Mill City Ventures III, Ltd - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

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

For the transition period from _______________________ to ___________________

Commission File Number 814-00991

MILL CITY VENTURES III, LTD.
(Exact name of registrant as specified in its charter)

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

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

(952) 479-1923

(Registrant’s telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading symbol(s)	Name of each exchange on which registered
None	None	None

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
	Emerging growth company ¨

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

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

As of July 29, 2019, Mill City Ventures III, Ltd. had 11,067,402 shares of common stock, and no other classes of capital stock, outstanding.

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended March 31, 2019

		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Balance Sheets – March 31, 2019 and December 31, 2018	3

	Condensed Statements of Operations – Three months ended March 31, 2019 and March 31, 2018	4

	Condensed Statements of Shareholders’ Equity – Three months ended March 31, 2019 and March 31, 2018	5

	Condensed Statements of Cash Flows – Three months ended March 31, 2019 and March 31, 2018	6

	Schedule of Investments – March 31, 2019 and December 31, 2018	7

	Condensed Notes to Financial Statements – March 31, 2019	9

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

Item 4.	Controls and Procedures	23

PART II.	OTHER INFORMATION	24

Item 6.	Exhibits	24

SIGNATURES		25

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PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

	March 31, 2019 (unaudited)			December 31, 2018
ASSETS
Investments, at fair value:	$	8,596,853		$	9,960,192
Non-control/non-affiliate investments (cost: $7,343,748 and $6,958,827 respectively)
Cash		2,969,835			966,121
Note receivable		250,000			250,000
Prepaid expenses		94,763			47,156
Receivable for sale of investments		—			18,999
Interest and dividend receivables		80,310			72,901
Right-of-use lease asset		53,393			—
Property and equipment, net		4,001			4,645
Total Assets	$	12,049,155		$	11,320,014

LIABILITIES
Accounts payable		100,795			41,125
Lease liability		58,172			—
Total Liabilities		158,967			41,125
Commitments and Contingencies (Note 6)

SHAREHOLDERS EQUITY (NET ASSETS)
Common Stock, par value $0.001 per share (250,000,000 authorized; 11,067,402 and 11,067,402 outstanding)		11,067			11,067
Additional paid-in capital		10,774,653			10,774,653
Accumulated deficit		(1,159,665	)		(1,159,665	)
Accumulated undistributed investment loss		(1,883,014	)		(1,725,097	)
Accumulated undistributed net realized gains on investment transactions		2,894,042			376,566
Net unrealized appreciation in value of investments		1,253,105			3,001,365
Total Shareholders' Equity (net assets)		11,890,188			11,278,889

Total Liabilities and Shareholders' Equity	$	12,049,155		$	11,320,014

Net Asset Value Per Common Share	$	1.07		$	1.02

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended
	March 31, 2019			March 31, 2018
Investment Income
Interest income	$	26,369		$	34,146
Dividend income		13,050			379
Total Investment Income		39,419			34,525

Operating Expenses
Professional fees		52,096			60,281
Payroll		58,332			61,053
Insurance		20,515			18,891
Occupancy		24,481			22,755
Director's fees		22,500			15,000
Depreciation and amortization		644			2,671
Other general and administrative		18,768			5,930
Total Operating Expenses		197,336			186,581
Net Investment Loss	$	(157,917	)	$	(152,056	)

Realized and Unrealized Gain (Loss) on Investments
Net realized gain on investments		3,070,846			51,752
Net change in unrealized appreciation (depreciation) on investments		(1,748,260	)		639,894
Net Realized and Unrealized Gain on Investments		1,322,586			691,646
Net Increase in Net Assets Resulting from Operations	$	1,164,669		$	539,590

Net Increase in Net Assets Resulting from Operations per share:
Basic and diluted	$	0.11		$	0.05

Weighted-average number of common shares outstanding		11,067,402			11,067,402

See accompanying Notes to Financial Statements

- 4 -

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended March 31, 2019	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions			Net Unrealized Appreciation in value of Investments			Total Shareholders' Equity

Balance as of December 31, 2018		11,067,402	$	11,067	$	10,774,653	$	(1,159,665	)	$	(1,725,097	)	$	376,566		$	3,001,365		$	11,278,889
Dividend Distribution				—		—		—			—			(553,370	)		—			(553,370	)
Undistributed net investment loss				—		—		—			(157,917	)		—			—			(157,917	)
Undistributed net realized gain on investment transactions				—		—		—			—			3,070,846			—			3,070,846
Appreciation (depreciation) in value of investments				—		—		—			—			—			(1,748,260	)		(1,748,260	)
Balance as of March 31, 2019		11,067,402	$	11,067	$	10,774,653	$	(1,159,665	)	$	(1,883,014	)	$	2,894,042		$	1,253,105		$	11,890,188

Three Months Ended March 31, 2018	Common Shares		Par Value		Additional Paid In Capital		Accumulated Deficit			Accumulated Undistributed Net Investment Loss			Accumulated Undistributed Net Realized Gain on Investments Transactions			Net Unrealized Appreciation in value of Investments			Total Shareholders' Equity

Balance as of December 31, 2017		11,067,402		11,067		10,774,653		(1,159,665	)		(1,194,773	)		957,818			240,115			9,629,215
Undistributed net investment loss				—		—		—			(152,056	)		—			—			(152,056	)
Undistributed net realized gain on investment transactions				—		—		—			—			51,752			—			51,752
Appreciation in value of investments				—		—		—			—			—			639,894			639,894
Balance as of March 31, 2018		11,067,402	$	11,067	$	10,774,653	$	(1,159,665	)	$	(1,346,829	)	$	1,009,570		$	880,009		$	10,168,805

See accompanying Notes to Financial Statements

- 5 -

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended
	March 31, 2019			March 31, 2018
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	1,164,669		$	539,590

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided (used) in operating activities:
Net change in unrealized appreciation or depreciation on investments		1,748,260			(639,894	)
Net realized gain on investments		(3,070,846	)		(51,752	)
Payments for purchases of investments		(120,653	)		(628,252	)
Proceeds from sales of investments		2,806,578			78,531
Depreciation & amortization expense		644			2,671

Changes in operating assets and liabilities:
Prepaid expenses and other assets		(43,477	)		27,192
Interest and dividends receivable		(7,409	)		(5,486	)
Receivable for investment sales		18,999			267,119
Accounts payable and other liabilities		24,557			3,216
Deferred rent		—			(396	)
Payable for investment purchase		—			14,415
Net cash provided (used) in operating activities		2,521,322			(393,046	)

Cash flows from financing activities:
Payments for common stock dividend		(517,608	)		—
Net cash used by financing activities		(517,608	)		—

Net increase (decrease) in cash		2,003,714			(393,046	)
Cash, beginning of period		966,121			2,158,314
Cash, end of period	$	2,969,835		$	1,765,268

Non-cash financing activities:
Tax withholding for dividend payment	$	35,762		$	0

See accompanying Notes to Financial Statements

- 6 -

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

MARCH 31, 2019

Investments⁽¹⁾	Investment Type⁽⁵⁾	Interest Rate⁽⁶⁾	Expiration Date⁽⁷⁾	Shares/Units		Cost		Fair Value		Percentage of Net Assets			Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation (Depreciation)
Equity Investments
Advertising
Creative Realities, Inc.	Warrants ⁽⁸⁾	n/a	12/28/2020		35,714	$	—	$	—		0.00	%	$	—	$	—	$	—
Business Services
Park City Group Inc.	Common Stock	n/a	n/a		10,000		68,222		79,900					11,678		—		11,678
Qualstar Corp.	Common Stock	n/a	n/a		11,299		61,455		61,914					574		115		459
Spar Group Inc.	Common Stock ⁽⁸⁾	n/a	n/a		170,012		243,003		106,274					—		136,729		(136,729	)
							372,680		248,088		2.08	%		12,252		136,844		(124,592	)
Consumer
Famous Daves of America, Inc.	Common Stock	n/a	n/a		38,963		154,409		221,310					66,901		—		66,901
Gaia, Inc.	Common Stock	n/a	n/a		10,000		157,047		91,500					—		65,547		(65,547	)
HG Holdings, Inc.	Common Stock ⁽⁸⁾	n/a	n/a		200,000		199,118		104,000					—		95,118		(95,118	)
NTN Buzztime Inc.	Common Stock	n/a	n/a		18,400		51,154		74,152					22,998		—		22,998
Tzfat Spirits of Israel, LLC	LLC Membership Units ⁽⁸⁾	n/a	n/a		55,000		101,019		25,000					—		76,019		(76,019	)
							662,747		515,962		4.34	%		89,899		236,684		(146,785	)
Financial
Ladenburg Thalmn	Common Stock ⁽⁹⁾	n/a	n/a		50,000		145,364		141,500					552		4,416		(3,864	)
							145,364		141,500		1.19	%		552		4,416		(3,864	)
Healthcare
HemaCare Corp.	Common Stock ⁽⁸⁾	n/a	n/a		130,697		404,498		1,797,084					1,392,586		—		1,392,586
Reshape Life Sciences Inc Pfd Conv Ser B	Warrants ⁽⁸⁾	n/a	8/16/2024		67,860		679		—					—		679		(679	)
							405,177		1,797,084		15.11	%		1,392,586		679		1,391,907
Industrial Goods
CPI Aerostructures Inc.	Common Stock	n/a	n/a		25,000		229,832		162,500					—		67,332		(67,332	)
Continental Materials Corporation	Common Stock ⁽⁸⁾	n/a	n/a		1,000		20,228		19,323					—		905		(905	)
Optex Systems Holdings, Inc.	Common Stock	n/a	n/a		21,642		39,531		43,284					3,753		—		3,753
							289,591		225,107		1.89	%		3,753		68,237		(64,484	)
Information Technology
Franklin Wireless Corp.	Common Stock	n/a	n/a		38,189		71,435		106,929					35,494		—		35,494
Gogo Inc.	Common Stock	n/a	n/a		10,000		57,640		44,900							12,740		(12,740	)
Insite Software Solutions, Inc	Warrants ⁽⁸⁾	n/a	12/30/2023		108,960		—		—					—		—		—
Intelligent Systems Corp.	Common Stock	n/a	n/a		2,000		26,940		63,880					36,940		—		36,940
Kwikbit Inc. (fka MAX 4G)	Preferred Stock ⁽⁸⁾	n/a	n/a		300,000		150,000		300,000					150,000		—		150,000
Points International, Inc.	Common Stock	n/a	n/a		8,000		98,932		107,520					8,588		—		8,588
Simulations Plus, Inc.	Common Stock	n/a	n/a		23,000		227,732		485,530					257,798		—		257,798
Taitron Components Inc.	Common Stock	n/a	n/a		20,000		41,295		52,600					11,305		—		11,305
TESSCO Technologies Inc.	Common Stock	n/a	n/a		20,074		346,203		310,746					146		35,603		(35,457	)
Travelzoo, Inc.	Common Stock	n/a	n/a		15,100		149,202		202,340					53,138		—		53,138
							1,169,379		1,674,445		14.08	%		553,409		48,343		505,066
Leisure & Hospitality
Waitr Holdings	Common Stock	n/a	n/a		166,118		1,870,489		2,041,590					171,101		—		171,101
DBR Enclave US Investors, LLC	LLC Units Units	n/a	n/a		500,000		500,000		500,000					—		—		—
							2,370,489		2,541,590		21.38	%		171,101		—		171,101
Oil & Gas
Northern Capital Partners I, LP	Limited Partnership Units ⁽⁸⁾	n/a	n/a		550,000		550,000		488,629					—		61,371		(61,371	)
Southern Plains Resources, Inc.	Common Stock ⁽⁸⁾	n/a	n/a		600,000		730,000		—					—		730,000		(730,000	)
							1,280,000		488,629		4.11	%		—		791,371		(791,371	)
Publishing
Educational Development Corp.	Common Stock	n/a	n/a		127,404		648,321		964,448		8.11	%		316,700		573		316,127


Total Equity Investments							7,343,748		8,596,853		72.30	%		2,540,252		1,287,147		1,253,105

Total Cash							2,969,835		2,969,835		24.98	%		—		—		—

Total Investments and Cash						$	10,313,583	$	11,566,688		97.28	%	$	2,540,252	$	1,287,147	$	1,253,105

⁽¹⁾

All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.

⁽²⁾

Interest is presented on a per annum basis.

⁽³⁾

Investment is secured but payment and collateral are subordinated to the debt of another creditor by contract.

⁽⁴⁾

Investment is convertible into common equity of the issuer.

⁽⁵⁾

In the case of warrants, warrants provide for the right to purchase common equity of the issuer.

⁽⁶⁾

In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis.

⁽⁷⁾

In the case of warrants, purchase rights under the warrants will expire at the close of business on this date.

⁽⁸⁾

Investment is not an income-producing investment.

⁽⁹⁾

Investment is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.

At March 31, 2019, aggregate non-qualifying assets represented approximately 1.2% of our total assets.

⁽¹⁰⁾

At March 31, 2019, the estimated net unrealized gain for federal tax purposes was $1,451,777, based on a tax cost basis of $7,145,076. At March 31, 2019, the estimated aggregate gross unrealized gain for federal income tax purposes was $2,626,992 and the estimated aggregate gross unrealized loss for federal income tax purposes was $1,175,215

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MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2018

Investments⁽¹⁾	Investment Type	Interest Rate⁽²⁾	Maturity Date	Principal Amount		Cost		Fair Value		Percentage of Net Assets			Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation (Depreciation)
Equity Investments
Advertising
Creative Realities, Inc.	Warrants ⁽⁸⁾	n/a	12/28/2020		35,714	$	—	$	—		0.00	%	$	—	$	—	$	—
Business Services
Park City Group Inc.	Common Stock	n/a	n/a		10,000		68,222		59,700					—		8,522		(8,522	)
Qualstar Corp.	Common Stock	n/a	n/a		11,299		61,455		59,320					—		2,135		(2,135	)
Spar Group Inc.	Common Stock ⁽⁸⁾	n/a	n/a		200,012		284,592		107,206					—		177,386		(177,386	)
							414,269		226,226		2.01	%		—		188,043		(188,043	)
Consumer
Famous Daves of America, Inc.	Common Stock	n/a	n/a		38,963		154,409		178,840					24,431		—		24,431
Gaia, Inc.	Common Stock	n/a	n/a		10,000		157,047		103,600					—		53,447		(53,447	)
HG Holdings, Inc.	Common Stock ⁽⁸⁾	n/a	n/a		200,000		199,118		87,000					—		112,118		(112,118	)
NTN Buzztime Inc.	Common Stock	n/a	n/a		16,370		46,437		31,921					—		14,516		(14,516	)
Tzfat Spirits of Israel, LLC	LLC Membership Units ⁽⁸⁾	n/a	n/a		55,000		101,019		25,000					—		76,019		(76,019	)
							658,030		426,361		3.78	%		24,431		256,100		(231,669	)
Education
Nat'l Amer. Univ. Holdings, Inc.	Common Stock	n/a	n/a		52,053		59,123		9,370		0.08	%		—		49,753		(49,753	)
Financial
OTC Markets Group Cl A	Common Stock	n/a	n/a		7,000		118,889		203,280					84,391		—		84,391
Ladenburg Thalmn	Common Stock ⁽⁹⁾	n/a	n/a		50,000		145,364		116,500					—		28,864		(28,864	)
							264,253		319,780		2.84	%		84,391		28,864		55,527
Healthcare
Reshape Life Sciences Inc Pfd Conv Ser B	Preferred LLC Units ^{(4) (8)}	n/a	n/a		156		155,321		32,448					—		122,873		(122,873	)
Reshape Life Sciences Inc Pfd Conv Ser B	Warrants ⁽⁸⁾	n/a	8/16/2024		67,860		679		—					—		679		(679	)
HemaCare Corp.	Common Stock ⁽⁸⁾	n/a	n/a		134,697		416,222		1,306,561					890,339		—		890,339
							572,222		1,339,009		11.87	%		890,339		123,552		766,787
Industrial Goods
CPI Aerostructures Inc.	Common Stock	n/a	n/a		25,000		229,832		159,250					—		70,582		(70,582	)
Optex Systems Holdings, Inc.	Common Stock	n/a	n/a		21,642		39,531		28,351					—		11,180		(11,180	)
							269,363		187,601		1.66	%		—		81,762		(81,762	)
Information Technology
Franklin Wireless Corp.	Common Stock	n/a	n/a		38,189		71,435		86,689					15,254		—		15,254
Gogo Inc.	Common Stock	n/a	n/a		10,000		57,640		29,900					—		27,740		(27,740	)
Insite Software Solutions, Inc	Warrants ⁽⁸⁾	n/a	12/30/2023		108,960		—		—					—		—		—
Intelligent Systems Corp.	Common Stock	n/a	n/a		9,671		130,269		124,949					—		5,320		(5,320	)
Kwikbit Inc. (fka MAX 4G)	Preferred Stock ⁽⁸⁾	n/a	n/a		300,000		150,000		300,000					150,000		—		150,000
Microvision, Inc.	Common Stock	n/a	n/a		5,000		6,250		3,020					—		3,230		(3,230	)
Points International, Inc.	Common Stock	n/a	n/a		8,000		98,932		79,680					—		19,252		(19,252	)
Simulations Plus, Inc.	Common Stock	n/a	n/a		24,001		237,363		477,611					240,248		—		240,248
Taitron Components Inc.	Common Stock	n/a	n/a		20,000		41,295		34,600					470		7,165		(6,695	)
TESSCO Technologies Inc.	Common Stock	n/a	n/a		20,074		346,203		240,888					—		105,315		(105,315	)
Travelzoo, Inc.	Common Stock	n/a	n/a		15,100		138,966		148,433					11,159		1,692		9,467
							1,278,353		1,525,770		13.53	%		417,131		169,714		247,417
Leisure & Hospitality
Bitesquad.com LLC	Preferred LLC Units ^{(4) (8)}	n/a	n/a		13,227		726,736		714,258					—		12,478		(12,478	)
Bitesquad.com LLC	Common Stock ⁽⁸⁾	n/a	n/a		60,316		288,157		3,136,432					2,848,275		—		2,848,275
DBR Enclave US Investors, LLC	LLC Units Units	n/a	n/a		500,000		500,000		500,000					—		—		—
							1,514,893		4,350,690		38.57	%		2,848,275		12,478		2,835,797
Oil & Gas
Northern Capital Partners I, LP	LP Units ⁽⁸⁾	n/a	n/a		550,000		550,000		488,629					—		61,371		(61,371	)
Southern Plains Resources, Inc.	Common Stock ⁽⁸⁾	n/a	n/a		600,000		730,000		—					—		730,000		(730,000	)
							1,280,000		488,629		4.33	%		—		791,371		(791,371	)
Publishing
Educational Development Corp.	Common Stock	n/a	n/a		127,404		648,321		1,086,756		9.64	%		438,435		—		438,435

Total Equity Investments						$	6,958,827	$	9,960,192		88.31	%	$	4,703,002	$	1,701,637	$	3,001,365

Total Cash							966,121		966,121		8.57	%		—		—		—

Total Investments and Cash						$	7,924,948	$	10,926,313		96.87	%	$	4,703,002	$	1,701,637	$	3,001,365

⁽¹⁾

⁽²⁾

Interest is presented on a per annum basis.

⁽⁴⁾

Investment is secured by equity of the issuer.

⁽⁵⁾

In the case of warrants, warrants provide for the right to purchase common equity of the issuer.

⁽⁶⁾

In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis.

⁽⁷⁾

In the case of warrants, purchase rights under the warrants will expire at the close of business on this date.

⁽⁸⁾

Investment is not an income-producing investment.

⁽⁹⁾

Investment is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.

At December 31, 2018, aggregate non-qualifying assets represented approximately 6.0% of our total assets.

At December 31, 2018, the estimated net unrealized gain for federal tax purposes was $3,202,798, based on a tax cost basis of $6,757,394.

At December 31, 2018, the estimated aggregate gross unrealized gain for federal income tax purposes was $4,789,742 and the estimated aggregate gross unrealized loss for federal income tax purposes was $1,586,944.

- 8 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

NOTE 1 – ORGANIZATION

Mill City Ventures III, Ltd. is an investment company 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.” The company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.

We are an internally managed closed-end non-diversified management investment company. We have elected to be regulated as a business development company, or “BDC,” under the Investment Company Act of 1940 (the “1940 Act”). To date, we have not made an election to be treated as a regulated investment company, or “RIC,” under the Internal Revenue Code of 1986 (the “Code”).

We primarily focus on investing in or lending to privately held and small-cap publicly traded U.S. companies, and making managerial assistance available to such companies. These investments are typically structured as purchases of preferred or common stock, investment contracts, or loans evidenced by promissory notes that may be convertible into stock by their terms or that may be accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. Our future revenues will relate to the gain we realize from the sale of securities we purchase, and to dividends and interest we derive from those securities. Our investment objective is to generate both current income and capital appreciation that ultimately result in gains.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The condensed balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

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 the Valuation Committee of our Board of Directors based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures.

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

- 9 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

For more information, see Note 4 “Fair Value of Financial Instruments.”

Income taxes: We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. For more information, see Note 8 “Income Taxes.”

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

Recent accounting pronouncements: In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Leases (Topic 840). Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The guidance requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted.

Effective January 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company elected the package of practical expedients, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company has also elected the practical expedient allowing us to not separate the lease and non-lease components for all classes of underlying assets. The Company elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualified, the Company did not recognize right-of-use assets or lease liabilities, and this included not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities of $57,523 each, as of January 1, 2019, with no impact on retained earnings. Financial position for reporting periods beginning on or after January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Additional information and disclosures required by this new standard are contained in Note 11, 'Operating Leases'.

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.

- 10 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

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

NOTE 3 – INVESTMENTS

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of March 31, 2019 (together with the corresponding percentage of the fair value of our total portfolio of investments):

	As of March 31, 2019
	Investments at		Percentage of			Investments at		Percentage of
	Amortized Cost		Amortized Cost			Fair Value		Fair Value
Senior Secured Loans	$	—		—	%	$	—		—	%
Preferred Stock		150,000		2.0			300,000		3.5
Common Stock		6,042,050		82.3			7,283,224		84.7
Warrants		679		—			—		—
Other Equity		1,151,019		15.7			1,013,629		11.8
Total	$	7,343,748		100.0	%	$	8,596,853		100.0	%

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2018 (together with the corresponding percentage of the fair value of our total portfolio of investments):

	As of December 31, 2018
	Investments at		Percentage of			Investments at		Percentage of
	Amortized Cost		Amortized Cost			Fair Value		Fair Value
Preferred Stock	$	1,032,057		14.8	%	$	1,046,706		10.5	%
Common Stock		4,775,072		68.6			7,899,857		79.3
Warrants		679		—			—		—
Other Equity		1,151,019		16.6			1,013,629		10.2
Total	$	6,958,827		100.0	%	$	9,960,192		100.0	%

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of March 31, 2019:

	As of March 31, 2019
	Investments at		Percentage of
	Fair Value		Fair Value
Advertising	$	—		0.0	%
Business Services		248,088		2.9	%
Consumer		515,962		6.0	%
Financial		141,500		1.6	%
Healthcare		1,797,084		20.9	%
Industrial Goods		225,107		2.6	%
Information Technology		1,674,445		19.5	%
Leisure & Hospitality		2,541,590		29.6	%
Oil & Gas		488,629		5.7	%
Publishing		964,448		11.2	%
Total	$	8,596,853		100.0	%

- 11 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2018:

	As of December 31, 2018
	Investments at		Percentage of
	Fair Value		Fair Value
Advertising	$	—		—	%
Business Services		226,226		2.3
Consumer		426,361		4.3
Education		9,370		0.1
Financial		319,780		3.2
Healthcare		1,339,009		13.4
Industrial Goods		187,601		1.9
Information Technology		1,525,770		15.3
Leisure & Hospitality		4,350,690		43.7
Oil & Gas		488,629		4.9
Publishing		1,086,756		10.9
Total	$	9,960,192		100.00	%

We do not “control,” and we are not an “affiliate” (as each of those terms is defined in the 1940 Act), of any of our portfolio companies as of March 31, 2019. Under the 1940 Act, we would generally be presumed to “control” a portfolio company if we owned more than 25% of its voting securities, and be an “affiliate” of a portfolio company if we owned at least 5% and up to 25% of its voting securities.

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

- 12 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

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

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

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

For non-traded (Level 3) debt securities with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists.

On a quarterly basis, our management provides members of our Valuation Committee with (i) valuation reports for each portfolio investment (which reports include our cost, the most recent prior valuation and any current proposed valuation, and an indication of the valuation methodology used, together with any other supporting materials); (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; (iii) quarter- or period-end statements from our custodial firms holding any of our portfolio investments; and (iv) recommendations to change any existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing. The committee then discusses these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.

We made no changes to our Valuation Policy and Procedures during the reporting period.

Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investment portfolio as of March 31, 2019 may differ materially from values that would have been used had a readily available market for the securities existed.

The following table presents the fair value measurements of our portfolio investments by major class, as of March 31, 2019, according to the fair value hierarchy:

	As of March 31, 2019
	Level 1		Level 2		Level 3		Total
Preferred Stock	$	—	$	—	$	300,000	$	300,000
Common Stock		7,283,224		—		—		7,283,224
Warrants		—		—		—		—
Other Equity		—		—		1,013,629		1,013,629
Total	$	7,283,224	$	—	$	1,313,629	$	8,596,853

- 13 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2018, according to the fair value hierarchy:

	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Preferred Stock	$	—	$	32,448	$	1,014,258	$	1,046,706
Common Stock		4,763,425		—		3,136,432		7,899,857
Warrants		—		—		—		—
Other Equity		—		—		1,013,629		1,013,629
Total	$	4,763,425	$	32,448	$	5,164,319	$	9,960,192

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the three months ended March 31, 2019:

	As of March 31, 2019
	Secured Loans		Preferred Stock			Common Stock			Warrants		Other Equity
Balance as of January 1, 2019	$	—	$	1,014,258		$	3,136,432		$	—	$	1,013,629
Net change in unrealized appreciation		—		12,478			(2,848,275	)		—		—
Purchases and other adjustments to cost		—		—			—			—		—
Sales and redemptions		—		(726,691	)		(3,266,669	)		—		—
Net realized gain (loss)		—		(45	)		2,978,512			—		—
Balance as of March 31, 2019	$	—	$	300,000		$	—		$	—	$	1,013,629

The net change in unrealized depreciation for the three months ended March 31, 2019 attributable to Level 3 portfolio investments still held as of March 31, 2019 is $0.

The following table lists our level 3 investments held as of March 31, 2019 and the unobservable inputs used to determine their valuation:

	Security Type	3/31/19 FMV		Unobservable Inputs
Insite Software Solutions, Inc	Warrants	$	—	company has substantial doubt about being a going concern
Tzfat Spirits of Israel, LLC	Other Equity		25,000	last funding secured by company
MAX 4G, Inc.	Preferred Stock		300,000	last funding secured by company
DBR Enclave US Investors, LLC	Other Equity		500,000	cost
Northern Capital Partners I, LP	Other Equity		488,629	issuer provided financials
Southern Plains Resources, Inc.	Common Stock		—	company has substantially ceased operations
		$	1,313,629

- 14 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the period ended December 31, 2018:

	As of December 31, 2018
	Secured Loans			Preferred Stock			Common Stock		Warrants		Other Equity
Balance as of January 1, 2018	$	500,000		$	1,026,736		$	1,293,490	$	—	$	1,013,629
Net change in unrealized appreciation		750,000			(12,478	)		1,842,942		—		—
Purchases and other adjustments to cost		—			—			—		—		—
Sales and redemptions		(550,000	)		—			—		—		—
Net realized gain (loss)		(700,000	)		—			—		—		—
Balance as of December 31, 2018	$	—		$	1,014,258		$	3,136,432	$	—	$	1,013,629

The net change in unrealized appreciation for the year ended December 31, 2018 attributable to Level 3 portfolio investments still held as of December 31, 2018 was $1,830,464, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.

The following table lists our level 3 investments held as of December 31, 2018 and the unobservable inputs used to determine their valuation:

	Security Type	12/31/18 FMV		Unobservable Inputs
Insite Software Solutions, Inc	Warrants	$	—	company has a substantial doubt about being a going concern
Tzfat Spirits of Israel, LLC	Other Equity		25,000	last funding secured by company
MAX 4G, Inc.	Preferred Stock		300,000	last funding secured by company
Bitesquad.com LLC	Preferred Stock		714,258	announced merger of company
Bitesquad.com LLC	Common Stock		3,136,432	announced merger of company
DBR Enclave US Investors, LLC	Other Equity		500,000	cost
Northern Capital Partners I, LP	Other Equity		488,629	issuer provided financials
Southern Plains Resources, Inc.	Common Stock		—	company has substantially ceased operations
		$	5,164,319

NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a Code of Ethics and certain other policies relating to conflicts of interest and related-party transactions, as well as policies and procedures relating to what regulations applicable to BDCs generally describe as “affiliate transactions.” Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested. Our Board of Directors has adopted a policy to require our disclosure of these instances in our periodic filings with the SEC. Our related-party transactions requiring disclosure under this policy are:

Mr. Joseph A. Geraci, II, our Chief Financial Officer, and Mr. Douglas M. Polinsky, our Chief Executive Officer, hold direct and indirect interests in the common stock of Southern Plains Resources, Inc., a company in which we made investments in common stock in each of March and July 2013.

Lantern Advisors, LLC is a limited liability company equally owned by Messrs. Geraci and Polinsky, and owns a cashless warrant to purchase up to 153,846 shares of Creative Realities, Inc. at a price of $0.70 per share through July 14, 2019. We made an initial investment in secured convertible debt of Creative Realities (together with common stock purchase warrants) in February 2015, and then a subsequent investment in secured convertible debt of Creative Realities (together with common stock purchase warrants) in December 2015. In December 2015, we also exchanged our common stock purchase warrant obtained in February 2015 for shares of Creative Realities common stock.

- 15 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

On August 10, 2018, we entered into a loan transaction with a shareholder and her spouse who own approximately 1,500,000 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory note bears interest payable monthly at the rate of 10% per annum. The note is secured by the debtors pledge to us of 625,000 shares of our common stock. The pledged shares are held in physical custody for us by our custodial agent Milliennium Trust Company.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

On October 17, 2018, we entered into a 12-month lease agreement to lease approximately 183 square feet of commercial space for the use of Mr. Geraci at the amount of $2,408 per month. The leased space became available for occupancy on December 1, 2018.

On October 24, 2018, we entered into a 39-month lease agreement to lease approximately 1,247 square feet of commercial space and one parking spot for the use of Mr. Polinsky. The 39-month lease term began on January 3, 2019 and expires on March 31, 2022.

The total base rent expense for the three months ended March 31, 2019 and 2018 was $12,035 and $11,345, respectively.

The table below sets forth the required annual minimum lease payments:

Year	Amount
2019	$	41,446
2020		20,551
2021		21,162
2022		5,449
TOTAL	$	88,608

NOTE 7 — RETIREMENT SAVINGS PLANS

Our two employees, Messrs. Geraci and Polinsky, are eligible to participate in a qualified defined contribution 401(k) plan whereby they may elect to have a specified portion of their salary contributed to the plan. We will make a safe harbor match equal to 100% of their elective deferrals up to 5% of eligible earnings in addition to our option to make discretionary contributions to the plan. We made contributions totaling $1,875 and $1,875 to the plans for the three months ended March 31, 2019 and 2018, respectively.

NOTE 8 – INCOME TAXES

We have made no provision for income taxes. The characterization of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.

NOTE 9 – SHAREHOLDERS’ EQUITY

At March 31, 2019, we had 11,067,402 shares of common stock issued and outstanding.

On February 15, 2019 we announced that our board of directors had approved a special cash dividend of $0.05 per common share. The dividend was paid on March 15, 2019 to stockholders of record as of the close of business on March 8, 2019.

- 16 -

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

NOTE 10 – PER-SHARE INFORMATION

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

	For the Three Months Ended March 31,
	2019		2018
Numerator: Net Increase (Decrease) in Net Assets Resulting from Operations	$	1,164,669	$	539,590
Denominator: Weighted-average number of common shares outstanding		11,067,402		11,067,402
Basic and diluted net gain per common share	$	0.11	$	0.05

NOTE 11 – OPERATING LEASES

On January 1, 2019 we adopted ASU No. 2016-2, Leases (Topic 842), and its amendments and elected the effective date transition method.

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

Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted average discount rate as of March 31, 2019 was 4.5% and the weighted average remaining lease term is 3 years.

Under ASC 840, rent expense for office facilities for the three months ended March 31, 2018 was $22,682.

The components of our operating lease were as follows for the three months ended March 31, 2019:

Operating lease costs	$	4,672
Variable lease cost		4,084
Short-term lease cost		7,363
Total	$	16,119

Variable lease costs consist primarily of property taxes, insurance, and common area or other maintenance costs for our leased facility.

Long-term Lease Maturity Schedule
2019	$	14,964
2020		20,551
2021		21,161
2022		5,449
Total lease payments		62,125
Less: interest		(3,953	)
Present value of lease liabilities	$	58,172

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MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

NOTE 12 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the three months ended March 31, 2019 through 2015:

	Three Months Ended
	March 31, 2019			March 31, 2018			March 31, 2017			March 31, 2016			March 31, 2015
Per Share Data ⁽¹⁾
Net asset value at beginning of period	$	1.02			0.87			0.77			0.72			0.94
Net investment income (loss)		(0.02	)		(0.01	)		(0.01	)		—			—
Net realized and unrealized gains (losses)		0.12			0.06			0.01			—			0.01
Payment of common stock dividend		(0.05	)		—			—			—			—
Net asset value at end of period	$	1.07			0.92			0.77			0.72			0.95

Ratio / Supplemental Data
Per share market value of investments at end of period	$	0.78			0.76			0.46			0.46			0.72
Shares outstanding at end of period		11,067,402			11,067,402			12,151,493			12,151,493			12,151,493
Average weighted shares outstanding for the period		11,067,402			11,863,392			12,151,493			12,151,493			12,166,608
Net assets at end of period	$	11,890,188			10,168,805			9,366,890			8,720,448			11,626,869
Average net assets ⁽²⁾	$	12,911,895			9,770,410			9,563,916			8,718,010			11,561,049
Total investment return		4.90	%		5.75	%		0.00	%		0.00	%		1.06	%
Portfolio turnover rate (3)		0.93	%		0.80	%		7.26	%		8.25	%		3.86	%
Ratio of operating expenses to average net assets ⁽³⁾		(6.06	)%		(7.52	)%		(6.86	)%		(6.65	)%		(5.60	)%
Ratio of net investment income (loss) to average net assets ⁽³⁾		(4.87	)%		(6.16	)%		(5.38	)%		(2.78	)%		2.00	%
Ratio of realized gains (losses) to average net assets ⁽³⁾		137.57	%		2.17	%		33.82	%		(22.92	)%		5.25	%

(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

None

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ITEM 2.

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

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

Overview

Portfolio and Investment Activity

Results of Operations

Financial Condition

Critical Accounting Estimates

Off-Balance Sheet Arrangements

Forward Looking Statements

OVERVIEW

We primarily focus on investing in or lending to privately held and small-cap publicly traded U.S. companies, and making managerial assistance available to such companies. These investments are typically structured as purchases of preferred or common stock, investment contracts, or loans evidenced by promissory notes that may be convertible into stock by their terms or that may be accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. Our revenues relate to the gain we realize from the sale of securities we purchase, and to dividends and interest we derive from those securities. Our investment objective is to generate both current income and capital appreciation that ultimately result in gains.

Our principal sources of income are interest and dividends we earn on our investments, and proceeds from the sale or redemption of our investments. Our statements of operations also reflect gain from increases in the carrying value of our investments (i.e., unrealized appreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses. Our statements of operations also reflect loss from decreases in the carrying value of our investments (i.e., unrealized depreciation).

As a BDC, we are required to comply with certain regulatory requirements. For example, we must invest at least 70% of our total assets in “qualifying assets,” including securities of private or small-cap publicly traded U.S. companies and cash, cash equivalents, U.S. government securities and high quality debt investments that mature in one year or less. We may from time to time invest up to 30% of our assets opportunistically in other types of investments, including the securities of larger public companies and foreign securities. In addition, we will be permitted, under certain conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock, but only if our “asset coverage,” as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must not make any dividend distribution to our shareholders or repurchase securities unless we meet the applicable asset-coverage ratios at the time of the dividend distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes.

The Company’s Board of Directors has approved a general plan to seek the approval of the Company’s shareholders for the Company’s de-registration as a BDC. Management presently anticipates that, shortly after the filing of this report, the Company will file a preliminary proxy statement for a special meeting at which such approval, together with approval of other items relating to the de-registration, will be sought.

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, 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 three months ended March 31, 2019, we made $120,053 of investments in portfolio companies and had $2,806,578 of redemptions and repayments, resulting in net investments at amortized cost of $7,343,748 for the period.

During the three months ended March 31, 2018, we made $628,252 of investments in portfolio companies and had $78,531 of redemptions and repayments, resulting in net investments at amortized cost of $7,602,218 for the period.

Our portfolio composition by major class, based on fair value at March 31, 2019, was as follows:

	Investments at Fair Value		Percentage of Fair Value
Senior Secured Loans	$	-		-	%
Unsecured Loans		-		-
Equity/Other		8,596,853		100.0
Total	$	8,596,853		100.0	%

RESULTS OF OPERATIONS

Our operating results for the three months ended March 31, 2019 and March 31, 2018 were as follows:

	For the three months ended March 31,
	2019			2018
Total investment income	$	39,419		$	34,525
Total expenses		(197,336	)		(186,581	)
Net investment loss	$	(157,917	)	$	(152,056	)

Investment Income

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

For the three months ended March 31, 2019, our total investment income was $39,419, and was attributable to interest income from one eligible portfolio company, DBR Enclave LLC, and our note receivable, and dividend payments received on account of investments in four eligible portfolio companies - Educational Development Corp., Simulations Plus, Inc, Taitron Components, Inc., and TESSCO Technologies, Inc, and dividends received on account of investments in one non-eligible portfolio company.

For the three months ended March 31, 2018, our total investment income was $34,525, and was attributable to interest income from two eligible portfolio companies, Bravo Financial, LLC and DBR Enclave LLC, and dividend payments received on account of investments in two eligible portfolio companies - OTC Markets Group Cl A, and Simulations Plus, Inc.,

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Operating Expenses

The composition of our operating expenses for the three months ended March 31, 2019 and March 31, 2018 was as follows:

Expense item	Three months ended March 31, 2019		Three months ended March 31, 2018
Professional fees	$	52,096	$	60,281
Payroll		58,332		61,053
Occupancy		24,481		22,755
Insurance		20,515		18,891
Directors’ fees		22,500		15,000
Depreciation and amortization		644		2,671
Other general and administrative		18,768		5,930
Total	$	197,336	$	186,581

Net Realized Gain from Investments

For the three months ended March 31, 2019, we had $2,806,578 of principal repayments, resulting in $3,070,846 of realized gains, due primarily to the acquisition of our holding in BiteSquad LLC by Waitr Holdings. For the three months ended March 31, 2018, we had $78,531 of principal repayments, resulting in $51,752 of realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three months ended March 31, 2019, our investments had $1,748,260 of unrealized depreciation. For the three months ended March 31, 2018, our investments had $639,894 of unrealized appreciation.

Changes in Net Assets from Operations

For the three months ended March 31, 2019, we recorded a net increase in net assets from operations of $1,164,669. Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2019, our per-share net increase in net assets from operations was $0.11. For the three months ended March 31, 2018, we recorded a net increase in net assets from operations of $539,590. Based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2018, our per-share net increase in net assets from operations was $0.05.

Cash Flows for the Three Months Ended March 31, 2019 and 2018

The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions and repayments of portfolio investments, among other factors. For the three months ended March 31, 2019, net cash provided in operating activities was $2,521,322. Cash flows provided in operating activities for the three months ended March 31, 2019 were primarily related to redemptions and repayments of investments of $2,806,578, offset mostly by purchases of investments totaling $120,653. For the three months ended March 31, 2018, net cash used in operating activities was $393,046. Cash flows used in operating activities for the three months ended March 31, 2018 were primarily related to purchases of investments totaling $628,252, offset mostly by redemptions and repayments of investments totaling $78,531.

FINANCIAL CONDITION

As of March 31, 2019, we had cash of $2,969,835, an increase of $2,003,714 from December 31, 2018. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies, cash distributions to our shareholders or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to collectively as “temporary investments.” As of the date of this filing, we expect that substantially all of our temporary investments will be redeployed into portfolio company investments by December 31, 2019.

To the extent our Board of Directors determines in the future, based on our financial condition and capital market conditions, that additional capital would allow us to take advantage of additional investment opportunities, we may seek to raise additional equity capital or to engage in borrowing, subject to the limitations on borrowing applicable to BDCs.

RELATED-PARTY TRANSACTIONS

See Note 5 to our Financial Statements for disclosure of our related-party transactions and potential conflicts of interest.

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CRITICAL ACCOUNTING ESTIMATES

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

In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition. For more information, see Note 2 “Significant Accounting Policies.”

OFF-BALANCE-SHEET ARRANGEMENTS

During the three months ended March 31, 2019, 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;

our business prospects and the prospects of our portfolio companies;

the outcome of compliance inspections conducted from time to time by the SEC’s Office of Compliance and Inspections;

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;

our ability to operate as a BDC and to be taxed as a RIC;

the adequacy of our cash resources and working capital; and

the timing of cash flows, if any, from the operations of our portfolio companies.

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 June 19, 2019 (related to our year ended December 31, 2018) 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 March 31, 2019, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of March 31, 2019.

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

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PART II. OTHER INFORMATION

ITEM 6.

EXHIBITS

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

* Filed herewith

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SIGNATURES

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

	MILL CITY VENTURES III, LTD.

Date: July 29, 2019	By:	/s/ Douglas M. Polinsky
		Douglas M. Polinsky
		Chief Executive Officer

Date: July 29, 2019	By:	/s/ Joseph A. Geraci, II
		Joseph A. Geraci, II
		Chief Financial Officer

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