Mill City Ventures III, Ltd - Quarter Report: 2021 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended September 30, 2021

☐

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)

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

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

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


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

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

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

As of November 12, 2021, Mill City Ventures III, Ltd. had 10,790,413 shares of common stock, and no other classes of capital stock, outstanding.

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MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended September 30, 2021


PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements (unaudited)

	Condensed Balance Sheets – September 30, 2021 and December 31, 2020	3

	Condensed Statements of Operations – Three and nine months ended September 30, 2021 and September 30, 2020	4

	Condensed Statements of Shareholders’ Equity – Three and nine months ended September 30, 2021 and September 30, 2020	5

	Condensed Statements of Cash Flows – Nine months ended September 30, 2021 and September 30, 2020	6

	Condensed Schedule of Investments – September 30, 2021 and Schedule of Investments – December 31, 2020	7

	Condensed Notes to Financial Statements – September 30, 2021	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

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


		September 30, 2021
	(unaudited)			December 31, 2020
ASSETS
Investments, at fair value:	$	11,057,453	$	6,667,897
Non-control/non-affiliate investments (cost: $10,562,451 and $4,968,576 respectively)
Cash		3,594,508		5,440,579
Note receivable		250,000		250,000
Prepaid expenses		128,682		43,838
Receivable for sale of investments		60,080		19,313
Interest and dividend receivables		471,340		65,911
Right-of-use lease asset		9,661		23,345
Total Assets	$	15,571,724	$	12,510,883

LIABILITIES
Accounts payable	$	27,616	$	32,917
Dividend payable		1,079,041		539,296
Payable for purchase of investments		30,689		—
Lease liability		10,843		26,061
Accrued income tax expense		1,141,700		13,722
Deferred taxes		141,000		258,000
Total Liabilities		2,430,889		869,996
Commitments and Contingencies

SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (250,000,000 authorized; 10,790,413 and 10,785,913 outstanding)		10,790		10,786
Additional paid-in capital		10,694,163		10,673,014
Accumulated deficit		(1,159,665)		(1,159,665)
Accumulated undistributed investment loss		(2,181,001)		(2,124,419)
Accumulated undistributed net realized gains on investment transactions		5,281,546		2,541,850
Net unrealized appreciation in value of investments		495,002		1,699,321
Total Shareholders' Equity (Net Assets)		13,140,835		11,640,887
Total Liabilities and Shareholders' Equity	$	15,571,724	$	12,510,883
Net Asset Value Per Common Share	$	1.22	$	1.08

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Investment Income
Interest income	$	755,601	$	285,338	$	1,977,992	$	740,008
Dividend income		—		1,696		—		15,461
Total Investment Income		755,601		287,034		1,977,992		755,469

Operating Expenses
Professional fees		79,950		58,719		300,297		133,016
Payroll		80,840		58,191		468,266		174,768
Insurance		27,890		20,672		80,023		61,793
Occupancy		16,689		16,562		49,716		49,693
Director's fees		30,000		22,500		90,000		67,500
Depreciation and amortization		—		643		—		1,930
Other general and administrative		4,213		3,659		35,294		11,548
Total Operating Expenses		239,582		180,946		1,023,596		500,248
Net Investment Gain		516,019		106,088		954,396		255,221

Realized and Unrealized Gain (Loss) on Investments
Net realized gain on investments		289,138		335,440		3,818,737		535,164
Net change in unrealized appreciation (depreciation) on investments		(774,169)		141,816		(1,204,319)		104,411
Net Realized and Unrealized Gain (Loss) on Investments		(485,031)		477,256		2,614,418		639,575
Net Increase in Net Assets Resulting from Operations Before Taxes		30,988		583,344		3,568,814		894,796
Provision For (Benefit From) Income Taxes		(300)		—		1,010,978		—
Net Increase (Decrease) in Net Assets Resulting from Operations	$	31,288	$	583,344	$	2,557,836	$	894,796

Net Increase in Net Assets Resulting from Operations per share:
Basic and diluted	$	0.00	$	0.05	$	0.24	$	0.08
Weighted-average number of common shares outstanding - basic and diluted		10,790,413		10,696,735		10,788,918		10,881,382

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)


										Accumulated		Net Unrealized
								Accumulated		Undistributed		Appreciation
				Additional				Undistributed		Net Realized Gain		(Depreciation)		Total
	Common	Par		Paid In		Accumulated		Net Investment		on Investments		in value of		Shareholders'
Three Months Ended September 30, 2021	Shares	Value		Capital		Deficit		Loss		Transactions		Investments		Equity
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
Dividend Declared	—		—		—		—		—		(1,079,041)		—		(1,079,041)
Undistributed net investment gain	—		—		—		—		516,319		—		—		516,319
Undistributed net realized gain on investment transactions	—		—		—		—		—		289,138		—		289,138
Depreciation in value of investments	—		—		—		—		—		—		(774,169)		(774,169)
Balance as of September 30, 2021	10,790,413	$	10,790	$	10,694,163	$	(1,159,665)	$	(2,181,001)	$	5,281,546	$	495,002	$	13,140,835


										Accumulated		Net Unrealized
								Accumulated		Undistributed		Appreciation
				Additional				Undistributed		Net Realized Gain		(Depreciation)		Total
	Common			Paid In		Accumulated		Net Investment		on Investments		in value of		Shareholders'
Three Months Ended September 30, 2020	Shares	Par Value		Capital		Deficit		Loss		Transactions		Investments		Equity
Balance as of June 30, 2020	10,696,735	$	10,696	$	10,616,757	$	(1,159,665)	$	(2,248,732)	$	3,275,540	$	(272,878)	$	10,221,718
Undistributed net investment gain	—		—		—		—		106,088		—		—		106,088
Undistributed net realized gain on investment transactions	—		—		—		—		—		335,440		—		335,440
Appreciation in value of investments	—		—		—		—		—		—		141,816		141,816
Balance as of September 30, 2020	10,696,735	$	10,696	$	10,616,757	$	(1,159,665)	$	(2,142,644)	$	3,610,980	$	(131,062)	$	10,805,062


										Accumulated		Net
								Accumulated		Undistributed		Unrealized
				Additional				Undistributed		Net Realized Gain		Appreciation		Total
	Common			Paid In		Accumulated		Net Investment		on Investments		in value of		Shareholders'
Nine Months Ended September 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
Common shares issued in consideration for expense payment	4,500		4		21,149		—		—		—		—		21,153
Dividend declared	—		—		—		—		—		(1,079,041)		—		(1,079,041)
Undistributed net investment loss	—		—		—		—		(56,582)		—		—		(56,582)
Undistributed net realized gain on investment transactions	—		—		—		—		—		3,818,737		—		3,818,737
Depreciation in value of investments	—		—		—		—		—		—		(1,204,319)		(1,204,319)
Balance as of September 30, 2021	10,790,413	$	10,790	$	10,694,163	$	(1,159,665)	$	(2,181,001)	$	5,281,546	$	495,002	$	13,140,835


										Accumulated
								Accumulated		Undistributed		Net Unrealized
				Additional				Undistributed		Net Realized Gain		Appreciation		Total
	Common			Paid In		Accumulated		Net Investment		on Investments		in value		Shareholders'
Nine Months Ended September 30, 2020	Shares	Par Value		Capital		Deficit		Loss		Transactions		of Investments		Equity
Balance as of December 31, 2019	11,067,402	$	11,067	$	10,774,653	$	(1,159,665)	$	(2,397,865)	$	3,075,816	$	(235,473)	$	10,068,533
Repurchase of shares	(370,667)		(371)		(157,896)		—		—		—		—		(158,267)
Undistributed net investment gain	—		—		—		—		255,221		—		—		255,221
Undistributed net realized gain on investment transactions	—		—		—		—		—		535,164		—		535,164
Appreciation in value of investments	—		—		—		—		—		—		104,411		104,411
Balance as of September 30, 2020	10,696,735	$	10,696	$	10,616,757	$	(1,159,665)	$	(2,142,644)	$	3,610,980	$	(131,062)	$	10,805,062

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended
	September 30, 2021		September 30, 2020
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	2,557,836	$	894,796

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		1,204,319		(104,411)
Net realized gain on investments		(3,818,737)		(535,164)
Purchases of investments		(18,133,352)		(7,655,802)
Proceeds from sales of investments		16,363,964		1,858,011
Depreciation & amortization expense		—		1,930
Income taxes payable		1,010,978		—
Common shares issued as consideration for expense payment		15,403		—

Changes in operating assets and liabilities:
Prepaid expenses and other assets		(71,160)		(6,409)
Interest and dividends receivable		(405,429)		(100,223)
Receivable for investment sales		(40,767)		(127,679)
Payable for investment purchase		30,689		—
Accounts payable and other liabilities		(20,519)		(13,049)
Net cash used in operating activities		(1,306,775)		(5,788,000)

Cash flows from financing activities:
Payments for repurchase of common stock		—		(158,267)
Payments for common stock dividend		(539,296)		—
Net cash used by financing activities		(539,296)		(158,267)
Net decrease in cash		(1,846,071)		(5,946,267)
Cash, beginning of period		5,440,579		8,066,656
Cash, end of period	$	3,594,508	$	2,120,389

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

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2021


					Percentage
					of Net
Investment / Industry	Cost		Fair Value		Assets
Short-Term Non-banking Loans
Consumer - 15% secured loans
AirDog Supplies, Inc.	$	1,250,000	$	1,250,000	9.51	%
Consumer - 20% secured loans		400,000		400,000	3.04	%
Financial - 44% secured loans
Benton Financial, LLC		2,082,000		2,082,000	15.84	%
Financial - 40% secured loans
Benton Financial, LLC		1,753,333		1,753,333	13.34	%
Financial - 12% secured loans		500,000		500,000	3.80	%
Litigation Financing - 23% secured loans
The Cross Law Firm, LLC		1,805,750		1,800,000	13.70	%
Real Estate - 15% secured loans		600,000		600,000	4.57	%
Alatus Development, LLC		1,250,000		1,250,000	9.51	%
Total Short-Term Non-Banking Loans		9,641,083		9,635,333	73.31	%

Common Stock
Consumer		140,000		492,000	3.74	%
Financial Services		30,689		30,120	0.23	%
Total Common Stock		170,689		522,120	3.97	%

Preferred Stock
Information Technology		150,000		300,000	2.28	%

Warrants
Healthcare		679		—	0.00	%

Other Equity
Financial		600,000		600,000	4.57	%

Total Investments	$	10,562,451	$	11,057,453	84.13	%

Total Cash		3,594,508		3,594,508	27.35	%

Total Investments and Cash	$	14,156,959	$	14,651,961	111.48	%

See accompanying Notes to the Financial Statements

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MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2020


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

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

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

Warrants
Healthcare		679		—	0.00	%

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

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

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

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

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NOTE 1 – ORGANIZATION

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

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The condensed balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

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

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

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

The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors, pursuant to our written Valuation Policy and Procedures. These policies and procedures generally require that we value our Level 3 equity investments at fair market value, unless circumstances warrant a different approach. Our Valuation Policy and Procedures provide examples of these circumstances, such as when a company in which we have invested has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a 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 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 and loan investments with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. The fair value for short-term non-banking loans is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent to those cash flows. The discount ranges from 12% to 47% and approximate rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk.

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On a quarterly basis, our management provides members of our Board of Directors with (i) valuation reports for each investment (which reports include our cost, the most recent prior valuation and any current proposed valuation, and an indication of the valuation methodology used, together with any other supporting materials); (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 investments; and (iv) recommendations to change any existing valuations of our investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing. The board then discusses these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our investments.

We made no changes to our Valuation Policy and Procedures during the reporting period other than to have our entire Board of Directors involved in implementing and discharging those policies and procedures.

Income taxes:

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

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

We file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, 2017 through 2020, which are the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2021.

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

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

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

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

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

Recently adopted accounting pronouncements:

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

NOTE 3 – INVESTMENTS

The following table shows the composition of our investments by major class, at amortized cost and fair value, as of September 30, 2021 (together with the corresponding percentage of the fair value of our total investments):


	As of September 30, 2021
	Investments at		Percentage of		Investments at		Percentage of
	Amortized Cost		Amortized Cost		Fair Value		Fair Value
Short-term Non-banking Loans	$	9,641,083	91.3	%	$	9,635,333	87.1	%
Preferred Stock		150,000	1.4			300,000	2.7
Common Stock		170,689	1.6			522,120	4.7
Warrants		679	—			—	—
Other Equity		600,000	5.7			600,000	5.5
Total	$	10,562,451	100.0	%	$	11,057,453	100.0	%

The following table shows the composition of our investments by major class, at amortized cost and fair value, as of December 31, 2020 (together with the corresponding percentage of the fair value of our total investments):


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

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


	Investments at		Percentage of
	Fair Value		Fair Value
Consumer	$	2,142,000	19.4	%
Financial		6,765,453	61.2
Information Technology		300,000	2.7
Real Estate		1,850,000	16.7
		—	—
Total	$	11,057,453	100.0	%

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


	As of December 31, 2020
	Investments at		Percentage of
	Fair Value		Fair Value
Consumer	$	3,700,000	55.5	%
Financial		900,000	13.5
Information Technology		300,000	4.5
Leisure & Hospitality		278,897	4.2
Real Estate		1,489,000	22.3
Total	$	6,667,897	100.0	%

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 as of September 30, 2021 may differ materially from values that would have been used had a readily available market for the securities or investments existed.

The following table presents the fair value measurements of our investments by major class, as of September 30, 2021, according to the fair value hierarchy:


	As of September 30, 2021
	Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	9,635,333	$	9,635,333
Preferred Stock		—		—		300,000		300,000
Common Stock		522,120		—		—		522,120
Warrants		—		—		—		—
Other Equity		—		—		600,000		600,000
Total	$	522,120	$	—	$	10,535,333	$	11,057,453

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


	As of December 31, 2020
	Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	2,789,000	$	2,789,000
Preferred Stock		—		—		300,000		300,000
Common Stock		3,300,000		—		—		3,300,000
Warrants		—		—		—		—
Other Equity		—		—		278,897		278,897
Total	$	3,300,000	$	—	$	3,367,897	$	6,667,897

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The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 investment assets for the nine months ended September 30, 2021:


	For the nine months ended September 30, 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		17,365,333		—		—		—		600,000
Sales and redemptions		(10,519,000)		—		—		—		(278,897)
Net realized loss		—		—		—		—		—
Balance as of June 30, 2021	$	9,635,333	$	300,000	$	—	$	—	$	600,000

The net change in unrealized appreciation for the nine months ended September 30, 2021 attributable to Level 3 investments still held as of September 30, 2021 is $0, 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 September 30, 2021 and the unobservable inputs used to determine their valuation:


Security Type	9/30/21 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	9,635,333	discounted cash flow	determining private company interest rate based on credit	12-44	%
Other Equity		600,000	last secured funding known by company	economic changes since last funding
Preferred Stock		300,000	last funding secured by company	economic changes since last funding
	$	10,535,333

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


	For the year ended December 31, 2020
	ST Non-banking		Preferred		Common
	Loans		Stock		Stock		Warrants		Other Equity
Balance as of January 1, 2020	$	—	$	300,000	$	—	$	—	$	534,200
Net change in unrealized appreciation		—		—		—		—		486,018
Purchases and other adjustments to cost		7,543,000		—		—		—		—
Sales and redemptions		(4,754,000)		—		—		—		(91,313)
Net realized loss		—		—		—		—		(650,008)
Balance as of December 31, 2020	$	2,789,000	$	300,000	$	—	$	—	$	278,897

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

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


Security Type	12/31/20 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	2,789,000	discounted cash flow	determining private company interest rate based on credit	14-44	%
Other Equity		278,897	last secured funding known by company	economic changes since purchase
Preferred Stock		300,000	last funding secured by company	economic changes since last funding
	$	3,367,897

NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a Code of Ethics and certain other policies relating to conflicts of interest. Nevertheless, from time to time we may hold investments in businesses 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 only related-party transaction requiring disclosure under this policy relates to an August 10, 2018 loan transaction we entered into with Elizabeth Zbikowski. Ms. Zbikowski, along with her husband Scott Zbikowski, owns approximately 1,765,000 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory note was subsequently amended such that it matures in August 2022. The note bears interest payable monthly at the rate of 10% per annum and is secured by the debtors’ pledge to us of 625,000 shares of our common stock. The pledged shares are held in physical custody for us by our custodial agent Millennium Trust Company.

NOTE 6 – INCOME TAXES

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

As of September 30, 2021 and December 31, 2020, we have a deferred tax liability of $141,000 and $258,000, respectively. Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, we may need to adjust the 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 September 30, 2021 and December 31, 2020, we had accrued income taxes of $1,141,700 and $13,722 respectively. We recorded a benefit from income taxes of approximately $300 (28.9 percent effective tax rate) and $0 (0 percent effective tax rate) during the three months ended September 30, 2021 and September 30, 2020, respectively. We recorded income taxes of approximately $1,010,978 (30.4 percent effective tax rate) and $0 (0 percent effective tax rate) during the nine months ended September 30, 2021 and September 30, 2020, respectively. Due to the full valuation allowances in periods prior to December 31, 2020, our effective tax rate was expected to be near zero percent, and therefore income tax accruals and expense were not material for those prior periods presented.

As of December 31, 2020, we had a federal net operating loss carryfoward (NOL) of approximately $351,000. The federal NOL was completely utilized and offset taxable income as of September 30, 2021. States may vary in their treatment of post-2017 NOLs. The remaining state NOLs are expected to be completely used and offset taxable income by September 30, 2021. The remaining state NOL carryforwards may expire in 2036 and 2037 if not used.

NOTE 7 – SHAREHOLDERS’ EQUITY

At September 30, 2021, we had 10,790,413 shares of common stock issued and outstanding.

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On September 27, 2021 we announced that our Board of Directors had approved a cash dividend of $0.10 per common share. The dividend was paid on October 29, 2021 to shareholders of record as of the close of business on October 15, 2021.

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

NOTE 8 – 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
	September 30,
	2021		2020
Numerator: Net increase in net assets resulting from operations	$	31,288	$	583,344
Denominator: Weighted-average number of common shares outstanding		10,790,413		10,696,735
Basic and diluted net gain per common share	$	0.00	$	0.05


	For the Nine Months Ended
	September 30,
	2021		2020
Numerator: Net increase in net assets resulting from operations	$	2,557,836	$	894,796
Denominator: Weighted-average number of common shares outstanding		10,788,918		10,881,382
Basic and diluted net gain per common share	$	0.24	$	0.08

NOTE 9 – OPERATING LEASES

We are 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 December 31, 2020 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 September 30, 2021 and September 30, 2020 was $16,689 and $16,562, respectively.

The components of our operating lease were as follows for the three and nine months ended September 30, 2021:


	Three Months		Nine Months
	Ended		Ended
	September 30, 2021		September 30, 2021
Operating lease costs	$	4,779	$	14,337
Variable lease cost		4,478		13,082
Short-term lease cost		7,432		22,297
Total	$	16,689	$	49,716

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Supplemental balance sheet information consisted of the following at September 30, 2021:


Operating Lease
Right-of-use assets	$	9,661

Operating Lease Liability	$	10,843
Less: short term portion		(10,843)
Long term portion	$	—

Maturity analysis under lease agreements consisted of the following as of September 30, 2021:


	Operating
	Leases
2021	$	5,290
2022		5,449
Total lease payments		10,739
Plus: interest		104
Present value of lease liabilities	$	10,843

NOTE 10 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the nine months ended September 30, 2021 through 2017:


	Nine Months Ended June 30,
	2021			2020		2019		2018		2017
Per Share Data ⁽¹⁾
Net asset value at beginning of period	$	1.08		0.91		1.02		0.87		0.77
Net investment gain (loss)		0.09		0.02		(0.05)		(0.04)		(0.04)
Net realized and unrealized gains (losses)		0.24		0.06		0.01		0.15		0.06
Provision for income taxes		(0.09)		0.00		0.00		0.00		0.00
Repurchase of common stock		0.00		0.02		0.00		0.00		0.04
Payment of common stock dividend		(0.10)		0.00		(0.05)		0.00		0.00
Net asset value at end of period	$	1.22		1.01		0.93		0.98		0.83

Ratio / Supplemental Data
Per share market value of investments at end of period	$	1.02		0.76		0.70		0.82		0.51
Shares outstanding at end of period		10,790,413		10,696,735		11,067,402		11,067,402		12,151,493
Average weighted shares outstanding for the period		10,788,918		10,881,382		11,067,402		11,067,402		12,151,493
Net assets at end of period	$	13,140,835		10,805,062		10,588,689		11,278,889		9,555,551
Average net assets ⁽²⁾	$	13,090,497		10,220,482		12,304,975		9,955,674		9,504,851
Total investment return		22.22	%	8.79	%	(8.82)	%	12.64	%	2.60	%
Portfolio turnover rate (3)		124.55	%	18.18	%	7.11	%	11.55	%	11.87	%
Ratio of operating expenses to average net assets ⁽³⁾		(10.31)	%	(6.49)	%	(7.70)	%	(6.98)	%	(7.38)	%
Ratio of net investment income (loss) to average net assets ⁽³⁾		9.87	%	3.35	%	(6.40)	%	(5.53)	%	(5.89)	%
Ratio of realized gains (losses) to average net assets ⁽³⁾		40.81	%	7.06	%	57.36	%	(12.79)	%	16.51	%

(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.

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NOTE 11 – General Uncertainty

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

NOTE 12 – Subsequent Events

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

●

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.”

The principal specialty finance solutions we provide are high-interest short-term lending arrangements. On occasion, these lending arrangements involve us obtaining collateral as security for the borrower’s repayment of funds to us. In some circles, short-term high-interest collateralized lending is referred to as “hard-money lending.”

We believe we are generally able to charge high interest for our specialty finance solutions because (i) banks and other traditional providers of credit may have neither the expertise nor the infrastructure needed to evaluate creditworthiness and risks in a timeframe suitable for a potential borrower, preferring instead to process transactions and structures that present few novel issues or risks; and (ii) we will often be able to devote time and attention to transactions involving a smaller dollar amount than an institutional lender will view as worthwhile. These beliefs essentially explain why we refer to our business as “specialty finance”— financing that may involve structures that are unique, creative, and often bespoke; and that may involve dollar amounts that are not suitable for institutional lenders.

We generally provide specialty finance solutions that are short-term in nature. By this, we mean lending arrangements that mature or come due within nine months of the lending date. We view the provision of short-term finance as desirable for two principal reasons. First, short-term lending requires a potential borrower to identify for us a near-term source of repayment for the funds they borrow from us. This permits us to evaluate that source of repayment clearly and carefully, thus helping identify the potential risks involved in a particular transaction and how we may be able to include structural terms that mitigate these risks. Second, short-term lending permits us to avail ourselves of a court-recognized exception for treating promissory notes (evidencing a loan) as “investment securities” under federal securities law. In sum, this exception generally applies to promissory notes with short-term maturities of nine months. Our ability to avail ourselves of this exception, and to more generally structure our transactions in such a way as to avoid them being properly considered as “investment securities” under federal securities laws, is important to our ability to avoid once again becoming subject to regulation under the 1940 Act.

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Examples of the kinds of the specialty finance solutions we have considered or provided to date, and may continue to provide in the future, include:

●

Short-term secured loans for real estate development

●

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

●

Short-term secured loans to a business for operating capital

●

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

We intend to remain opportunistic, however, and may engage in transactions that involve other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely.

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

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, 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 discussion of our results of operations and financial condition should be read in the context of this overview. Furthermore, we are including a full description of our business in this report.

INVESTMENT ACTIVITY

During the nine months ended September 30, 2021, we made $18,133,352 of investments and had $16,363,964 of sales and repayments, resulting in net investments at amortized cost of $10,562,451 at the end of the period.

During the nine months ended September 30, 2020, we made $7,655,802 of investments and had $1,858,011of sales and repayments, resulting in net investments at amortized cost of $8,309,325 at the end of the period.

Our investment composition by major class, based on fair value at September 30, 2021, was as follows:


	Investments at		Percentage of
	Fair Value		Fair Value
Short-term Non-banking Loans	$	9,635,333	87.1	%
Equity/Other		1,422,120	12.9
Total	$	11,057,453	100.0	%

RESULTS OF OPERATIONS

Our operating results for the three and nine months ended September 30, 2021 and September 30, 2021 were as follows:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Investment Income:	$	755,601	$	287,034	$	1,977,992	$	755,469
Operating Expenses:		(239,582)		(180,946)		(1,023,596)		(500,248)
Net Investment Gain	$	516,019	$	106,088	$	954,396	$	255,221

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Investment Income

We generate revenue primarily in the form of interest income and capital gains, if any, on the debt instruments 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 and nine months ended September 30, 2021, our total investment income was $755,601 and $1,977,992, respectively. For the three and nine months ended September 30, 2020, our total investment income was $287,034 and $755,469, respectively. The increase is due to the change in our business structure which now focuses on short-term non-bank lending. Our loan portfolio generates interest income, with an average rate on the loans of 27%.

Professional Fees

For the three and nine months ended September 30, 2021, we had $79,950 and $300,297 professional fees expense, respectively. For the three and nine months ended September 30, 2020, we had $58,719 and $133,016 professional fees expense, respectively. The increase is due to legal costs incurred to close on several new short-term banking loans. In 2020, we received a refund during the first quarter of $59,957 relating to certain audit expenses incurred during 2018 and 2019.

Net Realized Gain from Investments

For the three and nine months ended September 30, 2021, we had $6,474,137 and $16,363,964, respectively, of sales of investments, resulting in $289,138 and $3,818,737, respectively, of realized gains. For the three and nine months ended September 30, 2020, we had $665,187 and $1,858,011, respectively, of sales of investments, resulting in $335,440 and $535,164, respectively, of realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three and nine months ended September 30, 2021, our investments had $774,169 and $1,204,319 of unrealized depreciation, respectively. For the three and nine months ended September 30, 2020, our investments had $141,816 and $104,411 of unrealized appreciation, respectively.

Changes in Net Assets from Operations

For the three and nine months ended September 30, 2021, we recorded a net increase in net assets from operations of $31,288 and $2,557,836, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2021, our per-share net increase in net assets from operations was $0.00 and $0.24, respectively. For the three and nine months ended September 30, 2020, we recorded a net increase in net assets from operations of $583,344 and $894,796, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2020, our per-share net increase in net assets from operations was $0.05 and $0.08, respectively.

Cash Flows for the Nine months Ended September 30, 2021 and 2020

The level of cash flows used in or provided by operating activities is affected by the purchases of investments, redemptions and repayments of investments, among other factors. For the nine months ended September 30, 2021, net cash used in operating activities was $1,306,775. Cash flows used in operating activities for the nine months ended September 30, 2021 were primarily related to purchases of investments of $18,133,352, offset mostly by redemptions and repayments of investments totaling $16,363,964. For the nine months ended September 30, 2020, net cash used in operating activities was $5,788,000. Cash flows used in operating activities for the nine months ended September 30, 2020 were primarily related to purchases of investments of $7,655,802, offset mostly by redemptions and repayments of investments totaling $1,858,011.

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FINANCIAL CONDITION

As of September 30, 2021, we had cash of $3,594,508, a decrease of $1,846,071 from December 31, 2020. The primary use of our existing funds and any funds raised in the future is expected to be for investments, 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, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt and loan securities maturing in one year or less from the time of investment.

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

CRITICAL ACCOUNTING ESTIMATES

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

In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our investments and revenue recognition. For more information, refer to our Annual Report on Form 10-K for the year ended December 31, 2020.

OFF-BALANCE-SHEET ARRANGEMENTS

During the nine months ended September 30, 2021, 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;

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the success of our investments;

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our relationships with third parties;

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●

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

●

the ability of our portfolio companies to achieve their objectives;

●

our expected financings and investments;

●

our regulatory structure and tax treatment;

●

the adequacy of our cash resources and working capital; and

●

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

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

ITEM 4.CONTROLS AND PROCEDURES

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

As of September 30, 2021, 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 September 30, 2021.

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
101.INS	*	Inline XBRL Instance Document
101.SCH	*	Inline XBRL Schema Document
101.CAL	*	Inline XBRL Calculation Linkbase Document
101.DEF	*	Inline XBRL Definition Linkbase Document
101.LAB	*	Inline XBRL Label Linkbase Document
101.PRE	*	Inline XBRL Presentation Linkbase Document
104	*	Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)

*	Filed herewith

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SIGNATURES

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


	MILL CITY VENTURES III, LTD.

Date: November 12, 2021	By:	/s/ Douglas M. Polinsky
		DOUGLAS M. POLINSKY
		Chief Executive Officer


Date: November 12, 2021	By:	/s/ Joseph A. Geraci, II
		JOSEPH A. GERACI, II
		Chief Financial Officer

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