SUI Group Holdings Ltd. 10-Q

ITEM 1. FINANCIAL STATEMENTS MILL CITY VENTURES III, LTD. CONDENSED BALANCE SHEETS March 31, 2023 (unaudited) December 31, 2022 ASSETS Investments, at fair value: $ 19,712,356 $ 16,708,432 Non-control/non-affiliate investments (cost: $ 19,715,304 and $ 17,359,804 respectively) Cash 439,829 1,089,641 Note receivable, related party 250,000 250,000 Prepaid expenses 267,568 218,440 Interest and dividend receivables 366,391 250,879 Right-of-use operating lease asset 10,903 16,398 Deferred taxes 461,000 201,000 Total Assets $ 21,508,047 $ 18,734,790 LIABILITIES Accounts payable $ 91,038 $ 776,514 Line of credit 2,750,000 — Operating lease liability 11,067 16,562 Deferred interest income 42,217 70,154 Total Liabilities 2,894,322 863,230 SHAREHOLDERS EQUITY (NET ASSETS) Common stock, par value $ 0.001 per share ( 111,111,111 authorized; 6,185,255 outstanding) 12,215 12,215 Additional paid-in capital 15,043,291 15,043,291 Additional paid-in capital - stock options 1,460,209 — Accumulated deficit ( 1,159,665 ) ( 1,159,665 ) Accumulated undistributed investment loss ( 1,853,206 ) ( 1,086,739 ) Accumulated undistributed net realized gains on investment transactions 5,113,829 5,713,829 Net unrealized appreciation (depreciation) in value of investments ( 2,948 ) ( 651,371 ) Total Shareholders' Equity (net assets) 18,613,725 17,871,560 Total Liabilities and Shareholders' Equity $ 21,508,047 $ 18,734,790 Net Asset Value Per Common Share $ 3.01 $ 2.89 See accompanying Notes to Financial Statements 3 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended March 31, 2023 March 31, 2022 Investment Income Interest income $ 864,028 $ 1,000,206 Total Investment Income 864,028 1,000,206 Operating Expenses Professional fees 129,851 198,518 Payroll 1,130,439 196,442 Insurance 27,000 30,097 Occupancy 19,043 16,812 Director's fees 532,968 30,000 Interest expense 34,667 66,939 Other general and administrative 15,827 7,010 Total Operating Expenses 1,889,795 545,818 Net Investment Gain (Loss) ( 1,025,767 ) 454,388 Realized and Unrealized Gain (Loss) on Investments Net realized gain (loss) on investments ( 600,000 ) 138,770 Net change in unrealized appreciation (depreciation) on investments 648,423 ( 22,047 ) Net Realized and Unrealized Gain on Investments 48,423 116,723 Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes $ ( 977,344 ) $ 571,111 Provision (Benefit) for Income Taxes ( 259,300 ) 159,000 Net Increase (Decrease) in Net Assets Resulting from Operations $ ( 718,044 ) $ 412,111 Net Increase (Decrease) in Net Assets Resulting from Operations per share: Basic and diluted $ ( 0.12 ) $ 0.09 Weighted-average number of common shares outstanding - basic and diluted 6,185,255 4,795,739 See accompanying Notes to Financial Statements 4 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) Three Months Ended March 31, 2023 Common Shares Par Value Additional Paid In Capital Accumulated Deficit Accumulated Undistributed Net Investment Loss Accumulated Undistributed Net Realized Gain on Investments Transactions Net Unrealized Appreciation (Depreciation) in Value of Investments Total Shareholders' Equity Balance as of December 31, 2022 6,185,255 $ 12,215 $ 15,043,291 $ ( 1,159,665 ) $ ( 1,086,739 ) $ 5,713,829 $ ( 651,371 ) $ 17,871,560 Issuance of stock options — 1,460,209 — — — — 1,460,209 Net investment loss, net of tax benefit of $259,300 — — — ( 766,467 ) — — ( 766,467 ) Net realized loss on investment transactions — — — — ( 600,000 ) — ( 600,000 ) Appreciation in value of investments — — — — — 648,423 648,423 Balance as of March 31, 2023 6,185,255 $ 12,215 $ 16,503,500 $ ( 1,159,665 ) $ ( 1,853,206 ) $ 5,113,829 $ ( 2,948 ) $ 18,613,725 Three Months Ended March 31, 2022 Common Shares Par Value Additional Paid In Capital Accumulated Deficit Accumulated Undistributed Net Investment Loss Accumulated Undistributed Net Realized Gain on Investments Transactions Net Unrealized Appreciation (Depreciation) in Value of Investments Total Shareholders' Equity Balance as of December 31, 2021 4,795,739 $ 10,790 $ 10,694,163 $ ( 1,159,665 ) $ ( 1,877,667 ) $ 5,580,810 $ 165,618 $ 13,414,049 Net investment gain, net of tax of $159,000 — — — 295,388 — — 295,388 Net realized gain on investment transactions — — — — 138,770 — 138,770 Depreciation in value of investments — — — — — ( 22,047 ) ( 22,047 ) Balance as of March 31, 2022 4,795,739 $ 10,790 $ 10,694,163 $ ( 1,159,665 ) $ ( 1,582,279 ) $ 5,719,580 $ 143,571 $ 13,826,160 See accompanying Notes to Financial Statements 5 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, 2023 March 31, 2022 Cash flows from operating activities: Net increase (decrease) in net assets resulting from operations $ ( 718,044 ) $ 412,111 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 ( 648,423 ) 22,047 Net realized (gain) loss on investments 600,000 ( 138,770 ) Purchases of investments ( 6,900,500 ) ( 7,025,000 ) Proceeds from sales of investments 3,945,000 1,152,898 Issuance of stock options 1,460,209 — Deferred income taxes ( 260,000 ) ( 6,000 ) Changes in operating assets and liabilities: Prepaid expenses and other assets ( 43,633 ) 59,000 Interest and dividends receivable ( 115,512 ) ( 238,643 ) Accounts payable and other liabilities ( 690,971 ) 35,229 Deferred interest income ( 27,938 ) 272,000 Accrued income taxes — 165,000 Payable for investment purchase — ( 1,900,000 ) Net cash used in operating activities ( 3,399,812 ) ( 7,190,128 ) Cash flows from financing activities: Proceeds from line of credit 2,750,000 5,325,000 Net cash provided by financing activities 2,750,000 5,325,000 Net decrease in cash ( 649,812 ) ( 1,865,128 ) Cash, beginning of period 1,089,641 1,936,148 Cash, end of period $ 439,829 $ 71,020 See accompanying Notes to Financial Statements 6 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED SCHEDULE OF INVESTMENTS MARCH 31, 2023 Investment / Industry Cost Fair Value Percentage of Net Assets Short-Term Non-banking Loans Business Services - 15% secured loans Mustang Litigation Funding $ 5,000,000 $ 5,000,678 27.26 % Consumer - 15% secured loans 408,000 406,994 2.22 % Intelligent Mapping, LLC 2,900,000 2,892,010 15.77 % Financial - 33% secured loans Benton Financial, LLC 1,986,625 1,984,769 10.82 % Financial - 34% secured loans Benton Financial, LLC 1,165,000 1,163,911 6.35 % Financial - 36% secured loans Benton Financial, LLC 1,025,000 1,024,042 5.58 % Financial - 12% secured loans 500,000 366,079 1.99 % Information Technology - 15% convertible note 212,500 213,456 1.16 % Real Estate - 18% secured loans 2,500,000 2,492,891 13.59 % Real Estate - 15% secured loans 745,000 747,786 4.07 % Real Estate - 12% secured loans Alatus Development Corp 2,000,000 2,000,418 10.91 % Total Short-Term Non-Banking Loans 18,442,125 18,293,034 99.72 % Preferred Stock Consumer Wisdom Gaming, Inc 900,000 900,000 4.91 % Information Technology 150,000 300,000 1.64 % Total Preferred Stock 1,050,000 1,200,000 6.55 % Common Stock Consumer 212,500 209,322 1.14 % Warrants Healthcare 679 - 0.00 % Other Equity Financial 10,000 10,000 0.05 % Total Investments $ 19,715,304 $ 19,712,356 107.46 % Total Cash 439,829 439,829 2.40 % Total Investments and Cash $ $ 20,155,133 $ $ 20,152,185 109.86 % 7 Table of Contents MILL CITY VENTURES III, LTD. SCHEDULE OF INVESTMENTS DECEMBER 31, 2022 Investment / Industry Cost Fair Value Percentage of Net Assets Short-Term Non-banking Loans Business Services - 18% secured loans Liberated Syndication Inc. $ 2,250,000 $ 2,255,625 12.62 % Business Services - 15% secured loans Mustang Litigation Funding 5,000,000 4,975,955 27.84 % Consumer - 15% secured loans 400,000 398,635 2.23 % Intelligent Mapping, LLC 2,900,000 2,873,893 16.08 % Financial - 33% secured loans Benton Financial, LLC 2,479,125 2,478,030 13.87 % Financial - 12% secured loans 500,000 345,421 1.93 % Information Technology - 15% convertible note 212,500 213,656 1.20 % Real Estate - 15% secured loans 745,000 746,354 4.17 % Real Estate - 12% secured loans Alatus Development Corp 1,000,000 998,363 5.59 % Total Short-Term Non-Banking Loans 15,486,625 15,285,932 85.53 % Preferred Stock Consumer Wisdom Gaming, Inc 900,000 900,000 5.04 % Information Technology 150,000 300,000 1.68 % Total Preferred Stock 1,050,000 1,200,000 6.72 % Warrants Healthcare 679 - 0.00 % Other Equity Consumer 212,500 212,500 1.19 % Financial 610,000 10,000 0.06 % Total Other Equity 822,500 222,500 1.25 % Total Investments $ 17,359,804 $ 16,708,432 93.50 % Total Cash 1,089,641 1,089,641 6.10 % Total Investments and Cash $ $ 18,449,445 $ $ 17,798,073 99.60 % 8 Table of Contents MILL CITY VENTURES III, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2023 NOTE 1 – ORGANIZATION In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946. We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have remained a public reporting company filing periodic reports with the SEC. 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. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Basis of presentation : The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 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/A for the year ended December 31, 2022. Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below. The Company presents its financial statements as an investment company following accounting and reporting guidance in ASC 946. Cash deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits. Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by our Board of Directors, based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures. Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. 9 Table of Contents 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. 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 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. Intrinsic value means the value of any conversion feature (if the preferred investment is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to be a key input, to account for resale restrictions applicable to the securities issuable upon conversion. When valuing warrants, our valuation policy and procedures indicate that value will generally be the difference between the closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above. Generally, “out-of-the-money” warrants will be valued at cost or zero. For non-traded (Level 3) debt 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: 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. 10 Table of Contents 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. In making such determination, we consider all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine we would be able to realize our deferred income tax assets in the future in excess of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. We file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. We do not believe there will be any material changes in its unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, 2020 through 2022, which are the tax years that remain subject to examination by major tax jurisdictions as of March 31, 2023. Revenue recognition : Realized gains or losses on the sale of investments are calculated using the specific investment method. Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities purchased are accreted or amortized, as applicable, into interest income over the life of the related security using the effective-yield method. The amortized cost of investments represents the original cost, adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more, or when there is reasonable doubt that principal or interest will be collected in full. Loan origination fees are recognized when loans are issued. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and is in the process of collection. Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Certain investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal or stated value of the investment on the respective interest- or dividend-payment dates rather than being paid in cash, and generally becomes due at maturity or upon being repurchased by the issuer. PIK interest or dividends is recorded as interest or dividend income, as applicable. If at any point we believe that PIK interest or dividends is not expected be realized, the PIK-generating investment will be placed on non-accrual status. Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment 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: We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities. 11 Table of Contents 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 $ 18,442,125 93.5 % $ 18,293,034 92.8 % Preferred Stock 1,050,000 5.3 1,200,000 6.1 Common Stock 212,500 1.1 209,322 1.1 Warrants 679 — — — Other Equity 10,000 0.1 10,000 — Total $ 19,715,304 100.0 % $ 19,712,356 100.0 % The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 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 $ 15,486,625 89.2 % $ 15,285,932 91.5 % Preferred Stock 1,050,000 6.1 1,200,000 7.2 Warrants 679 — — — Other Equity 822,500 4.7 222,500 1.3 Total $ 17,359,804 100.0 % $ 16,708,432 100.0 % 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 $ 5,000,678 25.3 % Consumer 4,408,326 22.4 Financial 4,548,801 23.1 Information Technology 513,456 2.6 Real Estate 5,241,095 26.6 Total $ 19,712,356 100.0 % The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2022: Investments at Fair Value Percentage of Fair Value Business Services $ 7,231,580 43.3 % Consumer 4,385,028 26.2 Financial 2,833,451 17.0 Information Technology 513,656 3.1 Real Estate 1,744,717 10.4 Total $ 16,708,432 100.0 % 12 Table of Contents 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 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 Level 1 Level 2 Level 3 Total Short-term Non-banking Loans $ — $ — $ 18,293,034 $ 18,293,034 Preferred Stock — — 1,200,000 1,200,000 Common Stock 61,645 147,677 — 209,322 Other Equity — — 10,000 10,000 Total $ 61,645 $ 147,677 $ 19,503,034 $ 19,712,356 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 Level 1 Level 2 Level 3 Total Short-term Non-banking Loans $ — $ — $ 15,285,932 $ 15,285,932 Preferred Stock — — 1,200,000 1,200,000 Common Stock — — — — Other Equity — — 222,500 222,500 Total $ — $ — $ 16,708,432 $ 16,708,432 The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the three months ended March 31, 2023: For the three months ended March 31, 2023 ST Non-banking Loans Preferred Stock Common Stock Warrants Other Equity Balance as of January 1, 2023 $ 15,285,932 $ 1,200,000 $ — $ — $ 222,500 Net change in unrealized appreciation 51,602 — — — 600,000 Purchases and other adjustments to cost 6,900,500 — — — — Sales and redemptions ( 3,945,000 ) — — — — Net realized loss — — — — ( 600,000 ) Transfers out of level 3 — — — — ( 212,500 ) Balance as of March 31, 2023 $ 18,293,034 $ 1,200,000 $ — $ — $ 10,000 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 . 13 Table of Contents 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 3/31/23 FMV Valuation Technique Unobservable Inputs Range ST Non-banking Loans $ 18,293,034 discounted cash flow determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness 12 - 36 % Other Equity 10,000 last secured funding known by company economic changes since last funding Preferred Stock 1,200,000 last funding secured by company economic changes since last funding $ 19,503,034 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 Preferred Stock Common Stock Warrants Other Equity Balance as of January 1, 2022 $ 11,650,000 $ 1,200,000 $ — $ — $ 812,500 Net change in unrealized depreciation ( 200,693 ) — — — ( 600,000 ) Purchases and other adjustments to cost 23,548,458 — — — 10,000 Sales and redemptions ( 19,711,833 ) — — — — Balance as of December 31, 2022 $ 15,285,932 $ 1,200,000 $ — $ — $ 222,500 The net change in unrealized depreciation for the year ended December 31, 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: Security Type 12/31/22 FMV Valuation Technique Unobservable Inputs Range ST Non-banking Loans $ 15,285,932 discounted cash flow determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness 12 - 33 % Other Equity 222,500 last secured funding known by company Preferred Stock 1,200,000 last funding secured by company economic changes since last funding $ 16,708,432 NOTE 5 – 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 on August 30, 2023. The promissory note bears interest payable monthly at the rate of 10 % per annum. The note is secured by the debtors’ pledge to us of 277,778 shares of our common stock. The pledged shares are held in physical custody for us by Millennium Trust Company, as our custodial agent. · On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $ 5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. See note 8 above for further details. 14 Table of Contents 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 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 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 On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $ 5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. Amounts drawn under the Loan Agreement accrue interest at the per annum rate of 8 %, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets. As a Lender, Mr. Berman is obligated to furnish only one-half of the aggregate $ 5 million available under the Loan Agreement. The Loan Agreement has a five-year term ending on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender’s right, including Mr. Berman, to terminate the Loan Agreement, solely with respect to such Lender’s obligation to provide further credit, at any time after January 3, 2023. In the event that a Lender, including Mr. Berman, terminates its lending obligations, the Loan Agreement requires that we repay such Lender, prior to the five-year maturity date, with the proceeds derived from specified investments. During the period January 3 to June 30, 2022, the Loan Agreement provided for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement, and requires us to pay such fee in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions. Beginning July 1, 2022, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash. 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 . 15 Table of Contents 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: Shares Weighted Average Exercise Price Options outstanding at beginning of year — $ — Granted 870,000 2.11 Exercised — — Forfeited — — Balance at March 31 870,000 $ 2.11 Options exercisable at March 31: 870,000 $ 2.11 Weighted Average Grant Date Fair Value for options granted during the period: $ 1,242,902 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 Life Weighted Average Exercise Price Aggregate Intrinsic Value Options Exercisable Weighted Average Exercise Price Aggregate Intrinsic Value 870,000 9.85 $ 2.11 $ 175,100 870,000 $ 2.11 $ 175,100 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: 2023 Risk-free interest rate 3.48 % Expected volatility 90.00 % Expected life (years) 5 .0 Expected dividend yield — % The inputs for the Black-Scholes valuation model require management’s significant assumptions. The price per share of common stock is determined by using the closing market price on the Nasdaq Capital Market on the grant date. The risk-free interest rates are based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected life is based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos. 107 and 110. The expected volatility is estimated based on historical volatility information of peer companies that are publicly available in combination with the Company’s calculated volatility. 16 Table of Contents MILL CITY VENTURES III, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2023 NOTE 9 – SHAREHOLDERS’ EQUITY 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. Any fractional share resulting from the reverse stock split was rounded up to the nearest whole share. The reverse stock split was approved by the Company's board of directors in accordance with Minnesota law and resulted in a proportionate reduction in the number of authorized shares of capital stock available for issuance under the Company's articles of incorporation. This reduction was 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. All share and per share information has been retrospectively adjusted to reflect the reverse stock split. NOTE 10 – PER-SHARE INFORMATION Basic net gain per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below: For the Three Months Ended March 31, 2023 2022 Numerator: Net increase (decrease) in net assets resulting from operations $ ( 718,044 ) $ 412,111 Denominator: Weighted-average number of common shares outstanding 6,185,255 4,795,739 Basic and diluted net gain (loss) per common share $ ( 0.12 ) $ 0.09 NOTE 11 – OPERATING LEASES 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. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew. Because our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. 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 March 31, 2023 March 31, 2022 Operating lease costs $ 5,504 $ 4,779 Variable lease cost 4,905 4,601 Short-term lease cost 8,634 7,432 Total $ 19,043 $ 16,812 17 Table of Contents 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 2023 2022 Right-of-use assets $ 10,903 $ — Operating Lease Liability $ 11,067 $ — Less: short term portion ( 11,067 ) — Long term portion $ — $ — Maturity analysis under this lease extension agreement consists of the following as of March 31: 2023 2022 2022 $ — $ 18,164 2023 11,226 14,859 Total lease payments 11,226 33,023 Less: Present value discount ( 159 ) ( 1,035 ) Present value of lease liabilities $ 11,067 $ 31,988 NOTE 12 – FINANCIAL HIGHLIGHTS The following is a schedule of financial highlights for the three months ended March 31, 2023 through 2019: Three Months Ended March 31, 2023 2022 2021 2020 2019 Per Share Data (1) Net asset value at beginning of period $ 2.89 2.79 2.43 2.05 2.30 Net investment income (loss) ( 0.17 ) 0.09 0.00 0.00 ( 0.05 ) Net realized and unrealized gains (losses) 0.01 0.02 0.50 ( 0.07 ) 0.27 Provision for income taxes 0.04 ( 0.02 ) ( 0.14 ) 0.00 0.00 Issuance of stock options 0.24 0.00 0.00 0.00 0.00 Repurchase of common stock 0.00 0.00 0.00 0.00 0.00 Payment of common stock dividend 0.00 0.00 0.00 0.00 ( 0.11 ) Net asset value at end of period $ 3.01 2.88 2.79 1.98 2.41 Ratio / Supplemental Data Per share market value of investments at end of period $ 3.19 4.19 2.81 0.92 1.76 Shares outstanding at end of period 6,185,255 4,795,739 4,794,184 4,918,845 4,918,845 Average weighted shares outstanding for the period 6,185,255 4,795,739 4,793,739 4,918,845 4,918,845 Net assets at end of period $ 18,613,725 13,826,160 13,391,679 9,786,615 11,890,188 Average net assets (2) $ 18,242,642 13,620,104 12,516,283 9,927,574 12,911,895 Total investment return ( 4.15 )% 3.23 % 14.81 % ( 3.30 )% 4.90 % Portfolio turnover rate (3) 21.63 % 8.46 % 40.24 % 0.75 % 0.93 % Ratio of operating expenses to average net assets (3) ( 35.82 )% ( 15.28 )% ( 16.20 )% ( 7.82 )% ( 6.06 )% Ratio of net investment income (loss) to average net assets (3) ( 20.92 )% 14.24 % 0.42 % 0.87 % ( 4.87 )% Ratio of realized gains (losses) to average net assets (3) ( 12.68 )% 4.20 % 133.32 % 1.00 % 137.57 % (1) Per-share data was derived using the ending number of shares outstanding for the period. (2) Based on the monthly average of net assets as of the beginning and end of each period presented. (3) Ratios are annualized. NOTE 13 – SUBSEQUENT EVENTS 18 Table of Contents