc.								$	2,250,000	$	2,255,625		12.62	%
Business Services - 15% secured loans
Mustang Litigation Funding									5,000,000		4,975,955		27.84	%
Consumer - 15% secured loans									400,000		398,635		2.23	%
AirDog Supplies, Inc.	$	1,250,000	$	1,250,000		9.32	%
Financial - 52% secured loans		500,000		500,000		3.73	%
Intelligent Mapping, LLC									2,900,000		2,873,893		16.08	%
Financial - 33% secured loans
Benton Financial, LLC									2,479,125		2,478,030		13.87	%
Financial - 12% secured loans		500,000		500,000		3.73	%		500,000		345,421		1.93	%
Litigation Financing - 23% secured loans
The Cross Law Firm, LLC		1,805,750		1,800,000		13.42	%
Information Technology - 15% convertible note									212,500		213,656		1.20	%
Real Estate - 15% secured loans		700,000		700,000		5.22	%		745,000		746,354		4.17	%
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	%
Alatus Development Corp									1,000,000		998,363		5.59	%
Total Short-Term Non-Banking Loans		11,655,750		11,650,000		86.85	%		15,486,625		15,285,932		85.53	%

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

Preferred Stock
Consumer
Wisdom Gaming, Inc		900,000		900,000		6.71	%		900,000		900,000		5.04	%
Information Technology		150,000		300,000		2.24	%		150,000		300,000		1.68	%
Total Other Equity		1,050,000		1,200,000		8.95	%
Total Preferred Stock									1,050,000		1,200,000		6.72	%

Warrants
Healthcare		679		-		0.00	%		679		-		0.00	%

Other Equity
Consumer		212,500		212,500		1.58	%		212,500		212,500		1.19	%
Financial		600,000		600,000		4.47	%		610,000		10,000		0.06	%
Total Other Equity		812,500		812,500		6.05	%		822,500		222,500		1.25	%

Total Investments	$	13,933,057	$	14,098,675		105.10	%	$	17,359,804	$	16,708,432		93.50	%

Total Cash		1,936,148		1,936,148		14.43	%		1,089,641		1,089,641		6.10	%

Total Investments and Cash	$	15,869,205	$	16,034,823		119.53	%	$	$18,449,445	$	$17,798,073		99.60	%

~~- 9 -~~8

Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 1 – ORGANIZATION

In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.

We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have remained a public reporting company filing periodic reports with the SEC. We engage in the business of providing short-term specialty finance solutions, typically in the form of short-term loans, primarily to small businesses, both private and public, and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “securities” for purposes of federal securities laws, and we monitor our investments as a whole to ensure that no more than 40% of our total assets consist of “investment securities” as defined under the 1940 Act.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

The condensed balance sheet as of December 31, ~~2021~~2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2021.~~2022.

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

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

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

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

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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

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

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

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

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

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

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

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

For non-traded (Level 3) debt ~~securities~~instruments with a residual maturity less than or equal to 60 days, ~~the value~~we will generally bevalue such instruments based on a ~~present value~~discounted cash flows approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. ~~The~~For level 3 non-banking loans with a maturity in excess of 60 days, fair value ~~for short-term non-banking loans~~ is determined based on the initial purchase price and adjusted as necessary to reflect any changes in the ~~present value~~financial strength of ~~future contractual cash flows discounted at an~~the creditor and changes in interest ~~rate that reflects~~rates in the risks inherent to those cash flows. The applied discount ranges from 12% to 53% and approximate rates currently observed in publicly traded debt markets for debt of similar terms issued by companies with comparablehigh-yield credit ~~risk.~~markets.

On a quarterly basis, our management provides members of our Board of Directors with (i) valuation updates for each investment and loan we hold; (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; (iii) quarter- or period-end statements from custodial firms holdingrecommendations, if any, ~~of our investments; and (iv) recommendations~~ to change any existing valuations of our portfolio investments ~~or loans,~~ or hierarchy levels for purposes of determining the fair value of such investments ~~or loans~~ based upon the foregoing. ~~The board~~In such a case, the Board of Directors would then ~~discusses~~discuss these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.

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

Income taxes:

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

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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

We file income tax returns in the U.S. ~~federal~~Federal jurisdiction and various state jurisdictions. We do not believe there will be any material changes in ~~our~~its unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, ~~2019~~2020 through ~~2021,~~2022, which ~~were~~are the tax years that remain subject to examination by major tax jurisdictions as of ~~September 30, 2022.~~March 31, 2023.

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

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

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

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

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

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

Management and service fees:

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

Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 3 – INVESTMENTS ~~AND LOANS~~

The following table shows the composition of our ~~investments and loans~~investment portfolio by major class, at amortized cost and fair value, as of ~~September 30,~~March 31, 2023 (together with the corresponding percentage of the fair value of our total portfolio of investments):

	Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value

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

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

	As of September 30, 2022										Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value
	Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value
Short-term Non-banking Loans	$	16,040,748		89.5	%	$	16,040,748		88.8	%	$	15,486,625		89.2	%	$	15,285,932		91.5	%
Preferred Stock		1,050,000		5.9			1,200,000		6.6			1,050,000		6.1			1,200,000		7.2
Warrants		679		—			—		—			679		—			—		—
Other Equity		822,500		4.6			822,500		4.6			822,500		4.7			222,500		1.3
Total	$	17,913,927		100.0	%	$	18,063,248		100.0	%	$	17,359,804		100.0	%	$	16,708,432		100.0	%

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

	Investments at Fair Value		Percentage of Fair Value

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

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

	Investments at Fair Value		Percentage of Fair Value

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

- 12 -

Table of Contents

~~The following table shows the composition of our investments by major class, at amortized cost and fair value, as of December~~MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, ~~2021 (together with the corresponding percentage of the fair value of our total investments):~~

As of December 31, 2021

Investments at
Amortized Cost

Percentage of
Amortized Cost

Investments at
Fair Value

Percentage of
Fair Value

Short-term Non-banking Loans

$ 11,655,750

83.7 %

$ 11,650,000

82.6 %
Preferred Stock

1,050,000

7.5

1,200,000

8.5

Common Stock

414,128

3.0

436,175

3.1

Warrants

679

—

—

—

Other Equity

812,500

5.8

812,500

5.8

Total

$ 13,933,057

100.0 %

$ 14,098,675

100.0 %

~~The following table shows the composition of our investments and loans by industry grouping, based on fair value as of September 30, 2022:~~

As of September 30, 2022

Investments at
Fair Value

Percentage of
Fair Value

Consumer

$ 5,662,500

31.35 %
Financial

4,261,753

23.59

Information Technology

512,500

2.84

Real Estate

7,626,495

42.2

Total

$ 18,063,248

100.0 %

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

As of December 31, 2021

Investments at
Fair Value

Percentage of
Fair Value

Consumer

$ 2,362,500

16.8 %
Financial

3,836,175

27.2

Information Technology

300,000

2.1

Real Estate

7,600,000

53.9

Total

$ 14,098,675

100.0 %

For the three months ended September 30, 2022, one investment accounted for 49% of the interest income earned. This investee did not make any cash interest payments during the three months ended September 30, 2022, and owes accrued interest of approximately $650,000 at September 30, 2022. The Company believes it is probable that all interest will be collected from this investee. 2023

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our ~~investments and loans~~investment portfolio as of ~~September 30, 2022~~March 31, 2023 may differ materially from values that would have been used had a readily available market for ~~the~~those investments ~~and loans~~ existed.

The following table presents the fair value measurements of our portfolio investments ~~and loans~~ by major class, as of ~~September 30, 2022,~~March 31, 2023, according to the fair value hierarchy:

As of September 30, 2022

Level 1

Level 2

Level 3

Total

Short-term Non-banking Loans

$ —

$ —

$ 16,040,748

$ 16,040,748

Preferred Stock

—

—

1,200,000

1,200,000

Warrants

—

—

—

—

Other Equity

—

—

822,500

822,500

Total

$ —

$ —

$ 18,063,248

$ 18,063,248

~~- 13 -~~

~~Table of Contents~~

	As of March 31, 2023
	Level 1		Level 2		Level 3		Total

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

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

									As of December 31, 2022
	As of December 31, 2021								Level 1		Level 2		Level 3		Total
	Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	11,650,000	$	11,650,000	$	—	$	—	$	15,285,932	$	15,285,932
Preferred Stock		—		—		1,200,000		1,200,000		—		—		1,200,000		1,200,000
Common Stock		436,175		—		—		436,175		—		—		—		—
Other Equity		—		—		812,500		812,500		—		—		222,500		222,500
Total	$	436,175	$	—	$	13,662,500	$	14,098,675	$	—	$	—	$	16,708,432	$	16,708,432

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment ~~and loan~~ assets for the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:

	For the nine months ended September 30, 2022													For the three months ended March 31, 2023
	ST Non-banking Loans			Preferred Stock		Common Stock		Warrants		Other Equity		ST Non-banking Loans			Preferred Stock			Common Stock			Warrants			Other Equity
Balance as of January 1, 2022	$	11,650,000		$	1,200,000	$	—	$	—	$	812,500

Balance as of January 1, 2023													$	15,285,932		$	1,200,000		$	—		$	—		$	222,500
Net change in unrealized appreciation		—			—		—		—		—		51,602			—			—			—			600,000
Purchases and other adjustments to cost		13,914,333			-		—		—		10,000		6,900,500			—			—			—			—
Sales and redemptions		(9,523,585	)		—		—		—		—		(3,945,000	)		—			—			—			—
Balance as of September 30, 2022	$	16,040,748		$	1,200,000	$	—	$	—	$	822,500
Net realized loss														—			—			—			—			(600,000	)
Transfers out of level 3														—			—			—			—			(212,500	)
Balance as of March 31, 2023													$	18,293,034		$	1,200,000		$	—		$	—		$	10,000

The net change in unrealized appreciation for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 attributable to Level 3 portfolio investments ~~and loans~~ still held as of ~~September 30, 2022 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.~~March 31, 2023 was $651,602.

Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

The following table lists our Level 3 investments held as of ~~September 30, 2022~~March 31, 2023 and the unobservable inputs used to determine their valuation:

Security Type

9/30/22 FMV

Valuation Technique

Unobservable Inputs

Range

ST Non-banking Loans

$ 16,040,748

discounted cash flow

determining private company interest rate based on credit

12-53
%
Other Equity

822,500

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

$ 18,063,248

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~~Table of Contents~~

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

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment ~~and loan~~ assets for the ~~year~~period ended December 31, ~~2021:~~2022:

For the year ended December 31, 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

Net change in unrealized appreciation

—

—

—

—

—

Purchases and other adjustments to cost

24,765,333

900,000

—

—

812,500

Sales and redemptions

(15,904,333 )

—

—

—

(278,897 )
Balance as of December 31, 2021

$ 11,650,000

$ 1,200,000

$ —

$ —

$ 812,500

	For the year ended December 31, 2022
	ST Non-banking Loans			Preferred Stock		Common Stock		Warrants		Other Equity

Balance as of January 1, 2022	$	11,650,000		$	1,200,000	$	—	$	—	$	812,500
Net change in unrealized depreciation		(200,693	)		—		—		—		(600,000	)
Purchases and other adjustments to cost		23,548,458			—		—		—		10,000
Sales and redemptions		(19,711,833	)		—		—		—		—
Balance as of December 31, 2022	$	15,285,932		$	1,200,000	$	—	$	—	$	222,500

The net change in unrealized depreciation for the year ended December 31, ~~2021~~2022 attributable to Level 3 portfolio investments ~~and loans~~ still held as of December 31, ~~2021 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.~~2022 was $651,371.

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

Security Type	12/31/21 FMV		Valuation Technique	Unobservable Inputs	Range		12/31/22 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	11,650,000	discounted cash flow	determining private company credit rating	12-44	%	$	15,285,932	discounted cash flow	determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness	12-33	%
Other Equity		812,500	last secured funding known by company	economic changes since last funding				222,500	last secured funding known by company
Preferred Stock		1,200,000	last funding secured by company	economic changes since last funding				1,200,000	last funding secured by company	economic changes since last funding
	$	13,662,500					$	16,708,432

NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a conflicts of interest and related-party transactions ~~policy. Nevertheless, from time~~policy requiring (i) certain disclosures be made to ~~time we may hold investments in portfolio companies in which certain members of our management,~~ our Board of Directors orin relation to situations where officers, directors, significant shareholders, or any of ~~ours, are also directly or indirectly invested.~~their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with the SEC. In this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions:

	·	On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owned and continues to own approximately 534,445 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000, which was subsequently amended such that the note presently matures ~~in December 2022.~~on August 30, 2023. The promissory note bears interest payable monthly at the rate of 10% per annum. The note is secured by the debtors’ pledge to us of 277,778 shares of our common stock. The pledged shares are held in physical custody for us by Millennium Trust Company, as our custodial agent.

	·	On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. See note 78 above for further details.

Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we have a deferred tax asset of ~~$4,000~~$461,000 and ~~a deferred tax liability of $45,000,~~$201,000, respectively. As of ~~September 30, 2022,~~March 31, 2023, our net deferred tax asset consists of net operating losses (NOLs), foreign tax credit carryforwards, unrealized investment gain/loss, future tax-deductible stock option expenses, and ~~other book to tax timing differences.~~right of use assets. Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes.

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~~Table of Contents~~

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 we had ~~accrued~~prepaid income taxes of ~~$128,800~~$178,600 and ~~$1,269,000,~~$179,300, respectively. ~~The change in accrued income taxes was largely driven by $1,536,000 of federal and state tax payments made during 2022.~~ We recorded a benefit from income taxes of ~~$28,442 (27%~~$259,300 (26 percent effective tax rate) and a ~~benefit from~~provision for income taxes of ~~$300 (27%~~$159,000 (28 percent effective tax rate) during the three months ended ~~September 30,~~March 31, 2023 and March 31, 2022, ~~and September 30, 2021,~~ respectively. ~~We recorded income taxes~~

As of March 31, 2023, we had a federal NOL of approximately ~~$346,000 (27% effective~~$168,000. The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code. Due to tax ~~rate) and $1,010,978 (30.4% effective tax rate) during~~reform enacted in 2017, NOLs created after 2017 carry forward indefinitely. The estimated federal NOL that does not expire included in the ~~nine months ended September 30, 2022 and September 30, 2021, respectively.~~total above is $168,000. States may vary in their treatment of post-2017 NOLs. Minnesota is the only state carrying forward a NOL which was $100,000 at March 31, 2023. The state NOL carryforwards may expire in 2043 if not used.

NOTE 7 – LINE OF CREDIT

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

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

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

At ~~September 30,~~March 31, 2023 and December 31, 2022, the balance outstanding on the line was ~~$2,313,000~~$2,750,000 and $0, respectively, with a maturity date of January 3, 2027.

Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 8 – STOCK-BASED COMPENSATION

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

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

	Shares		Weighted Average Exercise Price
Options outstanding at beginning of year		—	$	—
Granted		870,000		2.11
Exercised		—		—
Forfeited		—		—
Balance at March 31		870,000	$	2.11

Options exercisable at March 31:		870,000	$	2.11

Weighted Average Grant Date Fair Value for options granted during the period:			$	1,242,902

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

Options Outstanding

Options Exercisable

Options Outstanding

Weighted Average Remaining Contractual

Life

Weighted Average Exercise

Price

Aggregate Intrinsic

Value

Options Exercisable

Weighted Average Exercise

Price

Aggregate Intrinsic Value

870,000

9.85

2.11

175,100

870,000

2.11

175,100

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

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

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

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

Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 9 – SHAREHOLDERS’ EQUITY

At ~~September 30, 2022,~~March 31, 2023, we had 6,185,255 shares of common stock issued and outstanding.

On August 9, 2022, the Company effected a stock combination (reverse stock split) of its common shares on a 1-for-2.25 basis such that every 2.25 shares of common stock issued and outstanding on that date were combined into one share of common stock. Any fractional share resulting from the reverse stock split was rounded up to the nearest whole share. The reverse stock split was approved by the ~~Company’s~~Company's board of directors in accordance with Minnesota law and resulted in a proportionate reduction in the number of authorized shares of capital stock available for issuance under the ~~Company’s~~Company's articles of incorporation. This reduction was affected pursuant to the filing of articles of amendment with the Minnesota Secretary of State indicating that the Company, on a post-reverse-split basis, is authorized to issue up to 111,111,111 shares of capital stock.

~~On August 11, 2022, the Company completed its public offer~~ All share and ~~sale of 1,250,000 common shares pursuant to a registration statement filed with the SEC and declared effective on August 9, 2022. Shares were sold by the Company at $4.00~~ per share ~~resulting in gross proceeds of $5,000,000. As part of~~information has been retrospectively adjusted to reflect the registered public offering, the Company granted the underwriters a 45-day option to purchase up to 187,500 additional common shares at the offering price, less underwriting discounts. In connection with the offering, the Company issued the underwriter a five-year warrant to purchase up to 75,000 common shares at the per-share price of $5.00. Net proceeds to the Company after the payment of underwriting discounts, underwriting expenses, and the Company’s own offering-related expenses were approximately $4,041,000.reverse stock split.

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NOTE 910 – PER-SHARE INFORMATION

Basic net gain ~~(loss)~~ 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 September 30,

2022

2021

Numerator: Net increase in net assets resulting from operations

$ (36,126 )

$ 31,288

Denominator: Weighted-average number of common shares outstanding

5,512,737

4,795,739

Basic and diluted net gain per common share

$ (0.01 )

$ 0.01

For the Nine Months
Ended September 30,

2022

2021

Numerator: Net increase in net assets resulting from operations

$ 893,993

$ 2,557,836

Denominator: Weighted-average number of common shares outstanding

5,045,830

4,795,075

Basic and diluted net gain per common share

$ 0.18

$ 0.53

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

NOTE 1011 – OPERATING LEASES

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

Because our ~~lease does~~leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted-average discount rate as of ~~December~~March 31, ~~2021~~2023 and March 31, 2022 was 4.5% and the weighted-average remaining lease term is one year.

~~Under ASC 840, rent~~Rent expense for office facilities for the three months ended ~~September 30,~~March 31, 2023 and 2022 was $19,043 and ~~September 30, 2021 was $18,589 and $16,689,~~$16,812, respectively.

The components of our operating ~~lease~~leases were as follows for the three ~~and nine~~ months ended ~~September 30, 2022:~~March 31:

Three Months Ended

Nine Months Ended

September 30, 2022

September 30, 2022

Operating lease costs

$ 5,504

$ 15,787

Variable lease cost

4,601

13,724

Short-term lease cost

8,484

25,031

Total

$ 18,589

$ 54,542

~~Supplemental balance sheet information consisted of the following at September 30, 2022:~~

Operating Lease

    Right-of-use assets

$ 21,563

Operating Lease Liability

$ 21,672

    Less: short term portion

(21,672 )
    Long term portion

$ —

	Three Months Ended
	March 31, 2023		March 31, 2022

Operating lease costs	$	5,504	$	4,779
Variable lease cost		4,905		4,601
Short-term lease cost		8,634		7,432
Total	$	19,043	$	16,812

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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

Operating Lease	2023			2022
Right-of-use assets	$	10,903		$	—

Operating Lease Liability	$	11,067		$	—
Less: short term portion		(11,067	)		—
Long term portion	$	—		$	—

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

	Operating Leases		2023			2022
2022	$	6,357	$	—		$	18,164
2023		14,859		11,226			14,859
Total lease payments		21,216		11,226			33,023
Plus: interest		456
Less: Present value discount				(159	)		(1,035	)
Present value of lease liabilities	$	21,672	$	11,067		$	31,988

NOTE 1112 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 through ~~2018:~~2019:

	Nine Months Ended September 30,															Three Months Ended March 31,
	2022			2021			2020			2019			2018			2023			2022			2021			2020			2019
Per Share Data ⁽¹⁾
Net asset value at beginning of period	$	2.80			2.43			2.05			2.30			1.96		$	2.89			2.79			2.43			2.05			2.30
Net investment gain (loss)		0.18			0.20			0.05			(0.11	)		(0.09	)
Net investment income (loss)																	(0.17	)		0.09			0.00			0.00			(0.05	)
Net realized and unrealized gains (losses)		0.02			0.54			0.14			0.02			0.34			0.01			0.02			0.50			(0.07	)		0.27
Provision for income taxes		(0.05	)		(0.20	)		0.00			0.00			0.00			0.04			(0.02	)		(0.14	)		0.00			0.00
Stock-based compensation		0.05			0.00			0.00			0.00			0.00
Issuance of stock options																	0.24			0.00			0.00			0.00			0.00
Repurchase of common stock		0.00			0.00			0.05			0.00			0.00			0.00			0.00			0.00			0.00			0.00
Other changes in equity		0.02			0.00			0.00			0.00			0.00
Payment of common stock dividend		0.00			(0.23	)		0.00			(0.11	)		0.00			0.00			0.00			0.00			0.00			(0.11	)
Net asset value at end of period	$	3.02			2.74			2.29			2.10			2.21		$	3.01			2.88			2.79			1.98			2.41

Ratio / Supplemental Data
Per share market value of investments at end of period	$	2.92			2.30			1.71			1.58			1.85		$	3.19			4.19			2.81			0.92			1.76
Shares outstanding at end of period		6,185,255			4,795,739			4,754,104			4,918,845			4,918,845			6,185,255			4,795,739			4,794,184			4,918,845			4,918,845
Average weighted shares outstanding for the period		5,045,830			4,795,075			4,836,170			4,918,845			4,918,845			6,185,255			4,795,739			4,793,739			4,918,845			4,918,845
Net assets at end of period	$	18,658,595			13,140,835			10,805,062			10,588,689			11,278,889		$	18,613,725			13,826,160			13,391,679			9,786,615			11,890,188
Average net assets ⁽²⁾	$	15,081,352			13,090,497			10,220,482			12,304,975			9,955,674		$	18,242,642			13,620,104			12,516,283			9,927,574			12,911,895
Total investment return		6.07	%		22.22	%		8.79	%		(8.82	)%		12.64	%		(4.15	)%		3.23	%		14.81	%		(3.30	)%		4.90	%
Portfolio turnover rate (3)		66.81	%		124.55	%		18.18	%		7.11	%		11.55	%		21.63	%		8.46	%		40.24	%		0.75	%		0.93	%
Ratio of operating expenses to average net assets ⁽³⁾		(19.24	)%		(10.31	)%		(6.49	)%		(7.70	)%		(6.98	)%		(35.82	)%		(15.28	)%		(16.20	)%		(7.82	)%		(6.06	)%
Ratio of net investment income (loss) to average net assets⁽³⁾		10.09	%		9.87	%		3.35	%		(6.40	)%		(5.53	)%		(20.92	)%		14.24	%		0.42	%		0.87	%		(4.87	)%
Ratio of realized gains (losses) to average net assets ⁽³⁾		1.18	%		40.81	%		7.06	%		57.36	%		(12.79	)%		(12.68	)%		4.20	%		133.32	%		1.00	%		137.57	%

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

NOTE 13 – SUBSEQUENT EVENTS

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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 are engaged in the business of providing short-term non-bank lending and specialty finance solutions to companies and individuals, generally on a secured basis. The loans we provide typically have maturities that are nine months or shorter, highly illiquid, and ordinarily involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale, or other projects relating to real estate, title loans, inventory needs, inventory financing, solve for short-term liquidity needs, or for other similar purposes. We intend to remain opportunistic, however, and may occasionally engage in transactions that involve our acquisition of other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make.

Our principal sources of income are interest and fees associated with our loans such as origination fees, closing fees or exit fees. In connection with the short-term non-bank specialty finance loans we provide, we may receive reimbursement of legal costs associated with loan documentation. We occasionally derive income from dividends paid on equity securities we hold from time to time, or from the sale of our equity securities. Our statement of operations also reflect increases and decreases in the carrying value of our assets and investments (i.e., unrealized appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.

Our MD&A should be read in conjunction with our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2021,~~2022, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview.

PORTFOLIO AND INVESTMENT ACTIVITY

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we made ~~$13,924,333~~$6,900,500 of investments and loans and had ~~$10,076,483~~$3,945,000 of redemptions and repayments, resulting in net investments at amortized cost of ~~$17,913,927 at the end~~$19,715,304 as of ~~the period.~~March 31, 2023.

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we made ~~$18,133,352~~$7,025,000 of investments and loans and had ~~$16,363,964~~$1,152,898 of redemptions and repayments, resulting in net investments at amortized cost of ~~$10,562,451~~$19,943,929 as of March 31, 2022.

Our portfolio composition by major class, based on fair value at ~~the end of that period.~~ March 31, 2023, was as follows:

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

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Table of Contents

~~Our investment composition by major class, based on fair value at September 30, 2022, was as follows:~~

Investments at
Fair Value

Percentage of
Fair Value

Short-term Non-banking Loans

$ 16,040,748

88.8 %
Preferred Stock

1,200,000

6.6

Other Equity

822,500

4.6

Total

$ 18,063,248

100.0 %

RESULTS OF OPERATIONS

Our operating results for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and March 31, 2022 ~~and September 30, 2021~~ were as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2022			2021			2022			2021			2023			2022
Investment Income:	$	1,115,224		$	755,601		$	3,351,935		$	1,977,992		$	864,029		$	1,000,206
Operating Expenses:		(1,179,792	)		(239,582	)		(2,227,865	)		(1,023,596	)		(1,889,796	)		(545,818	)
Net Investment Gain (Loss)	$	(64,568	)	$	516,019		$	1,124,070		$	954,396		$	(1,025,767	)	$	454,388

Investment Income

We generate revenue primarily in the form of interest income derived from the short-term non-banking loans we provide, together with fees we charge in connection with those loans, such as commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned. In some cases, the interest payable to us on the ~~short-erm~~short-term loans we provide may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. On occasion, we may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~interest earned on~~ our ~~loan portfolio~~total investment income was ~~$1,053,714~~$864,028 and $2,840,425, respectively, and our fees charged in connection with the loans was $61,510 and $511,510, respectively. For the three and nine months ended September 30, 2021, interest earned on our loan portfolio was $663,101 and $1,756,492, respectively, and our fees charged in connection with the loans was $92,500 and $221,500,$1,000,206, respectively. The ~~increase in the most recent period~~decrease is ~~primarily~~ due to a ~~combination of strong demand for~~decrease in our short-term ~~loans and our enhanced ability to satisfy that demand with the additional cash resources we have derived from prior loans that have been repaid to us.~~non-bank lending activity. Our loan portfolio generates interest income, with ~~a weighted-average interest~~an average rate on the loans of ~~26%~~18.9%.

Professional Fees

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, we had ~~$916,359~~$129,851 and ~~$1,309,348 professional fees expense, respectively. For the three and nine months ended September 30, 2021, we had $79,950 and $300,297~~$198,518 of professional fees expense, respectively. The ~~increase for the nine months in 2022~~decrease is due to the decrease in our short-term non-bank lending activity and the legal costs incurred to close ~~on several new short-term banking loans, to obtain our listing on the Nasdaq exchange,and our efforts to seek additional financing through a public offering of our common stock to grow our business.~~those deals.

~~Net Realized Gain from Investments~~Payroll and Directors Fees

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, we had ~~$2,098,585~~$1,130,439 and ~~$10,076,483, respectively,~~$196,442 of ~~sales~~payroll expense, respectively. In addition, director fees were $532,968 and $30,000 for the three months ended March 31, 2023 and 2022, respectively. The increase in the current period was due in large part to the company’s issuance of 870,000 10-year options to directors, officers and consultants to the company in November and December 2022 (which were issued subject to shareholder approval). On January 20, 2023 the company approved the options at a special meeting held for that purpose. These options generated a noncash expense of $1,460,209.

Interest Expense

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

Net Realized Gain (Loss) from Investments

For the three months ended March 31, 2023, we had $3,945,000 of proceeds from sale of investments, resulting in ~~$0 and $133,020~~$600,000 of realized ~~gains, respectively.~~losses. For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, we had ~~$6,474,137 and $16,363,964, respectively,~~$1,152,898 of ~~sales~~proceeds from sale of investments, resulting in ~~$289,138 and $3,818,737, respectively,~~$138,770 of realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, our investments included $648,423 of unrealized appreciation. For the three months ended March 31, 2022, our investments ~~had $0~~included $22,047 of unrealized appreciation and $16,297 of unrealized depreciation, respectively. For the three and nine months ended September 30, 2021, our investments had $774,169 and $1,204,319 of unrealized depreciation, respectively. depreciation.

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Changes in Net Assets from Operations

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, we recorded a net decrease in net assets from operations of ~~$36,126 and a net increase in net assets from operations of $893,993, respectively.~~$718,044. Based on the weighted-average number of shares of common stock outstanding for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, our per-share net decrease in net assets from operations was ~~$0.01 and our per share net increase from operations was $0.18, respectively.~~$0.12. For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, we recorded a net increase in net assets from operations of ~~$31,288 and $2,557,836, respectively.~~$412,111. Based on the weighted-average number of shares of common stock outstanding for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, our per-share net increase in net assets from operations was ~~$0.01 and $0.53, respectively.~~$0.09.

Cash Flows for the ~~Nine months~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

The level of cash flows used in or provided by operating activities is affected ~~primarily~~ by ~~our provision~~the timing of ~~short-term loans,~~ purchases, ~~of other investments,~~ redemptions and repayments of ~~our loans or~~portfolio investments, ~~and~~among other ~~related~~ factors. For the ~~nine~~three months ended ~~September 30,~~March 31, 2023, net cash used in operating activities was $3,399,812. Cash flows used in operating activities for the three months ended March 31, 2023 were primarily related to purchases of investments totaling $6,900,500, offset by redemptions and repayments totaling 3,945,000. For the three months ended March 31, 2022, net cash used in operating activities was ~~$6,429,293.~~$7,190,128. Cash flows ~~used~~provided in operating activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 were primarily related to ~~the funding of our short-term loans and~~ purchases of investments ~~aggregating $13,924,333, offset mostly by redemptions and repayments of short-term loans and investments~~ totaling $10,076,483. For the nine months ended September 30, 2021, net cash used in operating activities was $1,306,775. Cash flows used in operating activities for the nine months ended September 30, 2021 were primarily related to the funding of our short-term loans and purchases of investments aggregating $18,133,352, offset mostly by redemptions and repayments of short-term loans and investments totaling $16,363,964.

For the nine months ended September 30, 2022, net cash provided in financing activities was $6,354,795. Cash flows provided in financing activities for the nine months ended September 30, 2022 were primarily related to our public offering and our draw on the available line of credit, offset by payments against the line of credit. For the nine months ended September 30, 2021, net cash used in financing activities was $539,296. Cash flows used in financing activities for the nine months ended September 30, 2021 were related to the payment of our stock dividend to investors.$7,025,000.

FINANCIAL CONDITION

As of ~~September 30, 2022,~~March 31, 2023, we had cash of ~~$1,861,650,~~$439,829, a decrease of ~~$74,498~~$649,812 from December 31, ~~2021. We expect that~~2022. The primary use of our existing funds ~~together with~~and any funds raised in the future ~~will~~is expected to be ~~used primarily to fund~~for our ~~provision of short-term non-bank loans and specialty finance solutions~~investments in portfolio companies or for other general corporate purposes, including paying ~~our~~for operating expenses ~~and servicing~~or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our ~~existing debt. Pending use~~investments may consist of ~~our~~ cash, ~~as described, we may invest some portion of our~~ cash inequivalents, U.S. government securities or ~~other high quality~~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, 2023.

On August 9, 2022, we effected a stock combination (reverse stock split) of our common shares on a 1-for-2.25 basis such that every 2.25 shares of common stock issued and outstanding on that date were combined into one share of common stock. Any fractional share resulting from the reverse stock split was rounded up to the nearest whole share. The reverse stock split was approved by our Board of Directors in accordance with Minnesota law, and resulted in a proportionate reduction in the number of authorized shares of capital stock available for issuance under our articles of incorporation. On a post-reverse-split basis, we are authorized to issue up to 111,111,111 shares of capital stock.

On August 11, 2022, we completed a public offer and sale of 1,250,000 common shares pursuant to a registration statement filed with the SEC and declared effective on August 9, 2022. We sold these shares at $4.00 per share, resulting in gross proceeds of $5,000,000. As part of the registered public offering, we granted the underwriters a 45-day option to purchase up to 187,500 additional common shares at the offering price, less underwriting discounts, which option was not exercised. In connection with the offering, we issued the underwriter a five-year warrant to purchase up to 75,000 common shares at the per-share price of $5.00. Our net proceeds after the payment of underwriting discounts, underwriting expenses, and offering-related expenses we incurred were otherwise obligated to pay, were approximately $4,041,000.

CRITICAL ACCOUNTING ESTIMATES

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.

In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition. For more information, refer to our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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OFF-BALANCE-SHEET ARRANGEMENTS

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.

FORWARD-LOOKING STATEMENTS

Some of the statements made in this section of our report are forward-looking statements based on our management’s current expectations for our company. These expectations involve assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance, and can ordinarily be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to identify and consummate new investments, achieve certain margins and levels of profitability, the availability of any needed additional capital, and the ability to maintain compliance with regulations applicable to us. Some of the forward-looking statements contained in this report relate to, and are based our current assumptions regarding, the following:

	·	our future operating results;
	·	the success of our investments;
	·	our relationships with third parties;
	·	the dependence of our success on the general economy and its impact on the industries in which we invest;
	·	the ability of our portfolio companies to achieve their objectives;
	·	our expected financings and investments;
	·	our regulatory structure and tax treatment;
	·	the adequacy of our cash resources and working capital; and
	·	the timing of cash flows, if any, we receive from our investments.

The foregoing list is not exhaustive. For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on ~~March 10, 2021~~April 17, 2023 (related to our year ended December 31, ~~2021)~~2022) and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.

ITEM 4. CONTROLS AND PROCEDURES

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

As of ~~September 30, 2022,~~March 31, 2023, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures ~~are~~were not effective as of ~~September 30,~~March 31, 2023 due to the material weakness in our internal control over financial reporting identified and disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022.

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

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

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

___________

* Filed herewith

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SIGNATURES

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

	MILL CITY VENTURES III, LTD.

Date: ~~November 18, 2022~~May 22, 2023	By:	/s/ Douglas M. Polinsky
		~~Douglas~~DOUGLAS M. ~~Polinsky~~POLINSKY
		Chief Executive Officer


Date: ~~November 18, 2022~~May 22, 2023	By:	/s/ Joseph A. Geraci, II
		~~Joseph~~ JOSEPH A. ~~Geraci,~~GERACI, II
		Chief Financial Officer

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Three Months Ended September 30, 2022	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions		Net Unrealized Appreciation (Depreciation) in value of Investments		Total Shareholders’ Equity
Balance as of June 30, 2022		4,824,628	$	10,855	$	10,776,537	$	(1,159,665	)	$	(1,064,271	)	$	5,713,830	$	149,321	$	14,426,607
Common shares issued in public offering		1,250,000		1,250		4,040,545		—			—							4,041,795
Common shares issued in reverse stock split rounding		735		—		—												—
Common shares issued in stock-based compensation		32,115		32		66,844		—			—							66,876
Common shares issued in consideration for expense payment		77,777		78		159,365		—			—							159,443
Undistributed net investment loss				—		—		—			(36,126	)		—		—		(36,126	)
Balance as of September 30, 2022		6,185,255	$	12,215	$	15,043,291	$	(1,159,665	)	$	(1,100,397	)	$	5,713,830	$	149,321	$	18,658,595

Three Months Ended September 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 June 30, 2021		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(2,697,320	)	$	6,071,449		$	1,269,171		$	14,188,588
Dividend Declared				—		—		—			—			(1,079,041	)		—			(1,079,041	)
Common shares issued in consideration for expense payment				—		—		—			—									—
Undistributed net investment gain				—		—		—			516,319			—			—			516,319
Undistributed net realized gain on investment transactions				—		—		—			—			289,138			—			289,138
Depreciation in value of investments				—		—		—			—			—			(774,169	)		(774,169	)
Balance as of September 30, 2021		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(2,181,001	)	$	5,281,546		$	495,002		$	13,140,835

Nine Months Ended September 30, 2022	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions		Net Unrealized Appreciation in value of Investments			Total Shareholders’ Equity
Balance as of December 31, 2021		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(1,877,667	)	$	5,580,810	$	165,618		$	13,414,049
Common shares issued in public offering		1,250,000		1,250		4,040,545		—			—								4,041,795
Common shares issued in reverse stock split rounding		735		—		—													—
Common shares issued in stock-based compensation		31,248		97		149,218		—			—								149,315
Common shares issued in consideration for expense payment		107,533		78		159,365		—			—			—		—			159,443
Undistributed net investment gain				—		—		—			777,270			—		—			777,270
Undistributed net realized gain on investment transactions				—		—		—			—			133,020		—			133,020
Depreciation in value of investments				—		—		—			—			—		(16,297	)		(16,297	)
Balance as of September 30, 2022		6,185,255	$	12,215	$	15,043,291	$	(1,159,665	)	$	(1,100,397	)	$	5,713,830	$	149,321		$	18,658,595

Nine Months Ended September 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		4,793,739	$	10,786	$	10,673,014	$	(1,159,665	)	$	(2,124,419	)	$	2,541,850		$	1,699,321		$	11,640,887
Common shares issued in consideration for expense payment		2,000		4		21,149		—			—									21,153
Dividend declared				—		—		—			—			(1,079,041	)		—			(1,079,041	)
Undistributed net investment loss				—		—		—			(56,582	)		—			—			(56,582	)
Undistributed net realized gain on investment transactions														3,818,737						3,818,737
Depreciation in value of investments				—		—		—			—			—			(1,204,319	)		(1,204,319	)
Balance as of September 30, 2021		4,795,739	$	10,790	$	10,694,163	$	(1,159,665	)	$	(2,181,001	)	$	5,281,546		$	495,002		$	13,140,835

Security Type	9/30/22 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	16,040,748	discounted cash flow	determining private company interest rate based on credit	12-53	%
Other Equity		822,500	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
	$	18,063,248

	For the year ended December 31, 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
Net change in unrealized appreciation		—			—		—		—		—
Purchases and other adjustments to cost		24,765,333			900,000		—		—		812,500
Sales and redemptions		(15,904,333	)		—		—		—		(278,897	)
Balance as of December 31, 2021	$	11,650,000		$	1,200,000	$	—	$	—	$	812,500