Amended Quarterly Report (10-q/a)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Mark One)

☒

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

For the quarterly period ended June 30, 2021

☐

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

For the transition period from ______________________ to ___________________

Commission File Number 811-22778

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 October 8, 2021, Mill City Ventures III, Ltd. had 10,790,413 shares of common stock, and no other classes of capital stock, outstanding.

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NOTE OF EXPLANATION

This Amendment No. 1 to the Quarterly Report on Form 10-Q (this “Amendment”) of Mill City Ventures III, Ltd. (the “Company”) amends the Company’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2021 originally filed with the SEC on August 16, 2021. The Company is filing this Amendment to (i) include the inline XBRL files required as Exhibit 101, and (ii) update the Exhibit Index (Part II, Item 6). In addition, new Section 302 and 907 certifications are being filed with this Amendment, as required under Rule 12b- 15 under the Securities Exchange of 1934. No other changes to the report, including the financial statements and accompanying notes thereto, are being made pursuant to this Amendment.

MILL CITY VENTURES III, LTD.

Index to Form 10-Q

for the Quarter Ended June 30, 2021


PART I.	FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements (unaudited)

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

	Condensed Statements of Operations – Three and six months ended June 30, 2021 and June 30, 2020	4

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

	Condensed Statements of Cash Flows – Six months ended June 30, 2021 and June 30, 2020	7

	Condensed Schedule of Investments – June 30, 2021 and Schedule of Investments – December 31, 2020	8

	Condensed Notes to Financial Statements – June 30, 2021	10

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

Item 4.	Controls and Procedures	19

PART II.	OTHER INFORMATION	19

Item 6.	Exhibits	19

SIGNATURES		20

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PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS


	June 30, 2021
	(unaudited)		December 31, 2020
ASSETS
Investments, at fair value:	$	13,133,933	$	6,667,897
Non-control/non-affiliate investments (cost: $11,864,762 and $4,968,576 respectively)
Cash		1,515,005		5,440,579
Note receivable		250,000		250,000
Prepaid expenses		188,838		43,838
Receivable for sale of investments		94,778		19,313
Interest and dividend receivables		331,415		65,911
Right-of-use lease asset		14,279		23,345
Total Assets	$	15,528,248	$	12,510,883

LIABILITIES
Accounts payable	$	40,687	$	32,917
Dividend payable		—		539,296
Lease liability		15,973		26,061
Accrued income tax expense		920,000		13,722
Deferred taxes		363,000		258,000
Total Liabilities		1,339,660		869,996
Commitments and Contingencies

SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share (250,000,000 authorized; 10,790,413 and 10,785,913 outstanding)		10,790		10,786
Additional paid-in capital		10,694,163		10,673,014
Accumulated deficit		(1,159,665)		(1,159,665)
Accumulated undistributed investment loss		(2,697,320)		(2,124,419)
Accumulated undistributed net realized gains on investment transactions		6,071,449		2,541,850
Net unrealized appreciation in value of investments		1,269,171		1,699,321
Total Shareholders' Equity (Net Assets)		14,188,588		11,640,887
Total Liabilities and Shareholders' Equity	$	15,528,248	$	12,510,883
Net Asset Value Per Common Share	$	1.31	$	1.08

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Investment Income
Interest income	$	675,549	$	276,425	$	1,222,391	$	454,670
Dividend income		—		7,031		—		13,765
Total Investment Income		675,549		283,456		1,222,391		468,435
Operating Expenses
Professional fees		77,539		90,529		220,347		74,297
Payroll		85,346		58,080		387,426		116,577
Insurance		27,854		20,668		52,133		41,121
Occupancy		16,337		16,569		33,026		33,131
Director's fees		30,000		22,500		60,000		45,000
Depreciation and amortization		—		644		—		1,287
Other general and administrative		13,080		4,920		31,082		7,889
Total Operating Expenses		250,156		213,910		784,014		319,302
Net Investment Gain		425,393		69,546		438,377	$	149,133
Realized and Unrealized Gain on Investments
Net realized gain on investments		621,600		175,222		3,529,599		199,724
Net change in unrealized appreciation (depreciation) on investments		83,100		348,602		(430,150)		(37,405)
Net Realized and Unrealized Gain on Investments		704,700		523,824		3,099,449		162,319
Net Increase in Net Assets Resulting from Operations Before Taxes	$	1,130,093	$	593,370	$	3,537,826	$	311,452
Provision for Income Taxes		348,587		—		1,011,278		—
Net Increase in Net Assets Resulting from Operations	$	781,506	$	593,370	$	2,526,548		311,452
Net Increase in Net Assets Resulting from Operations per share:
Basic and diluted	$	0.07	$	0.05	$	0.23	$	0.03
Weighted-average number of common shares outstanding - basic and diluted		10,790,413		10,882,039		10,788,175		10,974,721

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)


												Net
										Accumulated		Unrealized
								Accumulated		Undistributed		Appreciation
								Undistributed		Net		(Depreciation)
				Additional				Net		Realized Gain on		in value		Total
	Common	Par		Paid In		Accumulated		Investment		Investments		of		Shareholders'
Three Months Ended June 30, 2021	Shares	Value		Capital		Deficit		Loss		Transactions		Investments		Equity
Balance as of March 31, 2021	10,786,913	$	10,787	$	10,678,763	$	(1,159,665)	$	(2,774,126)	$	5,449,849	$	1,186,071	$	13,391,679
Common shares issued in consideration for expense payment	3,500		3		15,400		—		—		—		—		15,403
Undistributed net investment gain	—		—		—		—		76,806		—		—		76,806
Undistributed net realized gain on investment transactions	—		—		—		—		—		621,600		—		621,600
Appreciation in value of investments	—		—		—		—		—		—		83,100		83,100
Balance as of June 30, 2021	10,790,413	$	10,790	$	10,694,163	$	(1,159,665)	$	(2,697,320)	$	6,071,449	$	1,269,171	$	14,188,588


										Accumulated		Net Unrealized
										Undistributed		Appreciation
								Accumulated		Net Realized Gain		(Depreciation)		Total
	Common			Additional		Accumulated		Undistributed		on Investments		in value of		Shareholders'
Three Months Ended June 30, 2020	Shares	Par Value		Paid In Capital		Deficit		Net Investment Loss		Transactions		Investments		Equity
Balance as of March 31, 2020	11,067,402	$	11,067	$	10,774,653	$	(1,159,665)	$	(2,318,278)	$	3,100,318	$	(621,480)	$	9,786,615
Repurchase of shares	(370,667)		(371)		(157,896)		—		—		—		—		(158,267)
Undistributed net investment loss			—		—		—		69,546		—		—		69,546
Undistributed net realized gain on investment transactions			—		—		—		—		175,222		—		175,222
Appreciation in value of investments			—		—		—		—		—		348,602		348,602
Balance as of June 30, 2020	10,696,735	$	10,696	$	10,616,757	$	(1,159,665)	$	(2,248,732)	$	3,275,540	$	(272,878)	$	10,221,718

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										Accumulated
								Accumulated		Undistributed		Net
								Undistributed		Net		Unrealized
				Additional				Net		Realized Gain on		Appreciation		Total
	Common	Par		Paid In		Accumulated		Investment		Investments		in value of		Shareholders'
Six Months Ended June 30, 2021	Shares	Value		Capital		Deficit		Loss		Transactions		Investments		Equity
Balance as of December 31, 2020	10,785,913	$	10,786	$	10,673,014	$	(1,159,665)	$	(2,124,419)	$	2,541,850	$	1,699,321	$	11,640,887
Issuance of shares	4,500		4		21,149		—		—						21,153
Undistributed net investment loss	—		—		—		—		(572,901)		—		—		(572,901)
Undistributed net realized loss on investment transactions	—		—		—		—		—		3,529,599		—		3,529,599
Depreciation in value of investments	—		—		—		—		—		—		(430,150)		(430,150)
Balance as of June 30, 2021	10,790,413	$	10,790	$	10,694,163	$	(1,159,665)	$	(2,697,320)	$	6,071,449	$	1,269,171	$	14,188,588


										Accumulated
								Accumulated		Undistributed Net			Net Unrealized
				Additional				Undistributed		Realized Gain		Appreciation		Total
	Common			Paid		Accumulated		Net Investment		on Investments		in value		Shareholders'
Six Months Ended June 30, 2020	Shares	Par Value		In Capital		Deficit		Loss		Transactions		of Investments		Equity
Balance as of December 31, 2019	11,067,402	$	11,067	$	10,774,653	$	(1,159,665)	$	(2,397,865)	$	3,075,816	$	(235,473)	$	10,068,533
Repurchase of shares	(370,667)		(371)		(157,896)		—		—		—		—		(158,267)
Undistributed net investment loss			—		—		—		149,133		—		—		149,133
Undistributed net realized loss on investment transactions			—		—		—		—		199,724		—		199,724
Depreciation in value of investments			—		—		—		—		—		(37,405)		(37,405)
Balance as of June 30, 2020	10,696,735	$	10,696	$	10,616,757	$	(1,159,665)	$	(2,248,732)	$	3,275,540	$	(272,878)	$	10,221,718

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six Months Ended
		June 30, 2021	June 30, 2020
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations	$	2,526,548	$	311,452
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided (used) in operating activities:
Net change in unrealized depreciation on investments		430,150		37,405
Net realized gain on investments		(3,529,599)		(199,724)
Purchases of investments		(13,250,664)		(6,217,296)
Proceeds from sales of investments		9,889,827		1,192,824
Depreciation & amortization expense		—		1,287
Deferred income taxes		1,011,278		—
Common shares issued as consideration for expense payment		15,403		—
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(135,934)		(32,007)
Interest and dividends receivable		(265,504)		(62,644)
Receivable for investment sales		(75,465)		(158,649)
Payable for investment purchase		—		1,680,000
Accounts payable and other liabilities		(2,318)		(10,047)
Deferred interest income		—		—
Payable for investment purchase		—		—
Net cash used in operating activities		(3,386,278)		(3,457,399)
Cash flows from financing activities:
Payments for repurchase of common stock		—		(158,267)
Payments for common stock dividend		(539,296)		—
Net cash used by financing activities		(539,296)		(158,267)
Net decrease in cash		(3,925,574)		(3,615,666)
Cash, beginning of period		5,440,579		8,066,656
Cash, end of period	$	1,515,005	$	4,450,990

Non-cash financing activities:
Common shares issued as consideration for investment	$	5,750		—

See accompanying Notes to Financial Statements

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MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

JUNE 30, 2021


					Percentage
					of Net
Investment / Industry	Cost		Fair Value		Assets
Short-Term Non-banking Loans
Consumer - 20% secured loans	$	400,000	$	400,000	2.82	%
Financial - 47% secured loans
Benton Financial, LLC		1,133,333		1,133,333	7.99	%
Financial - 44% secured loans
Benton Financial, LLC		840,000		840,000	5.92	%
Financial - 42% secured loans		313,333		313,333	2.21	%
Financial - 40% secured loans
Benton Financial, LLC		1,333,334		1,333,334	9.40	%
Financial - 34% secured loans		293,333		293,333	2.07	%
Financial - 12% secured loans		500,000		500,000	3.52	%
Litigation Financing - 23% secured loans
The Cross Law Firm, LLC		1,805,750		1,800,000	12.68	%
Real Estate - 15% secured loans
Alatus Development, LLC		1,250,000		1,250,000	8.81	%
Real Estate - 12% secured loans
Tailwinds, LLC		3,000,000		3,000,000	21.14	%
Total Short-Term Non-Banking Loans		10,869,083		10,863,333	76.56	%

Common Stock
Consumer
Ammo, Inc.		245,000		1,370,600	9.66	%

Preferred Stock
Information Technology		150,000		300,000	2.11	%

Warrants
Healthcare		679		—	0.00	%

Other Equity
Financial		600,000		600,000	4.23	%

Total Investments	$	11,864,762	$	13,133,933	92.56	%

Total Cash		1,515,005		1,515,005	10.68	%

Total Investments and Cash	$	13,379,767	$	14,648,938	103.24	%

See accompanying Notes to the Financial Statements

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MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2020


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

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

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

Warrants
Healthcare		679		—	0.00	%

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

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

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

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

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NOTE 1 – ORGANIZATION

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

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

●

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

●

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

●

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

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

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

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

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

For non-traded (Level 3) debt investments with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. The fair value for short-term non-banking loans is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent to those cash flows. The discount ranges from 14% to 47% and approximate rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk.

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

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

Income taxes:

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

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

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

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

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

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

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

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.

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Recently adopted accounting pronouncements

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

NOTE 3 – INVESTMENTS

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


	As of June 30, 2021
	Investments at		Percentage of		Investments at		Percentage of
	Amortized Cost		Amortized Cost		Fair Value		Fair Value
Short-term Non-banking Loans	$	10,869,083	91.6	%	$	10,863,333	82.7	%
Preferred Stock		150,000	1.3			300,000	2.3
Common Stock		245,000	2.1			1,370,600	10.4
Warrants		679	—			—	—
Other Equity		600,000	5.0			600,000	4.6
Total	$	11,864,762	100.0	%	$	13,133,933	100.0	%

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


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

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


	As of June 30, 2021
	Investments at		Percentage of
	Fair Value		Fair Value
Consumer	$	1,770,600	13.5	%
Financial		6,813,333	51.8
Information Technology		300,000	2.3
Real Estate		4,250,000	32.4
		—	—
Total	$	13,133,933	100.0	%

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


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

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investments as of June 30, 2021 may differ materially from values that would have been used had a readily available market for the securities or investments existed.

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


	As of June 30, 2021
	Level 1		Level 2		Level 3		Total
Short-term Non-banking Loans	$	—	$	—	$	10,863,333	$	10,863,333
Preferred Stock						300,000		300,000
Common Stock		1,370,600		—		—		1,370,600
Warrants		—		—		—		—
Other Equity		—		—		600,000		600,000
Total	$	1,370,600	$	—	$	11,763,333	$	13,133,933

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


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

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


	For the six months ended June 30, 2021
	ST Non-
	banking		Preferred		Common
	Loans		Stock		Stock		Warrants		Other Equity
Balance as of January 1, 2021	$	2,789,000	$	300,000	$	—	$	—	$	278,897
Net change in unrealized appreciation		—		—		—		—		—
Purchases and other adjustments to cost		12,513,333		—		—		—		600,000
Sales and redemptions		(4,439,000)		—		—		—		(278,897)
Net realized loss		—		—		—		—		—
Balance as of June 30, 2021	$	10,863,333	$	300,000	$	—	$	—	$	600,000

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The net change in unrealized appreciation for the six months ended June 30, 2021 attributable to Level 3 investments still held as of June 30, 2021 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.

The following table lists our Level 3 investments held as of June 30, 2021 and the unobservable inputs used to determine their valuation:


Security Type	6/30/21 FMV		Valuation Technique	Unobservable Inputs	Range
ST Non-banking Loans	$	10,863,333	discounted cash flow	determining private company interest rate based on credit	12-47	%
Other Equity		600,000	last secured funding known by company	economic changes since last funding
Preferred Stock		300,000	last funding secured by company	economic changes since last funding
	$	11,763,333

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


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

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

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


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

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NOTE 5 – RELATED-PARTY TRANSACTIONS

We maintain a Code of Ethics and certain other policies relating to conflicts of interest and related-party transactions, as well as policies and procedures relating to what regulations applicable. Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested. Our Board of Directors has adopted a policy to require our disclosure of these instances in our periodic filings with the SEC. Our only related-party transaction requiring disclosure under this policy relates to an August 10, 2018 loan transaction we entered into with Elizabeth Zbikowski. Ms. Zbikowski, along with her husband Scott Zbikowski, owns approximately 1,765,000 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory note was subsequently amended such that it matures in August 2021. The note bears interest payable monthly at the rate of 10% per annum and is secured by the debtors’ pledge to us of 625,000 shares of our common stock. The pledged shares are held in physical custody for us by our custodial agent Millennium Trust Company.

NOTE 6 – INCOME TAXES

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

As of June 30, 2021 and December 31, 2020, we have a deferred tax liability of $363,000 and $258,000, respectively. Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, we may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. We will continue to assess the need for a valuation allowance in future periods.

As of June 30, 2021 and December 31, 2020 we had accrued income taxes of $920,000 and $13,722 respectively. We recorded income taxes of approximately $349,000 (28.9 percent effective tax rate) and $0 (0 percent effective tax rate) during the three months ended June 20, 2021 and June 30, 2020, respectively. We recorded income taxes of approximately $1,011,000 (28.8 percent effective tax rate) and $0 (0 percent effective tax rate) during the six months ended June 30, 2021 and June 30, 2020, respectively. Due to the full valuation allowances in periods prior to December 31, 2020, our effective tax rate was expected to be near zero percent, therefore income tax accruals and expense were not material for those prior periods presented.

As of December 31, 2020, we had a federal NOL of approximately $371,000. The federal NOL is expected to be completely used and offset taxable income by June 30, 2021. 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 $356,000. States may vary in their treatment of post-2017 NOLs. We lost some state NOL carryforwards when we filed final 2019 tax returns in several states. The remaining state NOLs are expected to be completely used and offset taxable income by June 30, 2021. The remaining state NOL carryforwards may expire in 2036 and 2037 if not used.

NOTE 7 – SHAREHOLDERS’ EQUITY

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

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

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NOTE 8 – PER-SHARE INFORMATION

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


	For the Three Months Ended
	June 30,
		2021		2020
Numerator: Net increase (decrease) in net assets resulting from operations	$	781,506	$	593,370
Denominator: Weighted-average number of common shares outstanding		10,790,413		10,882,039
Basic and diluted net gain (loss) per common share	$	0.07	$	0.05


	For the Six Months Ended June 30,
	2021		2020
Numerator: Net increase (decrease) in net assets resulting from operations	$	2,526,548	$	311,452
Denominator: Weighted-average number of common shares outstanding		10,788,175		10,974,721
Basic and diluted net gain (loss) per common share	$	0.23	$	0.03

NOTE 9 – OPERATING LEASES

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

Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted-average discount rate as of December 31, 2020 was 4.5% and the weighted-average remaining lease term is one year.

Under ASC 840, rent expense for office facilities for the three months ended June 30, 2021 and June 30, 2020 was $16,337 and $16,569, respectively.

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


	Three Months		Six Months
	Ended		Ended
	June 30, 2021		June 30, 2021
Operating lease costs	$	4,779	$	9,558
Variable lease cost		4,125		8,603
Short-term lease cost		7,433		14,865
Total	$	16,337	$	33,026

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


Operating Lease
Right-of-use assets	$	14,279

Operating Lease Liability	$	15,973
Less: short term portion		(15,973)
Long term portion	$	—

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


	Operating
	Leases
2021	$	10,581
2022		5,449
Total lease payments		16,030
Less: interest		(57)
Present value of lease liabilities	$	15,973

NOTE 10 – FINANCIAL HIGHLIGHTS

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

a
	Six Months Ended June 30,
	2021			2020		2019		2018		2017
Per Share Data ⁽¹⁾
Net asset value at beginning of period	$	1.08		0.91		1.02		0.87		0.77
Net investment income (loss)		0.04		0.01		(0.03)		(0.02)		(0.02)
Net realized and unrealized gains (losses)		0.28		0.02		0.02		0.09		0.04
Provision for income taxes		(0.09)		0.00		0.00		0.00		0.00
Repurchase of common stock		0.00		0.02		0.00		0.00		0.00
Payment of common stock dividend		0.00		0.00		(0.05)		0.00		0.00
Net asset value at end of period	$	1.31		0.96		0.96		0.94		0.79

Ratio / Supplemental Data
Per share market value of investments at end of period	$	1.22		0.65		0.70		0.82		0.51
Shares outstanding at end of period		10,790,413		10,696,735		11,067,402		11,067,402		12,151,493
Average weighted shares outstanding for the period		10,788,175		10,974,721		11,067,402		11,067,402		12,151,493
Net assets at end of period	$	14,188,588		10,221,718		10,588,689		11,278,889		9,555,551
Average net assets ⁽²⁾	$	13,073,718		10,025,622		12,304,975		9,955,674		9,504,851
Total investment return		21.30	%	3.30	%	(5.88)	%	8.05	%	2.60	%
Portfolio turnover rate (3)		75.65	%	11.90	%	7.11	%	11.55	%	11.87	%
Ratio of operating expenses to average net assets ⁽³⁾		(11.72)	%	(9.41)	%	(7.70)	%	(6.98)	%	(7.38)	%
Ratio of net investment income (loss) to average net assets ⁽³⁾		6.88	%	3.02	%	(6.40)	%	(5.53)	%	(5.89)	%
Ratio of realized gains (losses) to average net assets ⁽³⁾		61.92	%	4.06	%	57.36	%	(12.79)	%	16.51	%

(1)	Per-share data was derived using the ending number of shares outstanding for the period.

(2)	Based on the monthly average of net assets as of the beginning and end of each period presented.

(3)	Ratios are annualized.

NOTE 11 – General Uncertainty

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

NOTE 12 – Subsequent Events

On August 2, 2021, Tailwind Real Estate, LLC pre-paid in full all of their obligations owing to us, including $3,000,000 of loan principal provided at March 31, 2021, and $18,500 of accrued but unpaid interest thereon.

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS


Exhibit Number		Description
3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 23, 2013)
3.2		Amended and Restated Bylaws of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10-SB filed on January 29, 2008)
31.1	*	Section 302 Certification of the Chief Executive Officer
31.2	*	Section 302 Certification of the Chief Financial Officer
32.1	*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	*	Inline XBRL Instance Document
101.SCH	*	Inline XBRL Schema Document
101.CAL	*	Inline XBRL Calculation Linkbase Document
101.DEF	*	Inline XBRL Definition Linkbase Document
101.LAB	*	Inline XBRL Label Linkbase Document
101.PRE	*	Inline XBRL Presentation Linkbase Document
104*		Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)

*	Filed herewith

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SIGNATURES

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


	MILL CITY VENTURES III, LTD.

Date: October 14, 2021	By:	/s/ Douglas M. Polinsky
		DOUGLAS M. POLINSKY
		Chief Executive Officer


Date: October 14, 2021	By:	/s/ Joseph A. Geraci, II
		JOSEPH A. GERACI, II
		Chief Financial Officer

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