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Mill City Ventures III, Ltd. – ‘10-Q’ for 3/31/22

On: Friday, 5/13/22, at 4:31pm ET · For: 3/31/22 · Accession #: 1410578-22-1480 · File #: 811-22778

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 5/13/22  Mill City Ventures III, Ltd.      10-Q        3/31/22   54:5.2M                                   Toppan Merrill/FA2

Quarterly Report — Form 10-Q

Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    765K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     21K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     21K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     18K 
10: R1          Document and Entity Information                     HTML     67K 
11: R2          Condensed Balance Sheets                            HTML     98K 
12: R3          Condensed Balance Sheets (Parenthetical)            HTML     23K 
13: R4          Condensed Statements of Operations (Unaudited)      HTML     77K 
14: R5          Condensed Statements of Shareholders Equity         HTML     42K 
                (Unaudited)                                                      
15: R6          Condensed Statements of Shareholders' Equity        HTML     17K 
                (Unaudited) (Parenthetical)                                      
16: R7          Condensed Statements of Cash Flows (Unaudited)      HTML     68K 
17: R8          Condensed Schedule of Investments                   HTML    106K 
18: R9          Organization                                        HTML     19K 
19: R10         Significant Accounting Policies                     HTML     36K 
20: R11         Investments                                         HTML     94K 
21: R12         Fair Value of Financial Instruments                 HTML    173K 
22: R13         Related-Party Transactions                          HTML     21K 
23: R14         Income Taxes                                        HTML     21K 
24: R15         Line of Credit                                      HTML     24K 
25: R16         Shareholders' Equity                                HTML     22K 
26: R17         Per-Share Information                               HTML     29K 
27: R18         Operating Leases                                    HTML     38K 
28: R19         Financial Highlights                                HTML     83K 
29: R20         Subsequent Events                                   HTML     19K 
30: R21         Significant Accounting Policies (Policies)          HTML     59K 
31: R22         Investments (Tables)                                HTML     95K 
32: R23         Fair Value of Financial Instruments (Tables)        HTML    175K 
33: R24         Per-Share Information (Tables)                      HTML     28K 
34: R25         Operating Leases (Tables)                           HTML     39K 
35: R26         Financial Highlights (Tables)                       HTML     82K 
36: R27         Organization (Details)                              HTML     17K 
37: R28         Significant Accounting Policies (Details)           HTML     22K 
38: R29         INVESTMENTS - Composition of our investments by     HTML     51K 
                major class (Details)                                            
39: R30         Fair Value of Financial Instruments (Details)       HTML     60K 
40: R31         Related-Party Transactions (Details)                HTML     31K 
41: R32         Income Taxes (Details)                              HTML     31K 
42: R33         LINE OF CREDIT - Additional Information (Details)   HTML     31K 
43: R34         Shareholders' Equity (Details)                      HTML     20K 
44: R35         Per-Share Information (Details)                     HTML     36K 
45: R36         OPERATING LEASES - Additional Information           HTML     22K 
                (Details)                                                        
46: R37         OPERATING LEASES - components of our operating      HTML     24K 
                lease (Details)                                                  
47: R38         OPERATING LEASES - Maturity analysis under lease    HTML     25K 
                agreements (Details)                                             
48: R39         Financial Highlights (Details)                      HTML     54K 
49: R40         Subsequent Events (Details)                         HTML     30K 
52: XML         IDEA XML File -- Filing Summary                      XML     91K 
50: XML         XBRL Instance -- mcvt-20220331x10q_htm               XML   1.41M 
51: EXCEL       IDEA Workbook of Financial Reports                  XLSX     58K 
 6: EX-101.CAL  XBRL Calculations -- mcvt-20220331_cal               XML     92K 
 7: EX-101.DEF  XBRL Definitions -- mcvt-20220331_def                XML    229K 
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53: JSON        XBRL Instance as JSON Data -- MetaLinks              231±   325K 
54: ZIP         XBRL Zipped Folder -- 0001410578-22-001480-xbrl      Zip    155K

‘10-Q’ — Quarterly Report

Document Table of Contents

Page	(sequential)	(alphabetic)	↑Top
		Alternative Formats (Word, et al.) Condensed Balance Sheets -- March 31, 2022 and December 31, 2021 Condensed Notes to Financial Statements -- March 31, 2022 Condensed Schedule of Investments -- March 31, 2022 and Schedule of Investments -- December 31, 2021 Condensed Statements of Cash Flows -- Three months ended March 31, 2022 and March 31, 2021 Condensed Statements of Operations -- Three months ended March 31, 2022 and March 31, 2021 Condensed Statements of Shareholders' Equity -- Three months ended March 31, 2022 and March 31, 2021 Controls and Procedures December 31, 2021 Exhibits Financial Statements (unaudited) Item 1 Item 2 Item 4 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 2022 March 31, 2022 and December 31, 2021 March 31, 2022 and Schedule of Investments -- December 31, 2021 Other Information Part Ii Signatures Table of Contents Three months ended March 31, 2022 and March 31, 2021
1	1st Page – Filing Submission
"	Table of Contents
"	Item 1
"	Financial Statements (unaudited)
"	Condensed Balance Sheets -- March 31, 2022 and December 31, 2021
"	Condensed Statements of Operations -- Three months ended March 31, 2022 and March 31, 2021
"	Condensed Statements of Shareholders' Equity -- Three months ended March 31, 2022 and March 31, 2021
"	Condensed Statements of Cash Flows -- Three months ended March 31, 2022 and March 31, 2021
"	Condensed Schedule of Investments -- March 31, 2022 and Schedule of Investments -- December 31, 2021
"	Condensed Notes to Financial Statements -- March 31, 2022
"	Item 2
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Item 4
"	Controls and Procedures
"	Part Ii
"	Other Information
"	Item 6
"	Exhibits
"	Signatures

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM i 10-Q

(Mark One)

i ☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended i March 31, 2022

i ☐

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 i 814-00991

i MILL CITY VENTURES III, LTD.

(Exact name of registrant as specified in its charter)

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

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

( i 952) i 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. ☒ i 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). ☒ i 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 ☐
i Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company i ☐

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). i ☐ Yes ☒ No

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

Table of Contents

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended March 31, 2022


PART I.	FINANCIAL INFORMATION		Page No.

Item 1.	Financial Statements (unaudited)

	Condensed Balance Sheets – March 31, 2022 and December 31, 2021		3

	Condensed Statements of Operations – Three months ended March 31, 2022 and March 31, 2021		4

	Condensed Statements of Shareholders’ Equity – Three months ended March 31, 2022 and March 31, 2021		5

	Condensed Statements of Cash Flows – Three months ended March 31, 2022 and March 31, 2021		6

	Condensed Schedule of Investments – March 31, 2022 and Schedule of Investments – December 31, 2021		7

	Condensed Notes to Financial Statements – March 31, 2022		9

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

Item 4.	Controls and Procedures		22

PART II.	OTHER INFORMATION

Item 6.	Exhibits		23

		SIGNATURES	24

- 2 -

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS


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

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

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

See accompanying Notes to Financial Statements

- 3 -

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)


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

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

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

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

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Accumulated

Net Unrealized

Accumulated

Undistributed

Appreciation

Additional

Undistributed

Net Realized Gain

(Depreciation)

Total

Common

Paid In

Accumulated

Net Investment

on Investments

in Value of

Shareholders’

Three Months Ended March 31, 2022

Shares

Par Value

Capital

Deficit

Loss

Transactions

Investments

Equity

Balance as of December 31, 2021

i 10,790,413

i 10,790

i 10,694,163

( i 1,159,665)

( i 1,877,667)

i 5,580,810

i 165,618

i 13,414,049

Net investment gain, net of tax of $ i 159,000

—

i 295,388

—

i 295,388

Net realized gain on investment transactions

—

i 138,770

—

i 138,770

Depreciation in value of investments

—

( i 22,047)

Balance as of March 31, 2022

i 10,790,413

i 10,790

i 10,694,163

( i 1,159,665)

( i 1,582,279)

i 5,719,580

i 143,571

i 13,826,160

Accumulated

Net Unrealized

Accumulated

Undistributed

Appreciation

Additional

Undistributed

Net Realized Gain

(Depreciation)

Total

Common

Paid In

Accumulated

Net Investment

on Investments

in Value of

Shareholders’

Three Months Ended March 31, 2021

Shares

Par Value

Capital

Deficit

Loss

Transactions

Investments

Equity

Balance as of December 31, 2020

i 10,785,913

i 10,786

i 10,673,014

( i 1,159,665)

( i 2,124,419)

i 2,541,850

i 1,699,321

i 11,640,887

Issuance of shares

i 1,000

i 1

i 5,749

—

i 5,750

Net investment loss, net of tax of $ i 662,691

—

( i 649,707)

—

( i 649,707)

Net realized gain on investment transactions

—

i 2,907,999

—

i 2,907,999

Depreciation in value of investments

—

( i 513,250)

Balance as of March 31, 2021

i 10,786,913

i 10,787

i 10,678,763

( i 1,159,665)

( i 2,774,126)

i 5,449,849

i 1,186,071

i 13,391,679

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


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

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

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

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

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

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

MARCH 31, 2022


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

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

Warrants
Healthcare		i 679		—	i 0.00	%

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

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

Total Cash		i 71,020		i 71,020	i 0.51	%

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

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MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2021


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

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

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

Warrants
Healthcare		i 679		—	i 0.00	%

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

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

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

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

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

NOTE 1 – ORGANIZATION

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

We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election on December 27, 2019. As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC. We offer short-term specialty finance solutions primarily to private businesses, small-cap public companies and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “investment securities” for purposes of federal securities law, and we monitor our investments as a whole to ensure that no more than i 40% of our total assets may consist of investment securities.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

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

The condensed balance sheet as of December 31, 2021 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 for the year ended December 31, 2021.

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

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

Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by our Board of Directors, 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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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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

●

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

●

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

●

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

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

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

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

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

For non-traded (Level 3) debt securities with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. The fair value for short-term non-banking loans is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent to those cash flows. The discount ranges from i 12% to i 48% and approximate rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk.

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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

Income taxes:

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

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

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

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

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities 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 in placed on non-accrual status.

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

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

Management and service fees:

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

NOTE 3 – INVESTMENTS

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


	Investments at		Percentage of		Investments at		Percentage of
	Amortized Cost		Amortized Cost		Fair Value		Fair Value
Short-term Non-banking Loans	$	i 18,080,750	i 90.6	%	$	i 18,075,000	i 90.0	%
Preferred Stock		i 1,050,000	i 5.3			i 1,200,000	i 5.9
Warrants		i 679	—			—	—
Other Equity		i 812,500	i 4.1			i 812,500	i 4.1
Total	$	i 19,943,929	i 100.0	%	$	i 20,087,500	i 100.0	%

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2021 (together with the corresponding percentage of the fair value of our total portfolio of investments):


	Investments at		Percentage of		Investments at		Percentage of
	Amortized Cost		Amortized Cost		Fair Value		Fair Value
Short-term Non-banking Loans	$	i 11,655,750	i 83.7	%	$	i 11,650,000	i 82.6	%
Preferred Stock		i 1,050,000	i 7.5			i 1,200,000	i 8.5
Common Stock		i 414,128	i 3.0			i 436,175	i 3.1
Warrants		i 679	—			—	—
Other Equity		i 812,500	i 5.8			i 812,500	i 5.8
Total	$	i 13,933,057	i 100.0	%	$	i 14,098,675	i 100.0	%

/ i

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


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

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


	As of December 31, 2021
	Investments at		Percentage of
	Fair Value		Fair Value
Consumer	$	i 2,362,500	i 16.8	%
Financial		i 3,836,175	i 27.2
Information Technology		i 300,000	i 2.1
Real Estate		i 7,600,000	i 53.9
Total	$	i 14,098,675	i 100.0	%

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

As of March 31, 2022

Level 1

Level 2

Level 3

Total

Short-term Non-banking Loans

—

i 18,075,000

Preferred Stock

—

i 1,200,000

Other Equity

—

i 812,500

Total

—

i 20,087,500

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

As of December 31, 2021

Level 1

Level 2

Level 3

Total

Short-term Non-banking Loans

—

i 11,650,000

Preferred Stock

—

i 1,200,000

Common Stock

i 436,175

—

i 436,175

Other Equity

—

i 812,500

Total

i 436,175

—

i 13,662,500

i 14,098,675

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

For the three months ended March 31, 2022

ST Non-banking

Common

Loans

Preferred Stock

Stock

Warrants

Other Equity

Balance as of January 1, 2022

i 11,650,000

i 1,200,000

—

i 812,500

Net change in unrealized appreciation

—

Purchases and other adjustments to cost

i 7,025,000

—

Sales and redemptions

( i 600,000)

—

Net realized loss

—

Balance as of March 31, 2022

i 18,075,000

i 1,200,000

—

i 812,500

The net change in unrealized depreciation for the three months ended March 31, 2022 attributable to Level 3 portfolio investments still held as of March 31, 2022 was $ i 0.

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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


Security Type	3/31/22 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	i 18,075,000	discounted cash flow	determining private company credit rating	i 12- i 48	%
Other Equity		i 812,500	last secured funding known by company	economic changes since last funding
Preferred Stock		i 1,200,000	last funding secured by company	economic changes since last funding
	$	i 20,087,500

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

For the year ended December 31, 2021

Non-banking

Preferred

Common

Loans

Stock

Warrants

Other Equity

Balance as of January 1, 2021

i 2,789,000

i 300,000

—

i 278,897

Net change in unrealized appreciation

—

Purchases and other adjustments to cost

i 24,765,333

i 900,000

—

i 812,500

Sales and redemptions

( i 15,904,333)

—

( i 278,897)

Net realized loss

—

Balance as of December 31, 2021

i 11,650,000

i 1,200,000

—

i 812,500

The net change in unrealized depreciation for the year ended December 31, 2021 attributable to Level 3 portfolio investments still held as of December 31, 2021 was $ i 0.

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


Security Type	12/31/21 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	i 11,650,000	discounted cash flow	determining private company credit rating	i 12- i 44	%
Other Equity		i 812,500	last secured funding known by company	economic changes since last funding
Preferred Stock		i 1,200,000	last funding secured by company	economic changes since last funding
	$	i 13,662,500

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a conflicts of interest and related-party transactions policy. Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested. In this regard, during the period covered by this report we entered into 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 i 1,765,000 shares of our common stock. In the transaction, we obtained a i two-year promissory note in the principal amount of $ i 250,000, which was subsequently amended such that the note presently matures in August 2022. The promissory note bears interest payable monthly at the rate of i 10% per annum. The note is secured by the debtors’ pledge to us of i 625,000 shares of our common stock. The pledged shares are held in physical custody for us by Millennium Trust Company, as our custodial agent.

●

On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $ i 5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. See note 7 for further details.

/ i

NOTE 6 – INCOME TAXES

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

As of March 31, 2022 and December 31, 2021, we have a net deferred tax liability of $ i 39,000 and $ i 45,000, respectively. Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, we may need to record a valuation allowance, which could materially impact our financial position and results of operations. We will continue to assess the need for a valuation allowance in future periods.

As of March 31, 2022 and December 31, 2021 we had accrued income taxes of $ i 1,434,000 and $ i 1,269,000, respectively. We recorded income taxes of $ i 159,000 ( i 28 percent effective tax rate) and $ i 662,691 ( i 29 percent effective tax rate) during the three months ended March 31, 2022 and March 31, 2021, respectively. $ i 1,362,000 of federal and state tax payments were made after March 31, 2022.

As of December 31, 2020, we had a federal NOL of approximately $ i 350,000. The remaining federal NOL was used in its entirety to offset taxable income during the 2021 tax year. At March 31, 2022, we have no federal or state NOLs available to offset taxable income, all NOLs have been exhausted. Due to tax reform enacted in 2017, any newly created NOLs will carry forward indefinitely.

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

NOTE 7 – LINE OF CREDIT

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

The Loan Agreement provides for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement, and requires us to pay such fee in 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.

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

/ i

NOTE 8 – SHAREHOLDERS’ EQUITY

At March 31, 2022, we had i 10,790,413 shares of common stock issued and outstanding.

NOTE 9 – PER-SHARE INFORMATION

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


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

NOTE 10 – OPERATING LEASES

We were subject to i two non-cancelable operating leases for office space which expired March 31, 2022. The leases did not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases did not contain contingent rent provisions.

Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted average discount rate as of December 31, 2021 was i 4.5%.

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

Under ASC 840, rent expense for office facilities for the three months ended March 31, 2022 and March 31, 2021 was $ i 16,812 and $ i 16,689, respectively.

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


	Three Months Ended
	March 31, 2022		March 31, 2021
Operating lease costs	$	i 4,779	$	i 4,779
Variable lease cost		i 4,601		i 4,478
Short-term lease cost		i 7,432		i 7,432
Total	$	i 16,812	$	i 16,689

On March 22, 2022, we signed an extension to our operating lease for office space which begins April 2, 2022 and expires October 2, 2023. The lease does not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the lease does not contain contingent rent provisions.

Maturity analysis under this lease extension agreement consists of the following as of March 31, 2022:


	Operating
	Leases
2022	$	i 18,164
2023		i 14,859
Total lease payments		i 33,023
Less: interest		( i 1,035)
Present value of lease liabilities	$	i 31,988

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Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

NOTE 11 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the three months ended March 31, 2022 through 2018:

Three Months Ended March 31,

2022

2021

2020

2019

2018

Per Share Data ⁽¹⁾

Net asset value at beginning of period

i 1.24

i 1.08

i 0.91

i 1.02

i 0.87

Net investment income (loss)

i 0.04

i 0.00

( i 0.02)

( i 0.01)

Net realized and unrealized gains (losses)

i 0.01

i 0.22

( i 0.03)

i 0.12

i 0.06

Provision for income taxes

( i 0.01)

( i 0.06)

i 0.00

Payment of common stock dividend

i 0.00

( i 0.05)

i 0.00

Net asset value at end of period

i 1.28

i 1.24

i 0.88

i 1.07

i 0.92

Ratio / Supplemental Data

Per share market value of investments at end of period

i 1.86

i 1.25

i 0.41

i 0.78

i 0.76

Shares outstanding at end of period

i 10,790,413

i 10,786,913

i 11,067,402

Average weighted shares outstanding for the period

i 10,790,413

i 10,785,913

i 11,067,402

i 11,863,392

Net assets at end of period

i 13,826,160

i 13,391,679

i 9,786,615

i 11,890,188

i 9,783,191

Average net assets ⁽²⁾

i 13,620,104

i 12,516,283

i 9,927,574

i 12,911,895

i 9,770,410

Total investment return

i 3.23

i 14.81

( i 3.30)

i 4.90

i 5.75

Portfolio turnover rate (3)

i 8.46

i 40.24

i 0.75

i 0.93

i 0.80

Ratio of operating expenses to average net assets ⁽³⁾

( i 15.28)

( i 16.20)

( i 7.82)

( i 6.06)

( i 7.52)

Ratio of net investment income (loss) to average net assets ⁽³⁾

i 14.24

i 0.42

i 0.87

( i 4.87)

( i 6.16)

Ratio of realized gains (losses) to average net assets ⁽³⁾

i 4.20

i 133.32

i 1.00

i 137.57

i 2.17

(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.

/ / i

NOTE 12 – Subsequent Events

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

On April 12, 2022 we received $ i 3,900,000 in advanced principal repayment of a short-term loan that had a maturity date of September 27, 2022. The note bore interest at a rate of i 12%.

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

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Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in seven sections:

●

Overview

●

Portfolio and Investment Activity

●

Results of Operations

●

Financial Condition

●

Critical Accounting Estimates

●

Off-Balance Sheet Arrangements

●

Forward Looking Statements

OVERVIEW

Mill City Ventures III, Ltd. was incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “company.”

We provide non-bank lending and specialty finance to companies and individuals on both a secured and unsecured basis. The loans we provide typically have maturities that range from 9 to 12 months and may involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale, other real estate projects, title loans, cash inventory needs, inventory financing, or for other purposes. We intend to remain opportunistic, however, and may engage in transactions that involve other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make.

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

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

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Table of Contents

PORTFOLIO AND INVESTMENT ACTIVITY

During the three months ended March 31, 2022, we made $7,025,000 of investments in portfolio companies and had $1,152,898 of redemptions and repayments, resulting in net investments at amortized cost of $19,943,929 as of March 31, 2022.

During the three months ended March 31, 2021, we made $9,430,664 of investments in portfolio companies and had $5,036,657 of redemptions and repayments, resulting in net investments at amortized cost of $12,276,332 as of March 31, 2021.

Our portfolio composition by major class, based on fair value at March 31, 2022, was as follows:


	Investments at		Percentage of
	Fair Value		Fair Value
Short-term Non-banking Loans	$	18,075,000	90.0	%
Equity/Other		2,012,500	10.0
Total	$	20,087,500	100.0	%

RESULTS OF OPERATIONS

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


	For the Three Months Ended
	March 31,
	2022		2021
Investment Income:	$	1,000,206	$	546,842
Operating Expenses:		(545,818)		(533,858)
Net Investment Gain	$	454,388	$	12,984

Investment Income

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt securities we own. We may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire. In some cases, the interest on our investments may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. Finally, we may also generate revenue in the form of commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned.

For the three months ended March 31, 2022 and 2021, our total investment income was $1,000,206 and $546,842, respectively. The increase is due to the increase in our short-term non-bank lending activity. Our loan portfolio generates interest income, with an average rate on the loans of 22.4%.

Professional Fees

For the three months ended March 31, 2022 and 2021, we had $198,518 and $142,808 of professional fees expense, respectively. The increase in 2022 is due to an increase in our short-term non-bank lending activity and the legal costs incurred to close those deals.

Net Realized Gain from Investments

For the three months ended March 31, 2022, we had $1,152,898 of proceeds from sale of investments, resulting in $138,770 of realized gains. For the three months ended March 31, 2021, we had $5,036,657 of proceeds from sale of investments, resulting in $2,907,999 of realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three months ended March 31, 2022, our investments included $22,047 of unrealized depreciation. For the three months ended March 31, 2021, our investments included $513,250 of unrealized depreciation.

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Table of Contents

Changes in Net Assets from Operations

For the three months ended March 31, 2022, we recorded a net increase in net assets from operations of $412,111. Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2022, our per-share net increase in net assets from operations was $0.04. For the three months ended March 31, 2021, we recorded a net increase in net assets from operations of $1,745,042. Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2021, our per-share net increase in net assets from operations was $0.16.

Cash Flows for the Three Months Ended March 31, 2022 and 2021

The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions and repayments of portfolio investments, among other factors. For the three months ended March 31, 2022, net cash used in operating activities was $7,190,128. Cash flows used in operating activities for the three months ended March 31, 2022 were primarily related to purchases of investments totaling $7,025,000. For the three months ended March 31, 2021, net cash used in operating activities was $4,402,126. Cash flows provided in operating activities for the three months ended March 31, 2021 were primarily related to purchases of investments totaling $9,430,664, offset by repayments of investments totaling $5,036,657.

FINANCIAL CONDITION

As of March 31, 2022, we had cash of $71,020, a decrease of $1,865,128 from December 31, 2021. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to collectively as “temporary investments.” As of the date of this filing, we expect that substantially all of our temporary investments will be redeployed into portfolio company investments by December 31, 2022.

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

CRITICAL ACCOUNTING ESTIMATES

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

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

OFF-BALANCE-SHEET ARRANGEMENTS

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

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Table of Contents

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

ITEM 4.CONTROLS AND PROCEDURES

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

As of March 31, 2022, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of March 31, 2022.

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

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Table of Contents

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
101.INS	*	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	*	Inline XBRL Taxonomy Extension Schema Document
101.CAL	*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	*	Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	*	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	*	Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)

* Filed herewith

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Table of Contents

SIGNATURES

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


	MILL CITY VENTURES III, LTD.

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


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

- 24 -

Dates Referenced Herein and Documents Incorporated by Reference

This ‘10-Q’ Filing	Date	Other Filings

	1/3/27
	10/2/23
	1/23/23
	1/3/23
	12/31/22
	9/30/22
	9/27/22
Filed on:	5/13/22
	4/26/22	S-1
	4/18/22
	4/12/22
	4/11/22	4
	4/2/22
For Period end:	3/31/22
	3/22/22
	1/3/22	8-K
	1/1/22
	12/31/21	10-K
	3/31/21	10-Q
	3/10/21	10-K
	1/1/21
	12/31/20	10-K
	12/31/19	10-K
	12/27/19	N-54C
	8/10/18	10-Q
	12/13/12	N-8A
	1/10/06
		List all Filings

2 Previous Filings that this Filing References

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 1/23/13  Mill City Ventures III, Ltd.      8-K:5,7,9   1/17/13    3:37K                                    Toppan Merrill/FA
 1/29/08  Mill City Ventures III, Ltd.      10SB12G                6:1.3M                                   Toppan Merrill/FA

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Mill City Ventures III, Ltd. – ‘10-Q’ for 3/31/22

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