mcvt_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________

FORM 10-Q

__________________________

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2023

☐	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 001-41472

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 May 15, 2023, Mill City Ventures III, Ltd. had 6,185,255 shares of common stock, and no other classes of capital stock, outstanding.

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended March 31, 2023

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements (unaudited)	3

	Condensed Balance Sheets – March 31, 2023 and December 31, 2022	3

	Condensed Statements of Operations – Three months ended March 31, 2023 and March 31, 2022	4

	Condensed Statements of Shareholders’ Equity – Three months ended March 31, 2023 and March 31, 2022	5

	Condensed Statements of Cash Flows – Three months ended March 31, 2023 and March 31, 2022	6

	Condensed Schedule of Investments – March 31, 2023 and Schedule of Investments – December 31, 2022	7

	Condensed Notes to Financial Statements – March 31, 2023	9

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

Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION

Item 6.	Exhibits	23

SIGNATURES		24

Table of Contents

PART I. FINANCIAL INFORMATION

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

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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

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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

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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

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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	%

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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	%

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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.

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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.

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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.

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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	%

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.

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

SEC Form 10-Q filed by Mill City Ventures III Ltd.