What changed in this filing

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Item 1. Financial Statements

2023-05-22 compared with 2022-11-18 · 227 added, 224 removed, 320 unchanged (58% of the section changed)

2 unchanged sentences

CONDENSED BALANCE SHEETS

September 30, 2022

December 31, 2021

Investments, at fair value:

3 unchanged sentences

Prepaid expenses

Receivable for sale of investments

Interest and dividend receivables

Right-of-use lease asset

Right-of-use operating lease asset

Deferred taxes

Line of credit

Accounts payable

Dividend payable

Payable for purchase of investments

Lease liability

Accrued income tax

Deferred taxes

Line of credit

Operating lease liability

Deferred interest income

Total Liabilities

Commitments and Contingencies

SHAREHOLDERS EQUITY (NET ASSETS)

Common stock, par value $ 0.001 per share ( 111,111,111 authorized;

6,185,255 and 4,795,739 outstanding)

6,185,255 outstanding)

Additional paid-in capital

Additional paid-in capital - stock options

Accumulated deficit

5 unchanged sentences

Accumulated undistributed net realized gains on investment transactions

Net unrealized appreciation in value of investments

Net unrealized appreciation (depreciation) in value of investments

Total Shareholders' Equity (net assets)

5 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Investment Income

Interest income

Dividend income

Total Investment Income

6 unchanged sentences

Net Investment Gain (Loss)

( 1,025,767 )

Realized and Unrealized Gain (Loss) on Investments

Net realized gain on investments

Net realized gain (loss) on investments

Net change in unrealized appreciation (depreciation) on investments

( 1,204,319 )

Net Realized and Unrealized Gain (Loss) on Investments

Net Realized and Unrealized Gain on Investments

Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes

Provision For (Benefit From) Income Taxes

$ ( 977,344 )

Provision (Benefit) for Income Taxes

Net Increase (Decrease) in Net Assets Resulting from Operations

$ ( 718,044 )

Net Increase (Decrease) in Net Assets Resulting from Operations per share:

4 unchanged sentences

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended September 30, 2022

Undistributed

(Depreciation)

Shareholders’

Balance as of June 30, 2022

$ ( 1,159,665 )

$ ( 1,064,271 )

Common shares issued in public offering

Common shares issued in reverse stock split rounding

Common shares issued in stock-based compensation

Common shares issued in consideration for expense payment

Undistributed net investment loss

Balance as of September 30, 2022

$ ( 1,159,665 )

$ ( 1,100,397 )

Three Months Ended September 30, 2021

Undistributed

(Depreciation)

Shareholders’

Balance as of June 30, 2021

$ ( 1,159,665 )

$ ( 2,697,320 )

Dividend Declared

( 1,079,041 )

Common shares issued in consideration for expense payment

Undistributed net investment gain

Undistributed net realized gain on investment transactions

Depreciation in value of investments

Balance as of September 30, 2021

$ ( 1,159,665 )

$ ( 2,181,001 )

Nine Months Ended September 30, 2022

Undistributed

Shareholders’

Three Months Ended March 31, 2023

Common Shares

Additional Paid In Capital

Accumulated Deficit

Accumulated Undistributed Net Investment Loss

Accumulated Undistributed Net Realized Gain on Investments Transactions

Net Unrealized Appreciation (Depreciation) in Value of Investments

Total Shareholders' Equity

Balance as of December 31, 2022

1 unchanged sentence

$ ( 1,086,739 )

Common shares issued in public offering

Common shares issued in reverse stock split rounding

Common shares issued in stock-based compensation

Common shares issued in consideration for expense payment

Undistributed net investment gain

Undistributed net realized gain on investment transactions

Depreciation in value of investments

Balance as of September 30, 2022

$ ( 651,371 )

$ ( 1,100,397 )

Nine Months Ended September 30, 2021

Undistributed

Shareholders’

Balance as of December 31, 2020

Issuance of stock options

Net investment loss, net of tax benefit of $259,300

Net realized loss on investment transactions

Appreciation in value of investments

Balance as of March 31, 2023

$ ( 1,159,665 )

$ ( 1,853,206 )

Common shares issued in consideration for expense payment

Dividend declared

Three Months Ended March 31, 2022

Common Shares

Additional Paid In Capital

Accumulated Deficit

Accumulated Undistributed Net Investment Loss

Accumulated Undistributed Net Realized Gain on Investments Transactions

Net Unrealized Appreciation (Depreciation) in Value of Investments

Total Shareholders' Equity

Balance as of December 31, 2021

$ ( 1,159,665 )

$ ( 1,877,667 )

Undistributed net investment loss

Undistributed net realized gain on investment transactions

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

Net realized gain on investment transactions

Depreciation in value of investments

( 1,204,319 )

Balance as of September 30, 2021

Balance as of March 31, 2022

$ ( 1,159,665 )

3 unchanged sentences

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

September 30, 2022

September 30, 2021

Three Months Ended

Cash flows from operating activities:

Net increase in net assets resulting from operations

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

Net realized gain on investments

Net increase (decrease) in net assets resulting from operations

$ ( 718,044 )

Adjustments to reconcile net increase (decrease) in net assets resulting

from operations to net cash provided (used) in operating activities:

Net change in unrealized (appreciation) depreciation on investments

Net realized (gain) loss on investments

Purchases of investments

2 unchanged sentences

Proceeds from sales of investments

Stock-based compensation

Issuance of stock options

Deferred income taxes

Changes in operating assets and liabilities:

1 unchanged sentence

Interest and dividends receivable

Receivable for investment sales

Accounts payable and other liabilities

Deferred interest income

Accrued income taxes

Payable for investment purchase

( 1,900,000 )

Accounts payable and other liabilities

Income taxes payable

Net cash used in operating activities

2 unchanged sentences

Cash flows from financing activities:

Proceeds from public offering

Proceeds from line of credit

Repayments on line of credit

( 6,101,000 )

Payments for common stock dividend

Net cash provided (used) by financing activities

Net cash provided by financing activities

Net decrease in cash

2 unchanged sentences

Cash, end of period

Non-cash financing activities:

Common shares issued as consideration

Dividend declared to common stock shareholders

See accompanying Notes to Financial Statements

1 unchanged sentence

CONDENSED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

MARCH 31, 2023

Investment / Industry

Percentage of Net Assets

Short-Term Non-banking Loans

Business Services - 15% secured loans

Mustang Litigation Funding

Consumer - 15% secured loans

AirDog Supplies, Inc.

Intelligent Mapping, LLC

Financial - 33% secured loans

Benton Financial, LLC

Financial - 34% secured loans

1 unchanged sentence

Financial - 36% secured loans

Benton Financial, LLC

Financial - 12% secured loans

1 unchanged sentence

Real Estate - 18% secured loans

Tailwinds, LLC

Real Estate - 15% secured loans

Real Estate - 12% secured loans

Alatus Development Corp

Real Estate - subordinated debt

Villas at 79th, LLC

Total Short-Term Non-Banking Loans

3 unchanged sentences

Total Preferred Stock

Total Other Equity

Total Investments

Total Investments and Cash

$ $ 20,155,133

$ $ 20,152,185

MILL CITY VENTURES III, LTD.

2 unchanged sentences

Investment / Industry

Percentage of

Short-Term Non-banking Loans

Business Services - 18% secured loans

Liberated Syndication Inc.

Business Services - 15% secured loans

Mustang Litigation Funding

Consumer - 15% secured loans

AirDog Supplies, Inc.

Intelligent Mapping, LLC

Financial - 33% secured loans

Benton Financial, LLC

Financial - 12% secured loans

Litigation Financing - 23% secured loans

The Cross Law Firm, LLC

Information Technology - 15% convertible note

Real Estate - 15% secured loans

Tailwinds, LLC

Real Estate - 12% secured loans

Alatus Development, LLC

Alatus Development Corp

Total Short-Term Non-Banking Loans

Financial Services

Preferred Stock

1 unchanged sentence

Information Technology

Total Other Equity

Total Preferred Stock

Total Other Equity

1 unchanged sentence

Total Investments and Cash

$ $ 18,449,445

$ $ 17,798,073

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 1 – ORGANIZATION

6 unchanged sentences

Since that time, we have remained a public reporting company filing periodic reports with the SEC.

We engage in the business of providing short-term specialty finance solutions, typically in the form of loans, primarily to small businesses, both private and public, and high-net-worth individuals.

We engage in the business of providing short-term specialty finance solutions, typically in the form of short-term loans, primarily to small businesses, both private and public, and high-net-worth individuals.

To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “securities” for purposes of federal securities laws, and we monitor our investments as a whole to ensure that no more than 40 % of our total assets consist of “investment securities” as defined under the 1940 Act.

4 unchanged sentences

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the quarter ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Operating results for the quarter ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The condensed balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2022.

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.

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.

For purposes of its financial statement presentation, the Company is an investment company following accounting and reporting guidance in ASC 946.

The Company presents its financial statements as an investment company following accounting and reporting guidance in ASC 946.

Cash deposits:

8 unchanged sentences

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.

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

Accounting guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value.

7 unchanged sentences

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

Our valuation policy and procedures :

Under our valuation policies and procedures, we evaluate the source of inputs, including any markets in which our investments are trading, and then apply the resulting information in determining fair value.

For our Level 1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter market, to average the last quoted bid and ask price on the most active market on which the security is quoted.

In the case of traded debt securities the prices for which are not readily available, we may value those securities using a present value approach, at their weighted-average yield to maturity.

The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors, pursuant to our written valuation policy and procedures.

These policies and procedures generally require that we value our Level 3 equity investments at cost plus any accrued interest, unless circumstances warrant a different approach.

An example of such circumstances may include a situation in which a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors).

Other situations identified in our valuation policy 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.

In the case of traded debt securities the prices for which are not readily available, we may value those securities using a discounted cash flows approach, at their weighted-average yield to maturity.

The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors.

In general, we value our Level 3 equity investments at cost unless circumstances warrant a different approach.

Examples of these circumstances includes a situation in which a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors).

Other facts and circumstances that may serve as an input supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party valuation conducted by an independent and qualified professional.

When valuing preferred equity investments, we generally view intrinsic value as a key input.

1 unchanged sentence

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.

When valuing warrants, our valuation policy and procedures indicate that value will generally be the difference between the closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable.

If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above.

Generally, “out-of-the-money” warrants will be valued at cost or zero.

For non-traded (Level 3) debt securities 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 applied discount ranges from 12 % to 53 % and approximate rates currently observed in publicly traded debt markets for debt of similar terms issued by companies with comparable credit risk.

On a quarterly basis, our management provides members of our Board of Directors with (i) valuation updates for each investment and loan we hold;

(ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents;

(iii) quarter- or period-end statements from custodial firms holding any of our investments;

and (iv) recommendations to change any existing valuations of our investments or loans, or hierarchy levels, for purposes of determining the fair value of such investments or loans based upon the foregoing.

The board then discusses these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.

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

For level 3 non-banking loans with a maturity in excess of 60 days, fair value is determined based on the initial purchase price and adjusted as necessary to reflect any changes in the financial strength of the creditor and changes in interest rates in the high-yield credit markets.

On a quarterly basis, our management provides members of our Board of Directors with recommendations, if any, 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.

In such a case, the Board of Directors would then discuss these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.

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

Income taxes:

2 unchanged sentences

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.

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized.

3 unchanged sentences

Federal jurisdiction and various state jurisdictions.

We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Our evaluation was performed for the tax years ended December 31, 2019 through 2021, which were the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2022.

We do not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

Our evaluation was performed for the tax years ended December 31, 2020 through 2022, which are the tax years that remain subject to examination by major tax jurisdictions as of March 31, 2023.

Revenue recognition :

15 unchanged sentences

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.

Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment is placed on non-accrual status.

Allocation of net gains and losses:

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

Stock-based compensation:

The Company’s stock-based compensation consists of stock options issued to certain employees and directors of the Company.

The Company recognizes compensation expense based on an estimated grant date fair value using the Black Sholes option-pricing method.

If the factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future.

The Company recognizes stock-based compensation expense for these options on a straight-line basis over the requisite service period.

The Company has elected to account for forfeitures as they occur.

Management and service fees:

1 unchanged sentence

Our executive management team manages our investments as part of their employment responsibilities.

NOTE 3 – INVESTMENTS AND LOANS

The following table shows the composition of our investments and loans by major class, at amortized cost and fair value, as of September 30, 2022 (together with the corresponding percentage of the fair value of our total investments):

As of September 30, 2022

Investments at

Amortized Cost

Percentage of

Amortized Cost

Investments at

Percentage of

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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

Investments at Amortized Cost

Percentage of Amortized Cost

Investments at Fair Value

Percentage of Fair Value

Short-term Non-banking Loans

Preferred Stock

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

As of December 31, 2021

Investments at

Amortized Cost

Percentage of

Amortized Cost

Investments at

Percentage of

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

Investments at Amortized Cost

Percentage of Amortized Cost

Investments at Fair Value

Percentage of Fair Value

Short-term Non-banking Loans

Preferred Stock

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

As of September 30, 2022

Investments at

Percentage of

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

Investments at Fair Value

Percentage of Fair Value

Business Services

Information Technology

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

As of December 31, 2021

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

Investments at

Percentage of

Business Services

Information Technology

For the three months ended September 30, 2022, one investment accounted for 49 % of the interest income earned.

This investee did not make any cash interest payments during the three months ended September 30, 2022, and owes accrued interest of approximately $ 650,000 at September 30, 2022.

The Company believes it is probable that all interest will be collected from this investee.

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Level 3 valuation information :

Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investments and loans as of September 30, 2022 may differ materially from values that would have been used had a readily available market for the investments and loans existed.

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

As of September 30, 2022

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

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

As of March 31, 2023

Short-term Non-banking Loans

Preferred Stock

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

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

As of December 31, 2022

1 unchanged sentence

Preferred Stock

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

For the nine months ended September 30, 2022

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, 2023:

For the three months ended March 31, 2023

ST Non-banking

4 unchanged sentences

( 3,945,000 )

Balance as of September 30, 2022

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

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

Net realized loss

Transfers out of level 3

Balance as of March 31, 2023

The net change in unrealized appreciation for the three months ended March 31, 2023 attributable to Level 3 portfolio investments still held as of March 31, 2023 was $ 651,602 .

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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

Security Type

3 unchanged sentences

discounted cash flow

determining private company interest rate based on credit

determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness

last secured funding known by company

3 unchanged sentences

economic changes since last funding

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

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, 2022:

For the year ended December 31, 2022

ST Non-banking Loans

ST Non-banking

Balance as of January 1, 2022

Net change in unrealized appreciation

Net change in unrealized depreciation

Purchases and other adjustments to cost

2 unchanged sentences

Balance as of December 31, 2022

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

The net change in unrealized depreciation for the year ended December 31, 2022 attributable to Level 3 portfolio investments still held as of December 31, 2022 was $ 651,371 .

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

4 unchanged sentences

discounted cash flow

determining private company credit rating

determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness

last secured funding known by company

economic changes since last funding

Preferred Stock

2 unchanged sentences

NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a conflicts of interest and related-party transactions policy.

Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested.

In this regard, we entered into the following related-party transactions:

We maintain a conflicts of interest and related-party transactions policy requiring (i) certain disclosures be made to our Board of Directors in relation to situations where officers, directors, significant shareholders, or any of their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with the SEC.

In this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions:

On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owned and continues to own approximately 534,445 shares of our common stock.

In the transaction, we obtained a two-year promissory note in the principal amount of $ 250,000 , which was subsequently amended such that the note presently matures in December 2022.

In the transaction, we obtained a two-year promissory note in the principal amount of $ 250,000 , which was subsequently amended such that the note presently matures on August 30, 2023.

The promissory note bears interest payable monthly at the rate of 10 % per annum.

6 unchanged sentences

Under the Loan Agreement, the Lenders made available to us a $ 5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business.

See note 7 for further details.

See note 8 above for further details.

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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, 2022 and December 31, 2021, we have a deferred tax asset of $ 4,000 and a deferred tax liability of $ 45,000 , respectively.

As of September 30, 2022, our net deferred tax asset consists of foreign tax credit carryforwards, unrealized gain/loss, and other book to tax timing differences.

As of March 31, 2023 and December 31, 2022, we have a deferred tax asset of $ 461,000 and $ 201,000 , respectively.

As of March 31, 2023, our net deferred tax asset consists of net operating losses (NOLs), foreign tax credit carryforwards, unrealized investment gain/loss, future tax-deductible stock option expenses, and right of use assets.

Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes.

As of September 30, 2022 and December 31, 2021 we had accrued income taxes of $ 128,800 and $ 1,269,000 , respectively.

The change in accrued income taxes was largely driven by $ 1,536,000 of federal and state tax payments made during 2022.

We recorded a benefit from income taxes of $ 28,442 ( 27 % effective tax rate) and a benefit from income taxes of $ 300 ( 27 % effective tax rate) during the three months ended September 30, 2022 and September 30, 2021, respectively.

We recorded income taxes of approximately $ 346,000 ( 27 % effective tax rate) and $ 1,010,978 ( 30.4 % effective tax rate) during the nine months ended September 30, 2022 and September 30, 2021, respectively.

As of March 31, 2023 and December 31, 2022 we had prepaid income taxes of $ 178,600 and $ 179,300 , respectively.

We recorded a benefit from income taxes of $ 259,300 ( 26 percent effective tax rate) and a provision for income taxes of $ 159,000 ( 28 percent effective tax rate) during the three months ended March 31, 2023 and March 31, 2022, respectively.

As of March 31, 2023, we had a federal NOL of approximately $ 168,000 .

The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code.

Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely.

The estimated federal NOL that does not expire included in the total above is $ 168,000 .

States may vary in their treatment of post-2017 NOLs.

Minnesota is the only state carrying forward a NOL which was $ 100,000 at March 31, 2023.

The state NOL carryforwards may expire in 2043 if not used.

NOTE 7 – LINE OF CREDIT

15 unchanged sentences

Beginning July 1, 2022, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash.

At September 30, 2022, the balance outstanding on the line was $ 2,313,000 with a maturity date of January 3, 2027 .

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

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 8 – STOCK-BASED COMPENSATION

The Board approved a 2022 Stock Incentive Plan which authorized 900,000 shares of common stock available to be issued.

To date, 870,000 shares were issued under the Plan, leaving 30,000 shares available for issuance.

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

Weighted Average Exercise Price

Options outstanding at beginning of year

Balance at March 31

Options exercisable at March 31:

Weighted Average Grant Date Fair Value for options granted during the period:

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

Options Outstanding

Options Exercisable

Options Outstanding

Weighted Average Remaining Contractual

Weighted Average Exercise

Aggregate Intrinsic

Options Exercisable

Weighted Average Exercise

Aggregate Intrinsic Value

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

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

Risk-free interest rate

Expected volatility

Expected life (years)

Expected dividend yield

The inputs for the Black-Scholes valuation model require management’s significant assumptions.

The price per share of common stock is determined by using the closing market price on the Nasdaq Capital Market on the grant date.

The risk-free interest rates are based on the rate for U.S.

Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date.

The expected life is based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos.

The expected volatility is estimated based on historical volatility information of peer companies that are publicly available in combination with the Company’s calculated volatility.

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

NOTE 9 – SHAREHOLDERS’ EQUITY

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

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

On August 9, 2022, the Company effected a stock combination (reverse stock split) of its common shares on a 1-for-2.25 basis such that every 2.25 shares of common stock issued and outstanding on that date were combined into one share of common stock.

2 unchanged sentences

This reduction was affected pursuant to the filing of articles of amendment with the Minnesota Secretary of State indicating that the Company, on a post-reverse-split basis, is authorized to issue up to 111,111,111 shares of capital stock.

On August 11, 2022, the Company completed its public offer and sale of 1,250,000 common shares pursuant to a registration statement filed with the SEC and declared effective on August 9, 2022.

Shares were sold by the Company at $ 4.00 per share, resulting in gross proceeds of $ 5,000,000 .

As part of the registered public offering, the Company granted the underwriters a 45-day option to purchase up to 187,500 additional common shares at the offering price, less underwriting discounts.

In connection with the offering, the Company issued the underwriter a five-year warrant to purchase up to 75,000 common shares at the per-share price of $ 5.00 .

Net proceeds to the Company after the payment of underwriting discounts, underwriting expenses, and the Company’s own offering-related expenses were approximately $ 4,041,000 .

All share and per share information has been retrospectively adjusted to reflect the reverse stock split.

NOTE 10 – PER-SHARE INFORMATION

Basic net gain (loss) per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period.

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,

Net increase in net assets resulting from operations

Weighted-average number of common shares outstanding

Basic and diluted net gain per common share

For the Nine Months

Ended September 30,

Net increase in net assets resulting from operations

For the Three Months Ended

Net increase (decrease) in net assets resulting from operations

$ ( 718,044 )

Weighted-average number of common shares outstanding

Basic and diluted net gain per common share

Basic and diluted net gain (loss) per common share

NOTE 11 – OPERATING LEASES

We are subject to two non-cancelable operating leases for office space expiring April 2, 2023.

We are a party to two non-cancelable operating leases for office space expiring April 2, 2023.

These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses.

1 unchanged sentence

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.

Because our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments.

The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease.

The weighted-average discount rate as of December 31, 2021 was 4.5 % and the weighted-average remaining lease term is one year.

Under ASC 840, rent expense for office facilities for the three months ended September 30, 2022 and September 30, 2021 was $ 18,589 and $ 16,689 , respectively.

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

The weighted-average discount rate as of March 31, 2023 and March 31, 2022 was 4.5 % and the weighted-average remaining lease term is one year.

Rent expense for office facilities for the three months ended March 31, 2023 and 2022 was $ 19,043 and $ 16,812 , respectively.

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

Three Months Ended

Nine Months Ended

September 30, 2022

Operating lease costs

1 unchanged sentence

Short-term lease cost

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

MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2023

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

Operating Lease

3 unchanged sentences

Long term portion

Maturity analysis under lease agreements consisted of the following as of September 30, 2022:

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

Total lease payments

Present value discount

Present value of lease liabilities

NOTE 12 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the nine months ended September 30, 2022 through 2018:

Nine Months Ended September 30,

The following is a schedule of financial highlights for the three months ended March 31, 2023 through 2019:

Three Months Ended March 31,

Per Share Data (1)

Net asset value at beginning of period

Net investment gain (loss)

Net investment income (loss)

Net realized and unrealized gains (losses)

Provision for income taxes

Stock-based compensation

Issuance of stock options

Repurchase of common stock

Other changes in equity

Payment of common stock dividend

14 unchanged sentences

Ratios are annualized.

NOTE 13 – SUBSEQUENT EVENTS

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements