MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended June 30, ~~2022~~2023


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

~~Item 1~~.		~~Financial Statements (unaudited)~~
Item 1.	Financial Statements (unaudited)	3

		Condensed Balance Sheets – June 30, ~~2022~~2023 and December 31, ~~2021~~2022		23

		Condensed Statements of Operations – Three and six months ended June 30, ~~2022~~2023 and June 30, ~~2021~~2022		34

		Condensed Statements of Shareholders’ Equity – Three and six months ended June 30, ~~2022~~2023 and June 30, 2022		45

		Condensed Statements of Cash Flows – Six months ended June 30, ~~2022~~2023 and June 30, ~~2021~~2022		56

		Condensed Schedule of Investments – June 30, ~~2022~~2023 and Schedule of Investments – December 31, ~~2021~~2022		68

		Condensed Notes to Financial Statements – June 30, ~~2022~~2023		9

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

Item 4.		Controls and Procedures		2322

PART II.	OTHER INFORMATION	23

~~PART II~~Item 5..		~~OTHER INFORMATION~~Other Information	23

Item 66..		Exhibits	23
		23
SIGNATURES		24


2

~~SIGNATURES~~Table of Contents		24

~~- 2 -~~

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

ITEM ~~1.FINANCIAL~~1. FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS


	June 30, 2022
	(unaudited)			December 31, 2021

					June 30, 2023 (unaudited)			December 31, 2022
ASSETS
Investments, at fair value:	$	15,341,080	$	14,098,675	$	16,528,425		$	16,708,432
Non-control/non-affiliate investments (cost: $15,191,759 and $13,933,057 respectively)
Non-control/non-affiliate investments (cost: $16,552,481 and $17,359,804 respectively)
Cash		629,572		1,936,148		1,101,527			1,089,641
Note receivable		250,000		250,000		250,000			250,000
Prepaid expenses		133,613		83,674		158,839			218,440
Interest and dividend receivables		439,422		324,350		309,299			250,879
Right-of-use lease asset		26,804		4,984		5,483			16,398
Deferred taxes						428,000			201,000
Total Assets	$	16,820,491	$	16,697,831	$	18,781,573		$	18,734,790


LIABILITIES
Line of credit	$	2,075,000	$	—
Accounts payable		51,783		64,028	$	77,311		$	776,514
Dividend payable		—		100
Payable for purchase of investments		—		1,900,000
Lease liability		26,859		5,654
Accrued income tax		201,242		1,269,000
Deferred taxes		39,000		45,000
Operating lease liability						5,537			16,562
Deferred interest income						14,279			70,154
Total Liabilities		2,393,884		3,283,782		97,127			863,230
Commitments and Contingencies


SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (250,000,000 authorized; 10,855,413 and 10,790,413 outstanding)		10,855		10,790
Common stock, par value $0.001 per share (111,111,111 authorized;						12,215			12,215
6,185,255 outstanding)
Additional paid-in capital		10,776,537		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		(1,064,271)		(1,877,667)		(1,802,749	)		(1,086,739	)
Accumulated undistributed net realized gains on investment transactions		5,713,830		5,580,810		5,155,200			5,713,829
Net unrealized appreciation in value of investments		149,321		165,618		(24,055	)		(651,371	)
Total Shareholders’ Equity (Net Assets)		14,426,607		13,414,049
Total Liabilities and Shareholders’ Equity	$	16,820,491	$	16,697,831
Total Shareholders' Equity (Net Assets)						18,684,446			17,871,560
Total Liabilities and Shareholders' Equity					$	18,781,573		$	18,734,790
Net Asset Value Per Common Share	$	1.33	$	1.24	$	3.02		$	2.89

See accompanying Notes to Financial Statements

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~~Table of Contents~~

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021

									Three Months Ended						Six Months Ended
									June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Investment Income
Interest income	$	1,236,505	$	675,549	$	2,236,711	$	1,222,391	$	907,502		$	1,236,505		$	1,771,530		$	2,236,711
Total Investment Income		1,236,505		675,549		2,236,711		1,222,391		907,502			1,236,505			1,771,530			2,236,711

Operating Expenses
Professional fees		197,591		77,539		392,989		220,347		287,325			197,591			417,176			392,989
Payroll		114,542		85,346		310,984		387,426		147,161			114,542			1,277,600			310,984
Insurance		26,979		27,854		57,076		52,133		26,522			26,979			53,522			57,076
Occupancy		19,141		16,337		35,953		33,026		21,072			19,141			40,115			35,953
Director’s fees		87,073		30,000		117,073		60,000
Director's fees										30,000			87,073			562,968			117,073
Interest expense		47,794		—		117,853		—		43,333			47,794			78,000			117,853
Other general and administrative		9,135		13,080		16,145		31,082		14,632			9,135			32,481			16,145
Total Operating Expenses		502,255		250,156		1,048,073		784,014		570,045			502,255			2,461,862			1,048,073
Net Investment Gain		734,250		425,393		1,188,638	$	438,377

Realized and Unrealized Gain on Investments
Net Investment Gain (Loss)										337,457			734,250			(690,332	)	$	1,188,638
Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investments		(5,750)		621,600		133,020		3,529,599		41,371			(5,750	)		(558,629	)		133,020
Net change in unrealized appreciation (depreciation) on investments		5,750		83,100		(16,297)		(430,150)		(21,107	)		5,750			627,316			(16,297	)
Net Realized and Unrealized Gain on Investments		—		704,700		116,723		3,099,449
Net Increase in Net Assets Resulting from Operations Before Taxes	$	734,250	$	1,130,093	$	1,305,361	$	3,537,826
Net Realized and Unrealized Gain (Loss) on Investments										20,264			—			68,687			116,723
Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes									$	357,721		$	734,250		$	(621,645	)	$	1,305,361

Provision for Income Taxes		216,242		348,587		375,242		1,011,278		287,000			216,242			25,678			375,242
Net Increase in Net Assets Resulting from Operations	$	518,008	$	781,506	$	930,119		2,526,548

Net Increase in Net Assets Resulting from Operations per share:
Net Increase (Decrease) in Net Assets Resulting from Operations									$	70,721		$	518,008		$	(647,323	)		930,119

Net Increase (Decrease) in Net Assets Resulting from Operations per share:
Basic and diluted	$	0.05	$	0.07	$	0.09	$	0.23	$	0.01		$	0.11		$	(0.10	)	$	0.19

Weighted-average number of common shares outstanding - basic and diluted		10,847,556		10,790,413		10,819,142		10,788,175		6,185,255			4,821,136			6,185,255			4,808,508

See accompanying Notes to Financial Statements

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~~- 3 -~~

~~Table of Contents~~

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Accumulated

Accumulated

Undistributed

Net Unrealized

Additional

Undistributed

Net Realized Gain

Appreciation

Total

Common

Par

Paid In

Accumulated

Net Investment

(Loss) on Investments

in value of

Shareholders'
Three Months Ended June 30, 2022

Shares

Value

Capital

Deficit

Loss

Transactions

Investments

Equity
Balance as of March 31, 2022

10,790,413

$
10,790

$
10,694,163

$
(1,159,665)

$
(1,582,279)

$
5,719,580

$
143,571

$
13,826,160
Common shares issued in stock based compensation

65,000

65

82,374

—

—

—

—

82,439
Undistributed net investment gain

—

—

—

—

518,008

—

—

518,008
Undistributed net realized loss on investment transactions

—

—

—

—

—

(5,750)

—


(5,750)
Appreciation in value of investments

—

—

—

—

—

—

5,750

5,750
Balance as of June 30, 2022

10,855,413

$
10,855

$
10,776,537

$
(1,159,665)

$
(1,064,271)

$
5,713,830

$
149,321

$
14,426,607

Accumulated

Accumulated

Undistributed

Net Unrealized

Additional

Undistributed

Net Realized Gain

Appreciation

Total

Common

Paid In

Accumulated

Net Investment

on Investments

in value

Shareholders'
Three Months Ended June 30, 2021

Shares

Par Value

Capital

Deficit

Loss

Transactions

of Investments

Equity
Balance as of March 31, 2021

10,786,913

$
10,787

$
10,678,763

$
(1,159,665)

$
(2,774,126)

$
5,449,849

$
1,186,071

$
13,391,679
Common shares issued in consideration for expense payment

3,500

3

15,400

—

—

—

—

15,403
Undistributed net investment gain

—

—

—

—

76,806

—

—

76,806
Undistributed net realized gain on investment transactions

—

—

—

—

—

621,600

—

621,600
Appreciation in value of investments

—

—

—

—

—

—

83,100

83,100
Balance as of June 30, 2021

10,790,413

$
10,790

$
10,694,163

$
(1,159,665)

$
(2,697,320)

$
6,071,449

$
1,269,171

$
14,188,588

Accumulated

Net Unrealized

Accumulated

Undistributed

Appreciation

Additional

Undistributed

Net Realized Gain

(Depreciation)

Total

Common

Paid In

Accumulated

Net Investment

on Investments

in Value of

Shareholders’
Six Months Ended June 30, 2022

Shares

Par Value

Capital

Deficit

Loss

Transactions

Investments

Equity
Balance as of December 31, 2021

10,790,413

$
10,790

$
10,694,163

$
(1,159,665)

$
(1,877,667)

$
5,580,810

$
165,618

$
13,414,049
Common shares issued in stock based compensation

65,000

65

82,374

—

—

—

—

82,439
Undistributed net investment gain

—

—

—

—

813,396

—

—

813,396
Undistributed net realized gain on investment transactions

—

—

—

—

—

133,020

—

133,020
Depreciation in value of investments

—

—

—

—

—

—

(16,297)

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

10,855,413

$
10,855

$
10,776,537

$
(1,159,665)

$
(1,064,271)

$
5,713,830

$
149,321

$
14,426,607

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’
Six Months Ended June 30, 2021

Shares

Par Value

Capital

Deficit

Loss

Transactions

Investments

Equity
Balance as of December 31, 2020

10,785,913

$
10,786

$
10,673,014

$
(1,159,665)

$
(2,124,419)

$
2,541,850

1,699,321

$
11,640,887
Issuance of shares

4,500

4

21,149

—

—

—

—

21,153
Undistributed net investment loss

—

—

—

(572,901)

—

—

(572,901)
Undistributed net realized gain on investment transactions

—

—

—

—

3,529,599

—

3,529,599
Depreciation in value of investments

—

—

—

—

—

—

(430,150)

(430,150)
Balance as of June 30, 2021

10,790,413

$
10,790

$
10,694,163

$
(1,159,665)

$
(2,697,320)

$
6,071,449

$
1,269,171

$
14,188,588

Three Months Ended June 30, 2023	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain (Loss) on Investments Transactions			Net Unrealized Appreciation in value of Investments			Total Shareholders' Equity
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
Dividend Distribution				—		—		—			—			—			—			—
Issuance of stock options		—		—		—		—			—			—						—
Undistributed net investment gain				—		—		—			50,457			—			—			50,457
Undistributed net realized gain on investment transactions				—		—		—			—			41,371			—			41,371
Depreciation in value of investments				—		—		—			—			—			(21,107	)		(21,107	)
Balance as of June 30, 2023		6,185,255	$	12,215	$	16,503,500	$	(1,159,665	)	$	(1,802,749	)	$	5,155,200		$	(24,055	)	$	18,684,446

Three Months Ended June 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 March 31, 2022		10,790,413	$	10,790	$	10,694,163	$	(1,159,665	)	$	(1,582,279	)	$	5,719,580		$	143,571		$	13,826,160
Common shares issued in stock based compensation		65,000		65		82,374		—			—									82,439
Undistributed net investment gain				—		—		—			518,008			—			—			518,008
Undistributed net realized loss on investment transactions				—		—		—			—			(5,750	)		—			(5,750	)
Appreciation in value of investments				—		—		—			—			—			5,750			5,750
Balance as of June 30, 2022		10,855,413	$	10,855	$	10,776,537	$	(1,159,665	)	$	(1,064,271	)	$	5,713,830		$	149,321		$	14,426,607

Six Months Ended June 30, 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 $139,300				—		—		—			(716,010	)		—			—			(716,010	)
Undistributed net realized loss on investment transactions				—		—		—			—			(558,629	)		—			(558,629	)
Appreciation in value of investments				—		—		—			—			—			627,316			627,316
Balance as of June 30, 2022		6,185,255	$	12,215	$	16,503,500	$	(1,159,665	)	$	(1,802,749	)	$	5,155,200		$	(24,055	)	$	18,684,446

Six Months Ended June 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 December 31, 2021		10,790,413	$	10,790	$	10,694,163	$	(1,159,665	)	$	(1,877,667	)	$	5,580,810		$	165,618		$	13,414,049
Common shares issued in stock based compensation		65,000		65		82,374		—			—									82,439
Undistributed net investment gain				—		—		—			813,396			—			—			813,396
Undistributed net realized gain on investment transactions				—		—		—			—			133,020			—			133,020
Depreciation in value of investments				—		—		—			—			—			(16,297	)		(16,297	)
Balance as of June 30, 2022		10,855,413	$	10,855	$	10,776,537	$	(1,159,665	)	$	(1,064,271	)	$	5,713,830		$	149,321		$	14,426,607

See accompanying Notes to Financial Statements

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~~Table of Contents~~

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended

June 30, 2022

June 30, 2021
Cash flows from operating activities:




Net increase in net assets resulting from operations

$
930,119

$
2,526,548

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

430,150
Net realized gain on investments

(133,020)

(3,529,599)
Purchases of investments

(9,103,580)

(13,250,664)
Proceeds from sales of investments

7,977,898

9,889,827
Deferred income taxes

(1,073,758)

1,011,278
Common shares issued as consideration for expense payment

82,439

15,403

Changes in operating assets and liabilities:

Prepaid expenses and other assets

(39,772)

(135,934)
Interest and dividends receivable

(115,072)

(265,504)
Receivable for investment sales

—

(75,465)
Payable for investment purchase

(1,900,000)

—
Accounts payable and other liabilities

(23,127)

(2,318)
Deferred interest income

—

—
Net cash used in operating activities

(3,381,576)

(3,386,278)

Cash flows from financing activities:

Proceeds from line of credit

6,075,000

—
Repayments on line of credit

(4,000,000)

—
Payments for common stock dividend

—

(539,296)
Net cash provided (used) by financing activities

2,075,000

(539,296)
Net decrease in cash

(1,306,576)

(3,925,574)
Cash, beginning of period

1,936,148

5,440,579
Cash, end of period

$
629,572

$
1,515,005

Non-cash financing activities:




Common shares issued as consideration for investment

$
—

$
5,750


	Six Months Ended
	June 30, 2023			June 30, 2022
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations	$	(647,323	)	$	930,119
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Net change in unrealized (appreciation) depreciation on investments		(627,316	)		16,297
Net realized (gain) loss on investments		558,629			(133,020	)
Purchases of investments		(8,900,500	)		(9,103,580	)
Proceeds from sales of investments		9,149,194			7,977,898
Issuance of stock options		1,460,209			—
Deferred income taxes		(227,000	)		(1,073,758	)
Common shares issued as consideration for expense payment		—			82,439
Changes in operating assets and liabilities:
Prepaid expenses and other assets		70,516			(39,772	)
Interest and dividends receivable		(58,420	)		(115,072	)
Payable for investment purchase		—			(1,900,000	)
Accounts payable and other liabilities		(710,228	)		(23,127	)
Deferred interest income		(55,875	)		—
Net cash provided (used) in operating activities		11,886			(3,381,576	)
Cash flows from financing activities:
Proceeds from line of credit		2,750,000			6,075,000
Repayments on line of credit		(2,750,000	)		(4,000,000	)
Net cash provided by financing activities		—			2,075,000
Net increase (decrease) in cash		11,886			(1,306,576	)
Cash, beginning of period		1,089,641			1,936,148
Cash, end of period	$	1,101,527		$	629,572

See accompanying Notes to Financial Statements

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~~Table of Contents~~

MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

JUNE 30, ~~2022~~2023


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

Short-Term Non-banking Loans
Consumer - 15% secured loans	$	400,000	$	400,000	2.77	%
AirDog Supplies, Inc.		1,250,000		1,250,000	8.66	%
Business Services - 15% secured loans

Mustang Litigation Funding							$	7,000,000	$	7,012,891		37.53	%
Consumer - 18% secured loans

Intelligent Mapping, LLC		2,900,000		2,900,000	20.10	%		2,900,000		2,900,324		15.52	%
Financial - 53.02% secured loans
Financial - 33% secured loans

Benton Financial, LLC		598,580		598,580	4.15	%		1,202,500		1,202,361		6.44	%
Financial - 34% secured loans

Benton Financial, LLC								772,500		773,022		4.14	%

Financial - 12% secured loans		500,000		500,000	3.46	%		500,000		389,831		2.08	%

Information Technology - 15% convertible note								212,500		212,482		1.14	%

Real Estate - 15% secured loans		1,280,000		1,280,000	8.87	%		745,000		747,178		4.00	%
Tailwinds, LLC		3,000,000		3,000,000	20.79	%
Real Estate - 48% secured loans
Villas at 79th, LLC		3,400,000		3,400,000	23.57	%
Real Estate - 12% secured loans

Alatus Development Corp								2,000,000		2,002,214		10.72	%

Total Short-Term Non-Banking Loans		13,328,580		13,328,580	92.37	%		15,332,500		15,240,303		81.57	%


Preferred Stock
Consumer

Wisdom Gaming, Inc		900,000		900,000	6.24	%		900,000		900,000		4.82	%

Information Technology		150,000		300,000	2.08	%		150,000		300,000		1.61	%
Total Other Equity		1,050,000		1,200,000	8.32	%


Total Preferred Stock								1,050,000		1,200,000		6.43	%

Common Stock

Consumer								159,302		78,122		0.42	%

Warrants
Healthcare		679		—	0.00	%		679		—		0.00	%


Other Equity
Consumer		212,500		212,500	1.47	%
Financial		600,000		600,000	4.16	%		10,000		10,000		0.05	%
Total Other Equity		812,500		812,500	5.63	%


Total Investments	$	15,191,759	$	15,341,080	106.32	%	$	16,552,481	$	16,528,425		88.47	%


Total Cash		629,572		629,572	4.36	%		1,101,527		1,101,527		5.90	%


Total Investments and Cash	$	15,821,331	$	15,970,652	110.68	%	$	$17,654,008	$	$17,629,952		94.37	%

See accompanying Notes to the Financial Statements

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~~- 6 -~~

~~Table of Contents~~

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, ~~2021~~2022


					Percentage
					of Net
Investment / Industry	Cost		Fair Value		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	%

See accompanying Notes to the Financial Statements

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~~- 7 -~~

~~Table of Contents~~

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 ~~that files~~filing periodic reports with the SEC. We ~~engaged~~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 June 30, ~~2022~~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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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.

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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.

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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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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 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 June 30, ~~2022.~~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.

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~~Table of Contents~~

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.

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 June 30, 2023 (together with the corresponding percentage of the fair value of our total portfolio of investments):

	As of June 30, 2023
	Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value

Short-term Non-banking Loans	$	15,332,500		92.6	%	$	15,240,303		92.2	%
Preferred Stock		1,050,000		6.3			1,200,000		7.2
Common Stock		159,302		1.0			78,122		0.5
Warrants		679		—			—		—
Other Equity		10,000		0.1			10,000		0.1
Total	$	16,552,481		100.0	%	$	16,528,425		100.0	%

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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 investments):


	As of June 30, 2022
	Investments at		Percentage of		Investments at		Percentage of
	Amortized Cost		Amortized Cost		Fair Value		Fair Value
									As of December 31, 2022
									Investments at Amortized Cost		Percentage of Amortized Cost			Investments at Fair Value		Percentage of Fair Value

Short-term Non-banking Loans	$	13,328,580	87.7	%	$	13,328,580	86.9	%	$	15,486,625		89.2	%	$	15,285,932		91.5	%
Preferred Stock		1,050,000	6.9			1,200,000	7.8			1,050,000		6.1			1,200,000		7.2
Common Stock										—		—			—		—
Warrants		679	—			—	—			679		—			—		—
Other Equity		812,500	5.4			812,500	5.3			822,500		4.7			222,500		1.3
Total	$	15,191,759	100.0	%	$	15,341,080	100.0	%	$	17,359,804		100.0	%	$	16,708,432		100.0	%

The following table shows the composition of our ~~investments 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 investments):~~

As of December 31, 2021


Investments at

Percentage of

Investments at

Percentage of

Amortized Cost

Amortized Cost

Fair Value

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~~investment portfolio by industry grouping, based on fair value as of June 30, ~~2022:~~2023:


	As of June 30, 2022
	Investments at		Percentage of
	Fair Value		Fair Value
					As of June 30, 2023
					Investments at Fair Value		Percentage of Fair Value

Business Services					$	7,012,891		42.4	%
Consumer	$	5,662,500	36.9	%		3,878,446		23.5
Financial		1,698,580	11.0			2,375,214		14.4
Information Technology		300,000	2.0			512,482		3.1
Real Estate		7,680,000	50.1			2,749,392		16.6
Total	$	15,341,080	100.0	%	$	16,528,425		100.0	%

The following table shows the composition of our ~~investments~~investment portfolio by industry grouping, based on fair value as of December 31, ~~2021:~~2022:


	As of December 31, 2021
	Investments at		Percentage of
	Fair Value		Fair Value
					As of December 31, 2022
					Investments at Fair Value		Percentage of Fair Value

Business Services					$	7,231,580		43.3	%
Consumer	$	2,362,500	16.8	%		4,385,028		26.2
Financial		3,836,175	27.2			2,833,451		17.0
Information Technology		300,000	2.1			513,656		3.1
Real Estate		7,600,000	53.9			1,744,717		10.4
Total	$	14,098,675	100.0	%	$	16,708,432		100.0	%

~~- 12 -~~

~~Table of Contents~~

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~~portfolio as of June 30, ~~2022~~2023 may differ materially from values that would have been used had a readily available market for the investments ~~and loans~~ existed.

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


	As of June 30, 2022
	Level 1		Level 2		Level 3		Total
									As of June 30, 2023
									Level 1		Level 2		Level 3		Total

Short-term Non-banking Loans	$	—	$	—	$	13,328,580	$	13,328,580	$	—	$	—	$	15,240,303	$	15,240,303
Preferred Stock		—		—		1,200,000		1,200,000						1,200,000		1,200,000
Common Stock *												78,122		—		78,122
Warrants										—		—		—		—
Other Equity		—		—		812,500		812,500		—		—		10,000		10,000
Total	$	—	$	—	$	15,341,080	$	15,341,080	$	—	$	78,122	$	16,450,303	$	16,528,425

* Common shares are subject to a lock up holding period and not freely tradeable until August 15, 2023.

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


	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
									As of December 31, 2022
									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 six months ended June 30, ~~2022:~~2023:

��


For the six months ended June 30, 2022

ST Non-banking

Common

Loans

Preferred Stock

Stock

Warrants

Other Equity
Balance as of January 1, 2022

$
11,650,000

$
1,200,000

$
—

$
—

$
812,500
Net change in unrealized appreciation

—

—

—

—

—
Purchases and other adjustments to cost

9,103,580

—

—

—

—
Sales and redemptions

(7,425,000)

—

—

—

—
Net realized loss

—

—

—

—

—
Balance as of June 30, 2021

$
13,328,580

$
1,200,000

$
—

$
—

$
812,500

	For the six months ended June 30, 2023
	ST Non-banking Loans			Preferred Stock		Common Stock		Warrants		Other Equity

Balance as of January 1, 2023	$	15,285,932		$	1,200,000	$	—	$	—	$	222,500
Net change in unrealized appreciation		108,496			—		—		—		600,000
Purchases and other adjustments to cost		8,900,500			—		—		—		—
Sales and redemptions		(9,054,625	)		—		—		—
Net realized loss		—			—		—		—		(600,000	)
Transfers out of level 3		—			—		—		—		(212,500	)
Balance as of June 30, 2023	$	15,240,303		$	1,200,000	$	—	$	—	$	10,000

The net change in unrealized appreciation for the six months ended June 30, ~~2022~~2023 attributable to Level 3 portfolio investments ~~and loans~~ still held as of June 30, ~~2022~~2023 is ~~$0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.~~$634,081.

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


Security Type	6/30/22 FMV		Valuation Technique	Unobservable Inputs	Range			6/30/23 FMV	Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	13,328,580	discounted cash flow	determining private company interest rate based on credit	12-53	%	$	15,240,303	discounted cash flow	determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness	12-34	%
Other Equity		812,500	last secured funding known by company	economic changes since last funding				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				1,200,000	last funding secured by company	economic changes since last funding
	$	15,341,080
							$	16,450,303

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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 ended December 31, ~~2021:~~2022:

For the year ended December 31, 2021


ST








Non-banking

Preferred

Common

Loans

Stock

Stock

Warrants

Other Equity
Balance as of January 1, 2021

$
2,789,000

$
300,000

$
—

$
—

$
278,897
Net change in unrealized appreciation

—

—

—

—

—
Purchases and other adjustments to cost

24,765,333

900,000

—

—

812,500
Sales and redemptions

(15,904,333)

—

—

—

(278,897)
Net realized loss

—

—

—

—

—
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

~~- 14 -~~

~~Table of Contents~~

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 ~~1,765,000~~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 ~~625,000~~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 7 below for further details.

NOTE 6 – INCOME TAXES

~~Presently, we~~

We are a ~~C-corporation~~C-Corporation for tax purposes and have booked an income tax provision for the periods described below.

Table of Contents

As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we ~~had~~have a deferred tax asset of $428,000 and $201,000, respectively. As of June 30, 2023, our net deferred tax ~~liability~~asset consists of ~~$39,000~~foreign tax credit carryforwards, unrealized investment gain/loss, non-qualified stock option expenses, and ~~$45,000, respectively.~~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. 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 June 30, ~~2022~~2023 and December 31, ~~2021~~2022 we had ~~accrued~~prepaid income taxes of ~~$201,242~~$44,600 and ~~$1,269,000,~~$179,300, respectively. ~~The change in accrued income taxes was driven by $1,449,000 of federal and state tax payments made shortly after quarter one of 2022 ended.~~ We recorded a an increase in income taxes of ~~$216,242 (29~~$25,700 (26 percent effective tax rate) and ~~$348,587~~an increase of income taxes of $324,000 (29 percent effective tax rate) during the three months ended June 30, ~~2022~~2023 and June 30, ~~2021,~~2022, respectively.

As of December 31, 2020, we had a federal NOL of approximately $350,000. The remaining federal NOL was used in its entirety to offset taxable income during the 2021 tax year. At June 30, 2022, we have no federal or state NOLs available to offset taxable income, as all NOLs have been exhausted. Due to tax reform enacted in 2017, any newly created NOLs will carry forward indefinitely.

~~- 15 -~~

~~Table of Contents~~

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.

~~The~~

During the period January 3 to June 30, 2022, the Loan Agreement ~~provides~~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.

As of June 30, 2023 and December 31, 2022, ~~the~~there was no balance outstanding on the ~~line was $2,075,000 with a maturity date of January 3, 2027.~~line.

NOTE 8 – ~~SHAREHOLDERS’ EQUITY~~STOCK-BASED COMPENSATION

~~At June 30,~~

The Company’s 2022 ~~we had 10,855,413~~Stock Incentive Plan authorized the issuance of incentives relating to 900,000 shares of common ~~stock issued and~~ ~~outstanding~~.

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

~~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

June 30,

2022

2021
Numerator: Net increase in net assets resulting from operations

$
518,008

$
781,506
Denominator: Weighted-average number of common shares outstanding

10,847,556

10,790,413
Basic and diluted net gain per common share

$
0.05

$
0.07

For the Six Months Ended

June 30,

2022

2021
Numerator: Net increase in net assets resulting from operations

$
930,119

$
2,526,548
Denominator: Weighted-average number of common shares outstanding

10,819,142

10,788,175
Basic and diluted net gain per common share

$
0.09

$
0.23

~~NOTE 10 – OPERATING LEASES~~

We are subject to 2 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.

~~- 16 -~~

~~Table of Contents~~

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 4.5% and the weighted-average remaining lease term is one year.

~~Under ASC 840, rent expense for office facilities for the three months ended June 30, 2022 and June 30, 2021 was $19,141 and $16,337, respectively.~~

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

Three Months Ended

Six Months Ended

June 30, 2022

June 30, 2022
Operating lease costs

$
5,504

$
10,283
Variable lease cost

4,522

9,123
Short-term lease cost

9,115

16,547
Total

$
19,141

$
35,953

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

Operating Lease

Right-of-use assets

$
26,804

Operating Lease Liability

$
26,859
Less: short term portion

(23,832)
Long term portion

$
3,027

~~Maturity analysis under lease agreements consisted of the following as~~stock. As of June 30, ~~2022:~~2023, incentives relating to the issuance of 870,000 shares have been issued under the Plan, leaving 30,000 shares available for issuance.

Operating

Leases
2022

$
12,715
2023

14,859
Total lease payments

27,574
Less: interest

(715)
Present value of lease liabilities

$
26,859

~~- 17 -~~

~~Table of Contents~~

~~NOTE 11 – FINANCIAL HIGHLIGHTS~~

The following ~~is a schedule of financial highlights~~table summarizes the activity for all stock options outstanding for the six months ended June 30, ~~2022 through 2018:~~2023:

Six Months Ended June 30,


2022

2021

2020

2019

2018

Per Share Data ⁽¹⁾











Net asset value at beginning of period

$
1.24

1.08

0.91

1.02

0.87

Net investment income (loss)

0.11

0.04

0.01

(0.03)

(0.02)

Net realized and unrealized gains (losses)

0.01

0.28

0.02

0.02

0.09

Provision for income taxes

(0.04)

(0.09)

0.00

0.00

0.00

Stock based compensation

0.01

0.00

0.00

0.00

0.00

Repurchase of common stock

0.00

0.00

0.02

0.00

0.00

Payment of common stock dividend

0.00

0.00

0.00

(0.05)

0.00

Net asset value at end of period

$
1.33

1.31

0.96

0.96

0.94











Ratio / Supplemental Data











Per share market value of investments at end of period

$
1.41

1.22

0.65

0.70

0.82

Shares outstanding at end of period

10,855,413

10,790,413

10,696,735

11,067,402

11,067,402

Average weighted shares outstanding for the period

10,819,142

10,788,175

10,974,721

11,067,402

11,067,402

Net assets at end of period

$
14,426,607

14,188,588

10,221,718

10,588,689

11,278,889

Average net assets ⁽²⁾

$
13,888,938

13,073,718

10,025,622

12,304,975

9,955,674

Total investment return

6.45
%
21.30
%
3.30
%
(5.88)
%
8.05
%
Portfolio turnover rate (3)

65.55
%
75.65
%
11.90
%
7.11
%
11.55
%
Ratio of operating expenses to average net assets ⁽³⁾

(14.63)
%
(11.72)
%
(9.41)
%
(7.70)
%
(6.98)
%
Ratio of net investment income (loss) to average net assets ⁽³⁾

18.01
%
6.88
%
3.02
%
(6.40)
%
(5.53)
%
Ratio of realized gains (losses) to average net assets ⁽³⁾

1.94
%
61.92
%
4.06
%
57.36
%
(12.79)
%

	Shares		Weighted Average Exercise Price
Options outstanding at beginning of year		—	$	—
Granted		870,000		2.11
Exercised		—		—
Forfeited		—		—
Balance at June 30, 2023		870,000	$	2.11

Options exercisable at June 30:		870,000	$	2.11

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

~~(1)~~

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The following table summarizes additional information about stock options outstanding and exercisable at June 30, 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		9.42	$	2.11	$	262,100		870,000	$	2.11	$	262,100

The Company recognized stock-based compensation expense for stock options of $1,460,209 for the six months ended June 30, 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 six months ended June 30, 2023:

~~Per-share data was derived using the ending number of shares outstanding for the period.~~

2023

~~(2)~~

Risk-free interest rate

~~Based on the monthly average of net assets as of the beginning and end of each period presented.~~

3.48

~~(3)~~ Expected volatility	~~Ratios are annualized.~~	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.

NOTE 129 – ~~Subsequent Events~~SHAREHOLDERS’ EQUITY

At June 30, 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 articles of incorporation. This reduction was ~~effected~~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. ~~The condensed financial statements included herein have not~~All share and per share information has been ~~adjust for~~retrospectively adjusted to reflect the ~~August 9, 2022~~ reverse stock split.

~~Also~~

NOTE 10 – PER-SHARE INFORMATION

	For the Three Months Ended June 30,
	2023		2022
Numerator: Net increase in net assets resulting from operations	$	70,721	$	518,008
Denominator: Weighted-average number of common shares outstanding		6,185,255		4,821,136
Basic and diluted net gain per common share	$	0.01	$	0.11

	For the Six Months Ended June 30,
	2023			2022
Numerator: Net increase (decrease) in net assets resulting from operations	$	(647,323	)	$	930,119
Denominator: Weighted-average number of common shares outstanding		6,185,255			4,808,508
Basic and diluted net gain (loss) per common share	$	(0.10	)	$	0.19

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NOTE 11 – OPERATING LEASES

We are a party to two non-cancelable operating leases for office space expiring October 24, 2023. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew.

Because our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on ~~August 9,~~a collateralized basis over the term of a lease. The weighted-average discount rate as of June 30, 2023 and June 30, 2022 was 4.5% and the ~~Company’s common stock~~weighted-average remaining lease term is one year.

Rent expense for office facilities for the six months ended June 30, 2023 and June 30, 2022 was ~~listed~~$40,115 and ~~began trading on~~$35,953, respectively.

The components of our operating lease were as follows for the ~~Nasdaq Capital Market~~three and six months ended June 30, 2023:

	Three Months Ended		Six Months Ended
	June 30, 2023		June 30, 2023

Operating lease costs	$	5,504	$	11,008
Variable lease cost		4,828		9,733
Short-term lease cost		10,740		19,374
Total	$	21,072	$	40,115

Supplemental balance sheet information consisted of the following at June 30:

Operating Lease	2023			2022
Right-of-use assets	$	5,483		$	26,804

Operating Lease Liability	$	5,537		$	26,859
Less: short term portion		(5,537	)		(23,832	)
Long term portion	$	—		$	3,027

Maturity analysis under lease agreements consisted of the ~~same ticker symbol MCVT.~~following as of June 30:

	2023			2022
2022	$	—		$	12,715
2023		5,613			14,859
Total lease payments		5,613			27,574
Less: Present value discount		(76	)		(715	)
Present value of lease liabilities	$	5,537		$	26,859

Table of Contents

NOTE 12 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the six months ended June 30, 2023 through 2019:

	Six Months Ended June 30,
	2023			2022			2021			2020			2019
Per Share Data ⁽¹⁾
Net asset value at beginning of period	$	2.89			1.24			1.08			0.91			1.02
Net investment income (loss)		(0.11	)		0.11			0.04			0.01			(0.03	)
Net realized and unrealized gains (losses)		0.01			0.01			0.28			0.02			0.02
Provision for income taxes		(0.01	)		(0.04	)		(0.09	)		0.00			0.00
Issuance of stock options		0.24			0.01			0.00			0.00			0.00
Repurchase of common stock		0.00			0.00			0.00			0.02			0.00
Payment of common stock dividend		0.00			0.00			0.00			0.00			(0.05	)
Net asset value at end of period	$	3.02			1.33			1.31			0.96			0.96

Ratio / Supplemental Data
Per share market value of investments at end of period	$	2.67			1.41			1.22			0.65			0.70
Shares outstanding at end of period		6,185,255			4,824,628			4,795,739			4,754,104			4,918,845
Average weighted shares outstanding for the period		6,185,255			4,808,508			4,794,744			4,877,654			4,918,845
Net assets at end of period	$	18,684,446			14,426,607			14,188,588			10,221,718			10,588,689
Average net assets ⁽²⁾	$	18,389,910			13,888,938			13,073,718			10,025,622			12,304,975
Total investment return (loss)		(3.81	)%		6.45	%		21.30	%		3.30	%		(5.88	)%
Portfolio turnover rate (3)		48.40	%		65.55	%		75.65	%		11.90	%		7.11	%
Ratio of operating expenses to average net assets ⁽³⁾		(25.16	)%		(14.63	)%		(11.72	)%		(9.41	)%		(7.70	)%
Ratio of net investment income (loss) to average net assets⁽³⁾		(7.43	)%		18.01	%		6.88	%		3.02	%		(6.40	)%
Ratio of realized gains (losses) to average net assets ⁽³⁾		(6.03	)%		1.94	%		61.92	%		4.06	%		57.36	%

(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

On August ~~11, 2022,~~14, 2023, the ~~Company completed its public offer and sale~~Board of ~~1,250,000 common shares pursuant to a registration statement filed with~~Directors amended 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~~exercise provisions of the ~~registered public offering, the Company granted the underwriters~~2022 Stock Incentive Plan to permit holders of stock options to exercise their options on 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 proceedsnet-exercise/cashless basis, subject to the ~~Company after~~discretion of the ~~payment~~board’s compensation committee (which administers the plan) to limit such exercises. On the same date, the compensation committee approved the accelerated vesting of ~~underwriting discounts, underwriting expenses,~~stock options earlier issued to non-executives and non-directors, immediately upon any change of control of the ~~Company’s own offering-related expenses were approximately $4,041,000.~~Company.

~~- 18 -~~

Table of Contents

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

~~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 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.

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PORTFOLIO AND INVESTMENT ACTIVITY

During the six months ended June 30, 2023, we made $8,900,500 of investment portfolio and had $9,149,194 of redemptions and repayments, resulting in net investments at amortized cost of $16,552,481 at the end of the period.

During the six months ended June 30, 2022, we made $9,103,580 of ~~investments and loans~~investment portfolio and had $7,977,898 of redemptions and repayments, resulting in net investments at amortized cost of $15,191,759 at the end of ~~the period.~~

During the six months ended June 30, 2021, we made $13,250,664 of investments and loans and had $9,889,827 of redemptions and repayments, resulting in net investments at amortized cost of $11,864,762 at the end of that period.

Our ~~investment~~portfolio composition by major class, based on fair value at June 30, ~~2022,~~2023, was as follows:


	Investments at		Percentage of
	Fair Value		Fair Value
					Investments at Fair Value		Percentage of Fair Value
Short-term Non-banking Loans	$	13,328,580	86.9	%	$	15,240,303		92.2	%
Equity/Other		2,012,500	13.1			1,288,122		7.8
Total	$	15,341,080	100.0	%	$	16,528,425		100.0	%

RESULTS OF OPERATIONS

Our operating results for the three and six months ended June 30, ~~2022~~2023 and June 30, ~~2021~~2022 were as follows:

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,


2022

2021

2022

2021
Investment Income:

$
1,236,505

$
675,549

$
2,236,711

$
1,222,391
Operating Expenses:

(502,255)

(250,156)

(1,048,073)

(784,014)
Net Investment Gain

$
734,250

$
425,393

$
1,188,638

$
438,377

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Investment Income:	$	907,502		$	1,236,505		$	1,771,530		$	2,236,711
Operating Expenses:		(570,045	)		(502,255	)		(2,461,862	)		(1,048,073	)
Net Investment Gain (Loss)	$	337,457		$	734,250		$	(690,332	)	$	1,188,638

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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 six months ended June 30, 2023, our total investment income was $907,502 and $1,771,530, respectively For the three and six months ended June 30, 2022 ~~interest earned on~~ our total investment income was $1,236,505 and $2,236,711, respectively. The decrease is due to a decrease in our short-term non-bank lending activity. Our loan portfolio ~~was $1,081,505 and $1,776,711, respectively, and our fees charged in connection~~generates interest income, with an average rate on the loans ~~was $155,000 and $450,000, respectively.~~ of 17.6%.

Professional Fees

For the three and six months ended June 30, ~~2021, interest earned on our loan portfolio was $675,549~~2023, we had $287,325 and ~~$1,093,391, respectively, and our~~$417,176 professional fees ~~charged in connection with the loans was $0 and $129,000,~~expense, respectively. The increase in the most recent period is primarily due to a combination of strong demand for 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. Our loan portfolio generates interest income, with a weighted average rate on the loans of 25%.

~~Professional Fees~~

For the three and six months ended June 30, 2022, we had $197,591 and $392,989 professional fees expense, respectively. The increase is due to the costs incurred to amend our Form 10K filing for December 31, 2022.

Payroll and Directors Fees

For the three and six months ended June 30, ~~2021,~~2023, we had ~~$77,539~~$147,161 and ~~$220,347 professional~~$1,277,600 of payroll expense, respectively, and we had $30,000 and $562,968 of directors fees, ~~expense,~~ respectively. ~~The increase for the six months in 2022 is due to legal costs incurred to close on several new short-term banking loans and our efforts to seek additional financing to grow our business.~~

~~Net Realized Gain from Investments~~

For the three and six months ended June 30, 2022, we had ~~$6,825,000~~$114,542 and ~~$7,977,898,~~$310,984 of payroll expense, respectively, and we had $87,073 and $117,073 of directors fees, 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 in November and December 2022 (which were issued subject to shareholder approval). On January 20, 2023 company shareholders approved the options and the related incentive plan at a special meeting held for that purpose. These options generated a noncash expense of $1,460,209.

Interest Expense

For the three and six months ended June 30, 2023, we had $43,333 and $78,000 of interest expense, respectively. For the three and six months ended June 30, 2022, we had $47,794 and $117,853 of interest expense, respectively. The decrease is due less borrowing on the line of credit during the current period.

Net Realized Gain (Loss) from Investments

For the three and six months ended June 30, 2023, we had $94,569 and $94,569, respectively, of sales of investments and $5,109,625 and 9,054,625, respectively, of repayments on short-term loans, resulting in $41,371 of realized gains and $558,629 of realized losses, respectively. For the three and six months ended June 30, 2022, we had $0 and $552,898, respectively, of sales of investments and $6,825,000 and 7,425,000, respectively, of repayments on short-term loans, resulting in $5,750 of realized losses and $133,020 of realized gains, respectively.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three and six months ended June 30, ~~2021, we~~2023, our investments had ~~$4,853,170~~$21,107 of unrealized depreciation and ~~$9,889,827, respectively,~~$627,316 of ~~sales of investments, resulting in $621,600 and $3,529,599, respectively, of realized gains.~~

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~~Net Change in Unrealized Appreciation (Depreciation) on Investments~~

unrealized appreciation, respectively. For the three and six months ended June 30, 2022, our investments had $5,750 of unrealized appreciation and $16,297 of unrealized depreciation, respectively.

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Changes in Net Assets from Operations

For the three and six months ended June 30, ~~2021,~~2023, we recorded a net increase in net assets from operations of $70,721 and a net decrease in net assets from operations of $647,323, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2023, our ~~investments had $83,100 of unrealized appreciation~~per-share net increase in net assets from operations was $0.01 and ~~$430,150 of unrealized depreciation,~~our per share net decrease in net assets from operations was $0.10, respectively.

~~Changes in Net Assets from Operations~~

For the three and six months ended June 30, 2022, we recorded a net increase in net assets from operations of $518,008 and $930,119, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2022, our per-share net increase in net assets from operations was ~~$0.05~~$0.11 and $0.09, respectively. For the three and six months ended June 30, 2021, we recorded a net increase in net assets from operations of $781,506 and $2,526,548, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2021, our per-share net increase in net assets from operations was $0.07 and $0.23,$0.19, respectively.

Cash Flows for the Six Months Ended June 30, ~~2022~~2023 and ~~2021~~2022

The level of cash flows used in or provided by operating activities is affected primarily by our provision of short-term loans, purchases of other investments, redemptions and repayments of our loans or investments, and other related factors. For the six months ended June 30, 2023, net cash provided in operating activities was $11,886. Cash flows provided in operating activities for the six months ended June 30, 2023 were primarily related to the funding of our short-term loans and purchases of investments aggregating $8,900,500, offset mostly by redemptions and repayments of short-term loans and investments totaling $9,149,194. For the six months ended June 30, 2022, net cash used in operating activities was $3,381,576. Cash flows used in operating activities for the six months ended June 30, 2022 were primarily related to the funding of our short-term loans and purchases of investments aggregating $9,103,580, offset mostly by redemptions and repayments of short-term loans and investments totaling $7,977,898. For the six months ended June 30, 2021, net cash used in operating activities was $3,386,278. Cash flows used in operating activities for the six months ended June 30, 2021 were primarily related to the funding of our short-term loans and purchases of investments aggregating $13,250,664, offset mostly by redemptions and repayments of short-term loans and investments totaling $9,889,827.

FINANCIAL CONDITION

As of June 30, ~~2022,~~2023, we had cash of ~~$629,572, a decrease~~$1,101,527, an increase of ~~$1,306,576~~$11,886 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.”

On ~~April 26,~~August 9, 2022, we ~~filed~~effected a ~~registration statement~~stock combination (reverse stock split) of our common shares on ~~Form S-1~~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 ~~U.S. Securities and Exchange Commission seeking~~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 ~~register an~~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 ~~our~~$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 ~~stock in~~shares at the offering price, less underwriting discounts, which option was not exercised. In connection with the offering, we issued the underwriter a ~~firm-commitment underwritten offering. To~~five-year warrant to purchase up to 75,000 common shares at the ~~extent our Board~~per-share price of ~~Directors determines in~~$5.00. Our net proceeds after the ~~future, based on our financial condition~~payment of underwriting discounts, underwriting expenses, and ~~capital market conditions, that additional capital would allow us~~offering-related expenses we incurred were otherwise obligated to ~~grow our business or otherwise take advantage of additional opportunities, we may seek to raise additional equity capital or engage in borrowing.~~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.

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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 six months ended June 30, ~~2022,~~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.

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ITEM 4.CONTROLS AND PROCEDURES

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

As of June 30, ~~2022,~~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 June 30, 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 5. OTHER INFORMATION

On August ___, 2023, the Board of Directors amended the exercise provisions of the 2022 Stock Incentive Plan to permit holders of stock options to exercise their options on a net-exercise/cashless basis, subject to the discretion of the board’s compensation committee (which administers the plan) to limit such exercises. On the same date, the compensation committee approved the accelerated vesting of stock options earlier issued to non-executives and non-directors, immediately upon any change of control of the Company.

ITEM 6. EXHIBITS


~~Exhibit~~ ~~Number~~		Exhibit Number		Description
~~3.1~~		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~~	*	10.1*		Amendment to 2022 Stock Incentive Plan, dated August ---, 2023
	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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SIGNATURES

~~- 23 -~~

		(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, ~~2022~~2023



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

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)	~~(Zip Code)~~


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