UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________



FORM 10-Q

__________________________



|(Mark One)
|----------
|x         
|          
|or        
| ̈         
|          



Commission File Number 814-00991

__________________________



MILL CITY
VENTURES III, LTD.
(Exact name of registrant as specified in its charter)

__________________________

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Minnesota                                                      |  | 90-0316651                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|328 Barry Avenue South #210, 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.     x   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).     x   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 x
| |                           | 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    x  No



As of May 11, 2018, Mill City Ventures
III, Ltd. had 11,067,402 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, 2018



|           |                                                                                            | Page No.
|---------- | ------------------------------------------------------------------------------------------ | --------
|           |                                                                                            |         
|PART I.    | FINANCIAL INFORMATION                                                                      |         
|           |                                                                                            |         
|Item 1.    | Financial Statements                                                                       |         
|           |                                                                                            |         
|           | Balance Sheets – March 31, 2018 and December 31, 2017                                      | 3       
|           |                                                                                            |         
|           | Statements of Operations – Three months ended March 31, 2018 and March 31, 2017            | 4       
|           |                                                                                            |         
|           | Statements of Changes in Net Assets – Three months ended March 31, 2018 and March 31, 2017 | 5       
|           |                                                                                            |         
|           | Statements of Cash Flows – Three months ended March 31, 2018 and March 31, 2017            | 6       
|           |                                                                                            |         
|           | Schedule of Investments – March 31, 2018 and December 31, 2017                             | 7       
|           |                                                                                            |         
|           | Notes to Financial Statements – March 31, 2018                                             | 11      
|           |                                                                                            |         
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations      | 20      
|           |                                                                                            |         
|Item 4.    | Controls and Procedures                                                                    | 24      
|           |                                                                                            |         
|PART II.   | OTHER INFORMATION                                                                          |         
|           |                                                                                            |         
|Item 6.    | Exhibits                                                                                   | 25      
|           |                                                                                            |         
|SIGNATURES | 25                                                                                        



2







PART I. FINANCIAL INFORMATION



| | ITEM 1. | FINANCIAL STATEMENTS
| | ------- | --------------------



MILL CITY VENTURES III, LTD.

BALANCE SHEETS



|                                                                                                         |  | March 31, 2018  (unaudited) |            |   | December 31, 2017 
(audited) |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---------------------------- | -
|ASSETS                                                                                                   |  |                             |            |   |                              |  
|Investments, at fair value:                                                                              |  | $                           | 8,482,227  |   |                              | $
|Non-control/non-affiliate investments (cost: $7,602,218 and $7,000,745 respectively)                     |  |                             |            |   |                              |  
|Cash                                                                                                     |  |                             | 1,765,268  |   |                              |  
|Prepaid expenses                                                                                         |  |                             | 35,357     |   |                              |  
|Receivable for sale of investments                                                                       |  |                             | —          |   |                              |  
|Interest and dividend receivables                                                                        |  |                             | 45,060     |   |                              |  
|Leasehold improvements, net                                                                              |  |                             | 5,529      |   |                              |  
|Property and equipment, net                                                                              |  |                             | 6,575      |   |                              |  
|Total Assets                                                                                             |  | $                           | 10,340,016 |   |                              | $
|                                                                                                         |  |                             |            |   |                              |  
|LIABILITIES                                                                                              |  |                             |            |   |                              |  
|Current Liabilities                                                                                      |  |                             |            |   |                              |  
|Accounts payable                                                                                         |  | $                           | 40,307     |   |                              | $
|Payable for purchase of investments                                                                      |  |                             | 120,637    |   |                              |  
|Deferred rent                                                                                            |  |                             | 10,267     |   |                              |  
|Total Current Liabilities                                                                                |  |                             | 171,211    |   |                              |  
|Total Liabilities                                                                                        |  |                             | 171,211    |   |                              |  
|Commitments and Contingencies (Note 6)                                                                   |  |                             |            |   |                              |  
|                                                                                                         |  |                             |            |   |                              |  
|SHAREHOLDERS EQUITY (NET ASSETS)                                                                         |  |                             |            |   |                              |  
|Common Stock, par value $0.001 per share (250,000,000 authorized; 11,067,402 and 11,067,402 outstanding) |  |                             | 11,067     |   |                              |  
|Additional paid-in capital                                                                               |  |                             | 10,774,653 |   |                              |  
|Accumulated deficit                                                                                      |  |                             | (1,159,665 | ) |                              |  
|Accumulated undistributed investment loss                                                                |  |                             | (1,346,829 | ) |                              |  
|Accumulated undistributed net realized gains on investment transactions                                  |  |                             | 1,009,570  |   |                              |  
|Net unrealized appreciation in value of investments                                                      |  |                             | 880,009    |   |                              |  
|Total Shareholders' Equity (net assets)                                                                  |  |                             | 10,168,805 |   |                              |  
|                                                                                                         |  |                             |            |   |                              |  
|Total Liabilities and Shareholders' Equity                                                               |  | $                           | 10,340,016 |   |                              | $
|                                                                                                         |  |                             |            |   |                              |  
|Net Asset Value Per Common Share                                                                         |  | $                           | 0.92       |   |                              | $



See accompanying Notes to Financial Statements

3







MILL CITY VENTURES III, LTD.

STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                                           |  | Three Months Ended |           
|-------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                           |  | March 31, 2018     |           
|Investment Income                                                          |  |                    |           
|Interest income                                                            |  | $                  | 34,146    
|Dividend income                                                            |  |                    | 379       
|                                                                           |  |                    |           
|Total Investment Income                                                    |  |                    | 34,525    
|                                                                           |  |                    |           
|Operating Expenses                                                         |  |                    |           
|Professional fees                                                          |  |                    | 60,281    
|Payroll                                                                    |  |                    | 61,053    
|Insurance                                                                  |  |                    | 18,891    
|Occupancy                                                                  |  |                    | 22,755    
|Director's fees                                                            |  |                    | 15,000    
|Depreciation and amortization                                              |  |                    | 2,671     
|Other general and administrative                                           |  |                    | 5,930     
|                                                                           |  |                    |           
|Total Operating Expenses                                                   |  |                    | 186,581   
|                                                                           |  |                    |           
|Net Investment Loss                                                        |  | $                  | (152,056  
|                                                                           |  |                    |           
|Realized and Unrealized Gain (Loss) on Investments                         |  |                    |           
|Net realized gain on investments                                           |  |                    | 51,752    
|Net change in unrealized appreciation (depreciation) on investments        |  |                    | 639,894   
|                                                                           |  |                    |           
|Net Realized and Unrealized Gain on Investments                            |  |                    | 691,646   
|Net Increase (Decrease) in Net Assets Resulting from Operations            |  | $                  | 539,590   
|                                                                           |  |                    |           
|Net Increase (Decrease) in Net Assets Resulting from Operations per share: |  |                    |           
|Basic and diluted                                                          |  | $                  | 0.05      
|                                                                           |  |                    |           
|Weighted-average number of common shares outstanding                       |  |                    | 11,067,402



See accompanying Notes to Financial Statements



4







MILL CITY VENTURES III, LTD.

STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)



|                                                                       |  | Three Months Ended |            |   | Three Months Ended |  
|---------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | -
|                                                                       |  | March 31, 2018     |            |   | March 31, 2017     |  
|Net Assets at Beginning of Period                                      |  | $                  | 9,629,215  |   |                    | $
|Net investment loss                                                    |  |                    | (152,056   | ) |                    |  
|Net realized gain on investments                                       |  |                    | 51,752     |   |                    |  
|Net increase (decrease) in unrealized appreciation on investments      |  |                    | 639,894    |   |                    |  
|Net increase (decrease) in net assets resulting from operations        |  |                    | 539,590    |   |                    |  
|Total  net increase (decrease) in net assets resulting from operations |  |                    | 539,590    |   |                    |  
|Net Assets at End of Period                                            |  | $                  | 10,168,805 |   |                    | $
|                                                                       |  |                    |            |   |                    |  
|Accumulated undistributed net investment loss                          |  | $                  | (1,346,829 | ) |                    | $



5







MILL CITY VENTURES III, LTD.

STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                         |  | Three Months Ended |          
|------------------------------------------------------------------------ |  | ------------------ | ---------
|                                                                         |  | March 31, 2018     |          
|Cash flows from operating activities:                                    |  |                    |          
|Net increase (decrease) in net assets resulting from operations          |  | $                  | 539,590  
|                                                                         |  |                    |          
|Adjustments to reconcile net increase (decrease) in net assets resulting |  |                    |          
|from operations to net cash (used) provided in operating activities:     |  |                    |          
|Net change in unrealized (appreciation) depreciation on investments      |  |                    | (639,894 
|Net realized gain on investments                                         |  |                    | (51,752  
|Payments for purchases of investments                                    |  |                    | (628,252 
|Proceeds from sales of investments                                       |  |                    | 78,531   
|Depreciation and amortization expense                                    |  |                    | 2,671    
|                                                                         |  |                    |          
|Changes in operating assets and liabilities:                             |  |                    |          
|Prepaid expenses                                                         |  |                    | 27,192   
|Interest and dividends receivable                                        |  |                    | (5,486   
|Receivable for sales of investments                                      |  |                    | 267,119  
|Accounts payable                                                         |  |                    | 3,216    
|Payable for purchase of investments                                      |  |                    | 14,415   
|Deferred rent                                                            |  |                    | (396     
|                                                                         |  |                    |          
|Net cash (used) provided in operating activities                         |  |                    | (393,046 
|                                                                         |  |                    |          
|Net (decrease) increase in cash                                          |  |                    | (393,046 
|                                                                         |  |                    |          
|Cash, beginning of period                                                |  |                    | 2,158,314
|Cash, end of period                                                      |  | $                  | 1,765,268



See accompanying Notes to Financial Statements



6







MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

MARCH 31, 2018



|Investments (1)        |  | Investment Type  |  | Interest Rate (2) |    |   | Maturity  Date |           | Principal  Amount |   |         | Cost |  |   | Fair Value |  |  | Percentage  of Net  Assets |         |  | Gross  Unrealized  Appreciation |  |      | Gross  Unrealized  Depreciation |  |   | Net  Unrealized  Appreciation  (Depreciation) | 
|---------------------- |  | ---------------- |  | ----------------- | -- | - | -------------- | --------- | ----------------- | - | ------- | ---- |  | - | ---------- |  |  | -------------------------- | ------- |  | ------------------------------- |  | ---- | ------------------------------- |  | - | --------------------------------------------- | 
|Debt Investments       |  |                  |  |                   |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Consumer               |  |                  |  |                   |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Mix 1 Life, Inc.       |  | Secured Loan (3) |  |                   | 12 | % |                | 2/6/2016  |                   | $ | 500,000 |      |  | $ | 500,000    |  |  | $                          | —       |  |                                 |  |      |                                 |  | $ | —                                             | 
|Mix 1 Life, Inc.       |  | Secured Loan     |  |                   | 12 | % |                | 3/13/2016 |                   | $ | 250,000 |      |  |   | 250,000    |  |  |                            | —       |  |                                 |  |      |                                 |  |   | —                                             | 
|                       |  |                  |  |                   |    |   |                |           |                   |   |         |      |  |   | 750,000    |  |  |                            | —       |  |                                 |  | 0.00 | %                               |  |   | —                                             | 
|Financial              |  |                  |  |                   |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Bravo Financial LLC    |  | Secured Loan     |  |                   | 12 | % |                | 8/31/2018 |                   | $ | 500,000 |      |  |   | 500,000    |  |  |                            | 500,000 |  |                                 |  | 4.92 | %                               |  |   | —                                             | 
|                       |  |                  |  |                   |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Total Debt Investments |  |                  |  |                   |    |   |                |           |                   |   |         |      |  | $ | 1,250,000  |  |  | $                          | 500,000 |  |                                 |  | 4.92 | %                               |  | $ | —                                             | 



|Investments (1)                  |  | Investment Type (4)      |  | InterestRate (5) |  | ExpirationDate (6) |  | Shares/Units |           |  | Cost |   |         | Fair Value |  |   | Percentage  of Net  Assets |  |  | Gross  Unrealized  Appreciation |      |   | Gross  Unrealized  Depreciation |   |         | Net Unrealized  Appreciation  (Depreciation) | 
|-------------------------------- |  | ------------------------ |  | ---------------- |  | ------------------ |  | ------------ | --------- |  | ---- | - | ------- | ---------- |  | - | -------------------------- |  |  | ------------------------------- | ---- | - | ------------------------------- | - | ------- | -------------------------------------------- | 
|Equity Investments               |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |         |                                              | 
|Advertising                      |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |         |                                              | 
|Creative Realities, Inc.         |  | Warrants (7)             |  | n/a              |  | 12/28/2020         |  |              | 1,071,429 |  |      | $ | —       |            |  | $ | 21,429                     |  |  |                                 | 0.21 | % |                                 | $ | 21,429  |                                              | 
|Business Services                |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |         |                                              | 
|Spar Group Inc.                  |  | Common Stock (7)         |  | n/a              |  | n/a                |  |              | 159,406   |  |      |   | 227,728 |            |  |   | 223,168                    |  |  |                                 | 2.19 | % |                                 |   | 3,261   |                                              | 
|Consumer                         |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |         |                                              | 
|Bridgford Foods Company          |  | Common Stock             |  | n/a              |  | n/a                |  |              | 2,959     |  |      |   | 43,805  |            |  |   | 44,267                     |  |  |                                 |      |   |                                 |   | 609     |                                              | 
|Famous Daves of America, Inc.    |  | Common Stock             |  | n/a              |  | n/a                |  |              | 37,923    |  |      |   | 159,087 |            |  |   | 269,253                    |  |  |                                 |      |   |                                 |   | 110,166 |                                              | 
|HG Holdings, Inc.                |  | Common Stock (7)         |  | n/a              |  | n/a                |  |              | 200,000   |  |      |   | 199,118 |            |  |   | 120,000                    |  |  |                                 |      |   |                                 |   | —       |                                              | 
|Mix 1 Life, Inc.                 |  | Common Stock             |  | n/a              |  | n/a                |  |              | 100,000   |  |      |   | 46,160  |            |  |   | —                          |  |  |                                 |      |   |                                 |   | —       |                                              | 
|Tzfat Spirits of Israel, LLC     |  | LLC Membership Units (7) |  | n/a              |  | n/a                |  |              | 55,000    |  |      |   | 101,019 |            |  |   | 25,000                     |  |  |                                 |      |   |                                 |   | —       |                                              | 
|                                 |  |                          |  |                  |  |                    |  |              |           |  |      |   | 549,189 |            |  |   | 458,520                    |  |  |                                 | 4.51 | % |                                 |   | 110,775 |                                              | 
|Education                        |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |         |                                              | 
|Nat'l Amer. Univ. Holdings, Inc. |  | Common Stock             |  | n/a              |  | n/a                |  |              | 114,753   |  |      |   | 186,693 |            |  |   | 149,844                    |  |  |                                 | 1.47 | % |                                 |   | 5,406   |                                              | 
|Financial                        |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |         |                                              | 
|OTC Markets Group Cl A           |  | Common Stock             |  | n/a              |  | n/a                |  |              | 11,226    |  |      |   | 181,748 |            |  |   | 300,857                    |  |  |                                 |      |   |                                 |   | 119,109 |                                              | 
|Hi-Crush Partners, LP            |  | Common Stock (8)         |  | n/a              |  | n/a                |  |              | 10,000    |  |      |   | 104,222 |            |  |   | 106,000                    |  |  |                                 |      |   |                                 |   | 1,778   |                                              | 
|QC Holdings, Inc.                |  | Common Stock (7)         |  | n/a              |  | n/a                |  |              | 15,000    |  |      |   | 10,655  |            |  |   | 8,100                      |  |  |                                 |      |   |                                 |   | —       |                                              | 
|                                 |  |                          |  |                  |  |                    |  |              |           |  |      |   | 296,625 |            |  |   | 414,957                    |  |  |                                 | 4.08 | % |                                 |   | 120,887 |                                              | 



7







|Healthcare                               |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|---------------------------------------- |  | ----------------------------- |  |  | --- | - |  | ---------- |  |  | ------- |  |  | - | --------- |  |  | - | ---------- |  |  |  | ------ | - |  | - | --------- |  |  | - | --------- |  |  | - | --------- | -
|Reshape Life Sciences Inc Pfd Conv Ser B |  | Preferred LLC Units (3) (7)   |  |  | n/a |   |  | n/a        |  |  | 156     |  |  |   | 155,321   |  |  |   | 98,397     |  |  |  |        |   |  |   | —         |  |  |   | 56,924    |  |  |   | (56,924   | )
|Reshape Life Sciences Inc Pfd Conv Ser B |  | Warrants (7)                  |  |  | n/a |   |  | 8/16/2024  |  |  | 67,860  |  |  |   | 679       |  |  |   | —          |  |  |  |        |   |  |   | —         |  |  |   | 679       |  |  |   | (679      | )
|HemaCare Corp.                           |  | Common Stock (7)              |  |  | n/a |   |  | n/a        |  |  | 139,697 |  |  |   | 430,877   |  |  |   | 810,243    |  |  |  |        |   |  |   | 379,366   |  |  |   | —         |  |  |   | 379,366   |  
|Opiant Pharmaceuticals, Inc.             |  | Common Stock (7)              |  |  | n/a |   |  | n/a        |  |  | 5,000   |  |  |   | 104,133   |  |  |   | 95,900     |  |  |  |        |   |  |   | 299       |  |  |   | 8,532     |  |  |   | (8,233    | )
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 691,010   |  |  |   | 1,004,540  |  |  |  | 9.88   | % |  |   | 379,665   |  |  |   | 66,135    |  |  |   | 313,530   |  
|Industrial Goods                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|ClearSign Combustion Corporation         |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 3,400   |  |  |   | 11,310    |  |  |   | 6,885      |  |  |  | 0.07   | % |  |   | —         |  |  |   | 4,425     |  |  |   | (4,425    | )
|Information Technology                   |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Insite Software Solutions, Inc           |  | Warrants (7)                  |  |  | n/a |   |  | 12/30/2023 |  |  | 108,960 |  |  |   | —         |  |  |   | —          |  |  |  |        |   |  |   | —         |  |  |   | —         |  |  |   | —         |  
|MAX 4G, Inc.                             |  | Preferred Stock (7)           |  |  | n/a |   |  | n/a        |  |  | 300,000 |  |  |   | 150,000   |  |  |   | 300,000    |  |  |  |        |   |  |   | 150,000   |  |  |   | —         |  |  |   | 150,000   |  
|Simulations Plus, Inc.                   |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 25,001  |  |  |   | 246,710   |  |  |   | 368,758    |  |  |  |        |   |  |   | 122,048   |  |  |   | —         |  |  |   | 122,048   |  
|Travelzoo, Inc.                          |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 34,150  |  |  |   | 354,633   |  |  |   | 248,441    |  |  |  |        |   |  |   | 426       |  |  |   | 106,618   |  |  |   | (106,192  | )
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 751,343   |  |  |   | 917,199    |  |  |  | 9.02   | % |  |   | 272,474   |  |  |   | 106,618   |  |  |   | 165,856   |  
|Leisure & Hospitality                    |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Bitesquad.com LLC                        |  | Preferred LLC Units (3) (7)   |  |  | n/a |   |  | n/a        |  |  | 73,543  |  |  |   | 1,014,893 |  |  |   | 2,020,226  |  |  |  |        |   |  |   | 1,005,333 |  |  |   | —         |  |  |   | 1,005,333 |  
|DBR Enclave US Investors, LLC            |  | LLC Membership Units          |  |  | 15  | % |  | 1/31/2020  |  |  | 500,000 |  |  |   | 500,000   |  |  |   | 500,000    |  |  |  |        |   |  |   | —         |  |  |   | —         |  |  |   | —         |  
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 1,514,893 |  |  |   | 2,520,226  |  |  |  | 24.78  | % |  |   | 1,005,333 |  |  |   | —         |  |  |   | 1,005,333 |  
|Oil & Gas                                |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Matrix Service Company                   |  | Common Stock (7)              |  |  | n/a |   |  | n/a        |  |  | 10,000  |  |  |   | 182,580   |  |  |   | 137,000    |  |  |  |        |   |  |   | —         |  |  |   | 45,580    |  |  |   | (45,580   | )
|Northern Capital Partners I, LP          |  | Limited Partnership Units (7) |  |  | n/a |   |  | n/a        |  |  | 550,000 |  |  |   | 550,000   |  |  |   | 488,629    |  |  |  |        |   |  |   | —         |  |  |   | 61,371    |  |  |   | (61,371   | )
|Southern Plains Resources, Inc.          |  | Common Stock (7)              |  |  | n/a |   |  | n/a        |  |  | 600,000 |  |  |   | 730,000   |  |  |   | —          |  |  |  |        |   |  |   | —         |  |  |   | 730,000   |  |  |   | (730,000  | )
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 1,462,580 |  |  |   | 625,629    |  |  |  | 6.15   | % |  |   | —         |  |  |   | 836,951   |  |  |   | (836,951  | )
|Publishing                               |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Educational Development Corp.            |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 65,202  |  |  |   | 660,847   |  |  |   | 1,639,830  |  |  |  | 16.13  | % |  |   | 978,983   |  |  |   | —         |  |  |   | 978,983   |  
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Total Equity Investments                 |  |                               |  |  |     |   |  |            |  |  |         |  |  | $ | 6,352,218 |  |  | $ | 7,982,227  |  |  |  | 78.49  | % |  | $ | 2,898,213 |  |  | $ | 1,268,204 |  |  | $ | 1,630,009 |  
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Total Investments                        |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 7,602,218 |  |  |   | 8,482,227  |  |  |  | 83.41  | % |  |   | 2,898,213 |  |  |   | 2,018,204 |  |  |   | 880,009   |  
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Total Cash                               |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 1,765,268 |  |  |   | 1,765,268  |  |  |  | 17.36  | % |  |   | —         |  |  |   | —         |  |  |   | —         |  
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |            |  |  |  |        |   |  |   |           |  |  |   |           |  |  |   |           |  
|Total Investments and Cash               |  |                               |  |  |     |   |  |            |  |  |         |  |  | $ | 9,367,486 |  |  | $ | 10,247,495 |  |  |  | 100.77 | % |  | $ | 2,898,213 |  |  | $ | 2,018,204 |  |  | $ | 880,009   |  



| | (1) | All investments and all cash are “qualifying assets”
under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Interest is presented on a per annum basis.
| | --- | -------------------------------------------

| | (3) | Investment is convertible into common equity of the issuer.
| | --- | -----------------------------------------------------------

| | (4) | In the case of warrants, warrants provide for the right
to purchase common equity of the issuer.
| | --- | ------------------------------------------------------------------------------------------------

| | (5) | In the case of preferred stock, this represents the right
to annual cumulative dividends calculated on a per annum basis.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (6) | In the case of warrants, purchase rights under the warrants
will expire at the close of business on this date.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (7) | Investment is not an income-producing investment.
| | --- | -------------------------------------------------

| | (8) | Investment is neither a “qualifying asset”
under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.
| | --- | --------------------------------------------------------------------------------------------------------------------------------

At March 31, 2018, aggregate non-qualifying
assets represented approximately 1.2% of our total assets.

At March 31, 2018, the estimated net unrealized
gain for federal tax purposes was $1,078,681, based on a tax cost basis of $7,403,546.

At March 31, 2018, the estimated aggregate
gross unrealized gain for federal income tax purposes was $2,984,953 and the estimated aggregate gross unrealized loss for federal
income tax purposes was $1,906,272



8







MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2017



|Investments (1)        |  | Investment Type  |  | InterestRate (2) |    |   | Maturity  Date |           | Principal  Amount |   |         | Cost |  |   | Fair Value |  |  | Percentage  of Net  Assets |         |  | Gross  Unrealized  Appreciation |  |      | Gross  Unrealized  Depreciation |  |   | Net  Unrealized  Appreciation  (Depreciation) | 
|---------------------- |  | ---------------- |  | ---------------- | -- | - | -------------- | --------- | ----------------- | - | ------- | ---- |  | - | ---------- |  |  | -------------------------- | ------- |  | ------------------------------- |  | ---- | ------------------------------- |  | - | --------------------------------------------- | 
|Debt Investments       |  |                  |  |                  |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Consumer               |  |                  |  |                  |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Mix 1 Life, Inc.       |  | Secured Loan (3) |  |                  | 12 | % |                | 2/6/2016  |                   | $ | 500,000 |      |  | $ | 500,000    |  |  | $                          | —       |  |                                 |  |      |                                 |  | $ | —                                             | 
|Mix 1 Life, Inc.       |  | Secured Loan     |  |                  | 12 | % |                | 3/13/2016 |                   | $ | 250,000 |      |  |   | 250,000    |  |  |                            | —       |  |                                 |  |      |                                 |  |   | —                                             | 
|                       |  |                  |  |                  |    |   |                |           |                   |   |         |      |  |   | 750,000    |  |  |                            | —       |  |                                 |  | 0.00 | %                               |  |   | —                                             | 
|Financial              |  |                  |  |                  |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Bravo Financial LLC    |  | Secured Loan     |  |                  | 12 | % |                | 8/31/2018 |                   | $ | 500,000 |      |  |   | 500,000    |  |  |                            | 500,000 |  |                                 |  | 5.19 | %                               |  |   | —                                             | 
|                       |  |                  |  |                  |    |   |                |           |                   |   |         |      |  |   |            |  |  |                            |         |  |                                 |  |      |                                 |  |   |                                               | 
|Total Debt Investments |  |                  |  |                  |    |   |                |           |                   |   |         |      |  | $ | 1,250,000  |  |  | $                          | 500,000 |  |                                 |  | 5.19 | %                               |  | $ | —                                             | 



|Investments (1)               |  | Investment Type (4)      |  | InterestRate (5) |  | ExpirationDate (6) |  | Shares/Units |           |  | Cost |   |         | Fair Value |  |   | Percentage  of Net  Assets |  |  | Gross  Unrealized  Appreciation |      |   | Gross  Unrealized  Depreciation |   |        | Net Unrealized  Appreciation  (Depreciation) | 
|----------------------------- |  | ------------------------ |  | ---------------- |  | ------------------ |  | ------------ | --------- |  | ---- | - | ------- | ---------- |  | - | -------------------------- |  |  | ------------------------------- | ---- | - | ------------------------------- | - | ------ | -------------------------------------------- | 
|Equity Investments            |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |        |                                              | 
|Advertising                   |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |        |                                              | 
|Creative Realities, Inc.      |  | Warrants (7)             |  | n/a              |  | 12/28/2020         |  |              | 1,071,429 |  |      | $ | —       |            |  | $ | 42,857                     |  |  |                                 | 0.45 | % |                                 | $ | 42,857 |                                              | 
|Consumer                      |  |                          |  |                  |  |                    |  |              |           |  |      |   |         |            |  |   |                            |  |  |                                 |      |   |                                 |   |        |                                              | 
|Famous Daves of America, Inc. |  | Common Stock             |  | n/a              |  | n/a                |  |              | 37,923    |  |      |   | 159,087 |            |  |   | 248,395                    |  |  |                                 |      |   |                                 |   | 89,308 |                                              | 
|Forward Industries, Inc.      |  | Common Stock (7)         |  | n/a              |  | n/a                |  |              | 20,100    |  |      |   | 23,969  |            |  |   | 24,723                     |  |  |                                 |      |   |                                 |   | 778    |                                              | 
|Mix 1 Life, Inc.              |  | Common Stock (9)         |  | n/a              |  | n/a                |  |              | 100,000   |  |      |   | 46,160  |            |  |   | 800                        |  |  |                                 |      |   |                                 |   | —      |                                              | 
|Stanley Furniture Co., Inc.   |  | Common Stock (7)         |  | n/a              |  | n/a                |  |              | 171,292   |  |      |   | 181,871 |            |  |   | 149,024                    |  |  |                                 |      |   |                                 |   | —      |                                              | 
|Tzfat Spirits of Israel, LLC  |  | LLC Membership Units (7) |  | n/a              |  | n/a                |  |              | 55,000    |  |      |   | 101,019 |            |  |   | 25,000                     |  |  |                                 |      |   |                                 |   | —      |                                              | 
|                              |  |                          |  |                  |  |                    |  |              |           |  |      |   | 512,106 |            |  |   | 447,942                    |  |  |                                 | 4.65 | % |                                 |   | 90,086 |                                              | 



9







|Education                                |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|---------------------------------------- |  | ----------------------------- |  |  | --- | - |  | ---------- |  |  | ------- |  |  | - | --------- |  |  | - | --------- |  |  |  | ----- | - |  | - | --------- | 
|Nat'l Amer. Univ. Holdings, Inc.         |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 100,000 |  |  |   | 172,757   |  |  |   | 142,000   |  |  |  | 1.47  | % |  |   | 3,321     | 
|Financial                                |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|OTC Markets Group Cl A                   |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 11,279  |  |  |   | 182,557   |  |  |   | 327,655   |  |  |  |       |   |  |   | 145,098   | 
|Hi-Crush Partners, LP                    |  | Common Stock (8)              |  |  | n/a |   |  | n/a        |  |  | 10,000  |  |  |   | 106,222   |  |  |   | 107,000   |  |  |  |       |   |  |   | 778       | 
|QC Holdings, Inc.                        |  | Common Stock (7)              |  |  | n/a |   |  | n/a        |  |  | 15,000  |  |  |   | 10,655    |  |  |   | 6,862     |  |  |  |       |   |  |   | —         | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 299,434   |  |  |   | 441,517   |  |  |  | 4.59  | % |  |   | 145,876   | 
|Healthcare                               |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Reshape Life Sciences Inc Pfd Conv Ser B |  | Preferred LLC Units (3) (7)   |  |  | n/a |   |  | n/a        |  |  | 156     |  |  |   | 155,321   |  |  |   | 100,433   |  |  |  |       |   |  |   | —         | 
|Reshape Life Sciences Inc Pfd Conv Ser B |  | Warrants (7)                  |  |  | n/a |   |  | 8/16/2024  |  |  | 67,860  |  |  |   | 679       |  |  |   | —         |  |  |  |       |   |  |   | —         | 
|HemaCare Corp.                           |  | Common Stock (7)              |  |  | n/a |   |  | n/a        |  |  | 136,897 |  |  |   | 421,839   |  |  |   | 413,429   |  |  |  |       |   |  |   | 6,396     | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 577,839   |  |  |   | 513,862   |  |  |  | 5.34  | % |  |   | 6,396     | 
|Industrial Goods                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|ClearSign Combustion Corporation         |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 3,400   |  |  |   | 11,310    |  |  |   | 12,240    |  |  |  | 0.12  | % |  |   | 930       | 
|Information Technology                   |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Insite Software Solutions, Inc           |  | Warrants (7)                  |  |  | n/a |   |  | 12/30/2023 |  |  | 108,960 |  |  |   | —         |  |  |   | —         |  |  |  |       |   |  |   | —         | 
|MAX 4G, Inc.                             |  | Preferred Stock (7)           |  |  | n/a |   |  | n/a        |  |  | 300,000 |  |  |   | 150,000   |  |  |   | 300,000   |  |  |  |       |   |  |   | 150,000   | 
|Simulations Plus, Inc.                   |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 25,001  |  |  |   | 246,710   |  |  |   | 402,509   |  |  |  |       |   |  |   | 155,799   | 
|Travelzoo, Inc.                          |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 30,000  |  |  |   | 324,848   |  |  |   | 193,500   |  |  |  |       |   |  |   | —         | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 721,558   |  |  |   | 896,009   |  |  |  | 9.31  | % |  |   | 305,799   | 
|Leisure & Hospitality                    |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Bitesquad.com LLC                        |  | Preferred LLC Units (3) (7)   |  |  | n/a |   |  | n/a        |  |  | 73,543  |  |  |   | 1,014,893 |  |  |   | 2,020,226 |  |  |  |       |   |  |   | 1,005,333 | 
|DBR Enclave US Investors, LLC            |  | LLC Membership Units          |  |  | 15  | % |  | 1/31/2020  |  |  | 500,000 |  |  |   | 500,000   |  |  |   | 500,000   |  |  |  |       |   |  |   | —         | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 1,514,893 |  |  |   | 2,520,226 |  |  |  | 26.17 | % |  |   | 1,005,333 | 
|Oil & Gas                                |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Northern Capital Partners I, LP          |  | Limited Partnership Units (7) |  |  | n/a |   |  | n/a        |  |  | 550,000 |  |  |   | 550,000   |  |  |   | 488,629   |  |  |  |       |   |  |   | —         | 
|Southern Plains Resources, Inc.          |  | Common Stock (7)              |  |  | n/a |   |  | n/a        |  |  | 600,000 |  |  |   | 730,000   |  |  |   | —         |  |  |  |       |   |  |   | —         | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 1,280,000 |  |  |   | 488,629   |  |  |  | 5.07  | % |  |   | —         | 
|Publishing                               |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Educational Development Corp.            |  | Common Stock                  |  |  | n/a |   |  | n/a        |  |  | 65,202  |  |  |   | 660,848   |  |  |   | 1,235,578 |  |  |  | 12.83 | % |  |   | 574,730   | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Total Equity Investments                 |  |                               |  |  |     |   |  |            |  |  |         |  |  | $ | 5,750,745 |  |  | $ | 6,740,860 |  |  |  | 70.00 | % |  | $ | 2,175,328 | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Total Investments                        |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 7,000,745 |  |  |   | 7,240,860 |  |  |  | 75.19 | % |  |   | 2,175,328 | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Total Cash                               |  |                               |  |  |     |   |  |            |  |  |         |  |  |   | 2,158,314 |  |  |   | 2,158,314 |  |  |  | 22.41 | % |  |   | —         | 
|                                         |  |                               |  |  |     |   |  |            |  |  |         |  |  |   |           |  |  |   |           |  |  |  |       |   |  |   |           | 
|Total Investments, and Cash              |  |                               |  |  |     |   |  |            |  |  |         |  |  | $ | 9,159,059 |  |  | $ | 9,399,174 |  |  |  | 97.60 | % |  | $ | 2,175,328 | 



| | (1) | All investments and all cash are “qualifying assets”
under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Interest is presented on a per annum basis.
| | --- | -------------------------------------------

| | (3) | Investment is convertible into common equity of the issuer.
| | --- | -----------------------------------------------------------

| | (4) | In the case of warrants, warrants provide for the right
to purchase common equity of the issuer.
| | --- | ------------------------------------------------------------------------------------------------

| | (5) | In the case of preferred stock, this represents the right
to annual cumulative dividends calculated on a per annum basis.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (6) | In the case of warrants, purchase rights under the warrants
will expire at the close of business on this date.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (7) | Investment is not an income-producing investment.
| | --- | -------------------------------------------------

| | (8) | Investment is neither a “qualifying asset”
under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.
| | --- | --------------------------------------------------------------------------------------------------------------------------------

At December 31, 2017, aggregate non-qualifying assets represented
approximately 1.1% of our total assets.

| | (9) | Value reflects 20% discount for restricted nature of securities
| | --- | ---------------------------------------------------------------

At December 31, 2017, the estimated net unrealized gain for
federal tax purposes was $541,796, based on a tax cost basis of $6,699,064.

At December 31, 2017, the estimated aggregate gross unrealized
gain for federal income tax purposes was $2,365,077, and the estimated aggregate gross unrealized loss for federal income tax purposes
was $1,823,281



10







MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018





NOTE 1 – ORGANIZATION



Mill City Ventures III, Ltd. is an investment
company incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III,
Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures”
or the “company.” The company follows accounting and reporting guidance in Accounting Standards (“ASC”)
946.



We are an internally managed closed-end
non-diversified management investment company. We have elected to be regulated as a business development company, or “BDC,”
under the Investment Company Act of 1940 (the “1940 Act”). To date, we have not made an election to be treated as a
regulated investment company, or “RIC,” under the Internal Revenue Code of 1986 (the “Code”).



We primarily focus on investing in or lending
to privately held and small-cap publicly traded U.S. companies, and making managerial assistance available to such companies. These
investments are typically structured as purchases of preferred or common stock, investment contracts, or loans evidenced by promissory
notes that may be convertible into stock by their terms or that may be accompanied by the issuance to us of warrants or similar
rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic
growth and working capital. Our future revenues will relate to the gain we realize from the sale of securities we purchase, and
to dividends and interest we derive from those securities. Our investment objective is to generate both current income and capital
appreciation that ultimately result in gains.



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, 2018 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2018.



The condensed balance sheet as of December
31, 2017 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, 2017.



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.



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 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 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.



11









MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018





For more information, see Note 4 “Fair
Value of Financial Instruments.”



Income taxes: We account for income
taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. For more information, see Note 7 “Income Taxes.”



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. 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 interested 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.



Recent accounting pronouncements:
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-02, Leases
(Topic 842). The guidance in this ASU supersedes the leasing guidance in Leases (Topic 840). Under the new guidance,
lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified
as operating leases. The guidance requires the use of a modified retrospective transition approach, which includes a number of
optional practical expedients that entities may elect to apply. The amendments in ASU No. 2016-02 are effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted.
While we are currently evaluating the impact of ASU No. 2016-02, we expect an increase to the consolidated balance sheets for the
lease assets and associated lease liabilities for our lease agreements previously accounted for as operating leases.



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.



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.



12









MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018



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, 2018 (together with the corresponding percentage of
the fair value of our total portfolio of investments):



|                     |  | As of March 31, 2018           |          
|-------------------- |  | ------------------------------ | ---------
|                     |  | Investments at  Amortized Cost |          
|Senior Secured Loans |  | $                              | 1,250,000
|Preferred Stock      |  |                                | 1,320,214
|Common Stock         |  |                                | 3,880,306
|Warrants             |  |                                | 679      
|Other Equity         |  |                                | 1,151,019
|Total                |  | $                              | 7,602,218



The following table shows the composition of our investment
portfolio by major class, at amortized cost and fair value, as of December 31, 2017 (together with the corresponding percentage
of the fair value of our total portfolio of investments):



|                     |  | As of December 31, 2017        |          
|-------------------- |  | ------------------------------ | ---------
|                     |  | Investments at  Amortized Cost |          
|Senior Secured Loans |  | $                              | 1,250,000
|Preferred Stock      |  |                                | 1,320,214
|Common Stock         |  |                                | 3,278,833
|Warrants             |  |                                | 679      
|Other Equity         |  |                                | 1,151,019
|Total                |  | $                              | 7,000,745



The following table shows the composition of our investment
portfolio by industry grouping, based on fair value as of March 31, 2018:



|                       |  | As of March 31, 2018      |          
|---------------------- |  | ------------------------- | ---------
|                       |  | Investments at Fair Value |          
|Advertising            |  | $                         | 21,429   
|Business Services      |  |                           | 223,168  
|Consumer               |  |                           | 458,520  
|Education              |  |                           | 149,844  
|Financial              |  |                           | 914,957  
|Healthcare             |  |                           | 1,004,540
|Industrial Goods       |  |                           | 6,885    
|Information Technology |  |                           | 917,199  
|Leisure & Hospitality  |  |                           | 2,520,226
|Oil & Gas              |  |                           | 625,629  
|Publishing             |  |                           | 1,639,830
|Total                  |  | $                         | 8,482,227



The following table shows the composition of our investment
portfolio by industry grouping, based on fair value as of December 31, 2017:

|                       |  | As of December 31, 2017   |          
|---------------------- |  | ------------------------- | ---------
|                       |  | Investments at Fair Value |          
|Advertising            |  | $                         | 42,857   
|Consumer               |  |                           | 447,942  
|Education              |  |                           | 142,000  
|Financial              |  |                           | 941,517  
|Healthcare             |  |                           | 513,862  
|Industrial Goods       |  |                           | 12,240   
|Information Technology |  |                           | 896,009  
|Leisure & Hospitality  |  |                           | 2,520,226
|Oil & Gas              |  |                           | 488,629  
|Publishing             |  |                           | 1,235,578
|Total                  |  | $                         | 7,240,860



13







MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018



We do not “control,” and we are not an “affiliate”
(as each of those terms is defined in the 1940 Act), of any of our portfolio companies as of March 31, 2018. Under the 1940 Act,
we would generally be presumed to “control” a portfolio company if we owned more than 25% of its voting securities,
and be an “affiliate” of a portfolio company if we owned at least 5% and up to 25% of its voting securities.



NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS



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



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.



14







MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018



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 securities with a residual maturity
less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized
face value of the debt unless justification for impairment exists.



On a quarterly basis, our management provides members of our
Valuation Committee with (i) valuation reports for each portfolio 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 portfolio investments; and (iv) recommendations 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. The 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 portfolio investments.



We made no changes to our Valuation Policy and Procedures during
the reporting period.



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,
2018 may differ materially from values that would have been used had a readily available market for the securities existed.



The following table presents the fair value
measurements of our portfolio investments by major class, as of March 31, 2018, according to the fair value hierarchy:



|                     |  | As of March 31, 2018 |          
|-------------------- |  | -------------------- | ---------
|                     |  | Level 1              |          
|Senior Secured Loans |  | $                    | -        
|Preferred Stock      |  |                      | -        
|Common Stock         |  |                      | 4,528,546
|Warrants             |  |                      | -        
|Other Equity         |  |                      | -        
|Total                |  | $                    | 4,528,546



The following table presents the fair value
measurements of our portfolio investments by major class, as of December 31, 2017, according to the fair value hierarchy



|                     |  | As of December 31, 2017 |          
|-------------------- |  | ----------------------- | ---------
|                     |  | Level 1                 |          
|Senior Secured Loans |  | $                       | -        
|Preferred Stock      |  |                         | -        
|Common Stock         |  |                         | 3,262,915
|Warrants             |  |                         | -        
|Other Equity         |  |                         | -        
|Total                |  | $                       | 3,262,915



15







MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018



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,
2018:



|                                                     |  | Senior Secured  Loans |         |  | Preferred Stock |   |           | Common Stock |  |   | Warrants |  |  | Other Equity |  
|---------------------------------------------------- |  | --------------------- | ------- |  | --------------- | - | --------- | ------------ |  | - | -------- |  |  | ------------ | -
|Balance as of December 31, 2017                      |  | $                     | 500,000 |  |                 | $ | 2,320,226 |              |  | $ | -        |  |  | $            | -
|Net change in unrealized appreciation (depreciation) |  |                       | -       |  |                 |   | -         |              |  |   | -        |  |  |              | -
|Purchases and other adjustments to cost              |  |                       | -       |  |                 |   | -         |              |  |   | -        |  |  |              | -
|Sales and redemptions                                |  |                       | -       |  |                 |   | -         |              |  |   | -        |  |  |              | -
|Net realized gain                                    |  |                       | -       |  |                 |   | -         |              |  |   | -        |  |  |              | -
|Balance as of March 31, 2018                         |  | $                     | 500,000 |  |                 | $ | 2,320,226 |              |  | $ | -        |  |  | $            | -



The net change in unrealized depreciation
for the three months ended March 31, 2018 attributable to Level 3 portfolio investments still held as of March 31, 2018 is $0.



The following table lists our level 3 investments
held as of March 31, 2018 and the unobservable inputs used to determine their valuation:



|                                |  | Security Type   |  | 3/31/18 FMV |           |  | Unobservable Inputs
|------------------------------- |  | --------------- |  | ----------- | --------- |  | -------------------
|Mix 1 Life, Inc.                |  | Loans (Secured) |  | $           | —         |  |                    
|Bravo Financial LLC             |  | Loans (Secured) |  |             | 500,000   |  |                    
|Insite Software Solutions, Inc  |  | Warrants        |  |             | —         |  |                    
|Tzfat Spirits of Israel, LLC    |  | Other Equity    |  |             | 25,000    |  |                    
|MAX 4G, Inc.                    |  | Preferred Stock |  |             | 300,000   |  |                    
|Bitesquad.com LLC               |  | Preferred Stock |  |             | 2,020,226 |  |                    
|DBR Enclave US Investors, LLC   |  | Other Equity    |  |             | 500,000   |  |                    
|Northern Capital Partners I, LP |  | Other Equity    |  |             | 488,629   |  |                    
|Southern Plains Resources, Inc. |  | Common Stock    |  |             | —         |  |                    
|                                |  |                 |  | $           | 3,833,855 |  |                    



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, 2017:



|                                        |  | Senior Secured  Loans |          |   | Preferred Stock |   |           | Common Stock |  |   | Warrants |  |  | Other Equity |       
|--------------------------------------- |  | --------------------- | -------- | - | --------------- | - | --------- | ------------ |  | - | -------- |  |  | ------------ | ------
|Balance as of January 1, 2017           |  | $                     | 680,000  |   |                 | $ | 3,047,011 |              |  | $ | -        |  |  | $            | -     
|Net change in unrealized appreciation   |  |                       | (97,305  | ) |                 |   | 138,321   |              |  |   | -        |  |  |              | -     
|Purchases and other adjustments to cost |  |                       | 10,000   |   |                 |   | -         |              |  |   | -        |  |  |              | -     
|Sales and redemptions                   |  |                       | (182,695 | ) |                 |   | (746,225  | )            |  |   | -        |  |  |              | (5,884
|Net realized gain                       |  |                       | 90,000   |   |                 |   | (118,881  | )            |  |   | -        |  |  |              | 5,884 
|Balance as of December 31, 2017         |  | $                     | 500,000  |   |                 | $ | 2,320,226 |              |  | $ | -        |  |  | $            | -     



The net change in unrealized appreciation
for the year ended December 31, 2017 attributable to Level 3 portfolio investments still held as of December 31, 2017 was $180,000,
and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.



16







MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018



The following table lists our level 3 investments
held as of December 31, 2017 and the unobservable inputs used to determine their valuation:



|                                |  | Security Type   |  | 12/31/17 FMV |           |  | Unobservable Inputs
|------------------------------- |  | --------------- |  | ------------ | --------- |  | -------------------
|Mix 1 Life, Inc.                |  | Loans (Secured) |  | $            | —         |  |                    
|Bravo Financial LLC             |  | Loans (Secured) |  |              | 500,000   |  |                    
|Insite Software Solutions, Inc  |  | Warrants        |  |              | —         |  |                    
|Tzfat Spirits of Israel, LLC    |  | Other Equity    |  |              | 25,000    |  |                    
|MAX 4G, Inc.                    |  | Preferred Stock |  |              | 300,000   |  |                    
|Bitesquad.com LLC               |  | Preferred Stock |  |              | 2,020,226 |  |                    
|DBR Enclave US Investors, LLC   |  | Other Equity    |  |              | 500,000   |  |                    
|Northern Capital Partners I, LP |  | Other Equity    |  |              | 488,629   |  |                    
|Southern Plains Resources, Inc. |  | Common Stock    |  |              | —         |  |                    
|                                |  |                 |  | $            | 3,833,855 |  |                    



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
to BDCs generally describe as “affiliate transactions.” 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 related-party transactions requiring disclosure under this policy are:



| | · | Mr. Joseph A. Geraci, II, our Chief Financial Officer, and Mr. Douglas M. Polinsky, our Chief Executive Officer, hold direct
and indirect interests in the common stock of Southern Plains Resources, Inc., a company in which we made investments in common
stock in each of March and July 2013.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A former director of our company, Christopher Larson, had a direct interest in Mix 1 Life, Inc. and served as that company’s
Chief Financial Officer at the time of a portfolio investment we made in secured convertible debt of Mix 1 Life (together with
common stock purchase warrants) in February 2014. In June 2014, Mr. Larson became a director of Mix 1 Life. In August 2014, we
exercised our common stock purchase warrant on a cashless basis for the purchase of Mix 1 Life common stock. In March 2015, we
invested in additional secured debt of Mix 1 Life. Mr. Larson resigned from his position as a director of Mill City Ventures in
November 2015.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Lantern Advisors, LLC is a limited liability company equally owned by Messrs. Geraci and Polinsky, and owns a cashless warrant
to purchase up to 153,846 shares of Creative Realities, Inc. at a price of $0.70 per share through July 14, 2019. We made an initial
investment in secured convertible debt of Creative Realities (together with common stock purchase warrants) in February 2015, and
then a subsequent investment in secured convertible debt of Creative Realities (together with common stock purchase warrants) in
December 2015. In December 2015, we also exchanged our common stock purchase warrant obtained in February 2015 for shares of Creative
Realities common stock.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17







MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018



NOTE 6 – COMMITMENTS AND CONTINGENCIES



We have an agreement to lease approximately
1,917 square feet of commercial space, and two parking spots, for a period of 62 months. The 62-month lease term began October
1, 2013 and runs through November 30, 2018. The total base rent expense for the three months ended March 31, 2018 and 2017 was
$11,345 and $11,345, respectively. The table below sets forth the required annual minimum lease payments:



|Year  |  | Amount |       
|----- |  | ------ | ------
|2018  |  | $      | 34,173
|Total |  | $      | 34,173



NOTE 7 – INCOME TAXES



We plan to be taxed as a regulated investment
company, or “RIC,” and intend to comply with the requirements of the Code applicable to RICs. Currently, however, we
have not elected to be treated as a RIC. Upon our election to be taxed as a RIC, we will be required to distribute at least 90%
of our investment company taxable income, and we intend at that time to distribute to shareholders (or retain through a deemed
distribution) all of our investment company taxable income and net capital gain. Based on the foregoing, we have made no provision
for income taxes. The characterization of income and gains that we will distribute is determined in accordance with income tax
regulations that may differ from GAAP. Book and tax basis differences relating to shareholder dividends and distributions and other
permanent book and tax differences are reclassified to paid-in capital.



NOTE 8 – SHAREHOLDERS’ EQUITY



At March 31, 2018, we had 11,067,402 shares of common stock
issued and outstanding.



NOTE 9 – PER-SHARE INFORMATION



Basic net gain (loss) per common share
is computed by dividing net gain (loss) 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, |           
|------------------------------------------------------------------------------- |  | ------------------------------------- | ----------
|                                                                                |  | 2018                                  |           
|Numerator: Net increase (decrease) in net asset value resulting from operations |  | $                                     | 539,590   
|Denominator: Weighted-average number of common shares outstanding               |  |                                       | 11,067,402
|Basic and diluted net gain (loss) per common share                              |  | $                                     | .05       



18







MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2018



NOTE 10 – FINANCIAL HIGHLIGHTS



The following is a schedule of financial highlights for the
three months ended March 31, 2018 through 2014:



|                                                                |  | Three Months Ended |           
|--------------------------------------------------------------- |  | ------------------ | ----------
|                                                                |  | March 31,  2018    |           
|Per Share Data (1)                                              |  |                    |           
|Net asset value at beginning of period                          |  | $                  | 0.87      
|Net investment income (loss)                                    |  |                    | (0.01     
|Net realized and unrealized gains (losses)                      |  |                    | 0.06      
|Net asset value at end of period                                |  | $                  | 0.92      
|                                                                |  |                    |           
|Ratio / Supplemental Data                                       |  |                    |           
|Per share market value of investments at end of period          |  | $                  | 0.76      
|Shares outstanding at end of period                             |  |                    | 11,067,402
|Average weighted shares outstanding for the period              |  |                    | 11,067,402
|Net assets at end of period                                     |  | $                  | 10,168,805
|Average net assets (2)                                          |  | $                  | 9,770,410 
|Total investment return                                         |  |                    | 5.75      
|Portfolio turnover rate (3)                                     |  |                    | 0.80      
|Ratio of operating expenses to average net assets (3)           |  |                    | (7.52     
|Ratio of net investment income (loss) to average net assets (3) |  |                    | (6.16     
|Ratio of realized gains (losses) to average net assets (3)      |  |                    | 2.17      



| | (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.
| | --- | ----------------------







19







ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Our Management’s Discussion and Analysis
of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a
narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors
that may affect our future results. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A
refer to the same period in the prior year. Our MD&A is presented in seven sections:



| | · | Overview
| | - | --------

| | · | Portfolio and Investment Activity
| | - | ---------------------------------

| | · | Results of Operations
| | - | ---------------------

| | · | Financial Condition
| | - | -------------------

| | · | Critical Accounting Estimates
| | - | -----------------------------

| | · | Off-Balance Sheet Arrangements
| | - | ------------------------------

| | · | Forward Looking Statements
| | - | --------------------------



OVERVIEW



Mill City Ventures III, Ltd. is an investment
company incorporated in the State of Minnesota on January 10, 2006. In this report, we generally refer to Mill City Ventures III,
Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures”
or the “company.”



We are an internally managed closed-end
non-diversified management investment company. We have elected to be regulated as a business development company, or “BDC,”
under the Investment Company Act of 1940 (the “1940 Act”). To date, we have not made an election to be treated as a
regulated investment company, or “RIC,” under the Internal Revenue Code of 1986 (the “Code”).



We primarily focus on investing in or lending
to privately held and small-cap publicly traded U.S. companies, and making managerial assistance available to such companies. These
investments are typically structured as purchases of preferred or common stock, investment contracts, or loans evidenced by promissory
notes that may be convertible into stock by their terms or that may be accompanied by the issuance to us of warrants or similar
rights to purchase stock. Our investments may be made for purposes of financing acquisitions, recapitalizations, buyouts, organic
growth and working capital. Our revenues relate to the gain we realize from the sale of securities we purchase, and to dividends
and interest we derive from those securities. Our investment objective is to generate both current income and capital appreciation
that ultimately result in gains.



Our principal sources of income are interest
and dividends we earn on our investments, and proceeds from the sale or redemption of our investments. Our statements of operations
also reflect gain from increases in the carrying value of our investments (i.e., unrealized appreciation). Our principal expenses
relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance
expenses. Our statements of operations also reflect loss from decreases in the carrying value of our investments (i.e., unrealized
depreciation).



As a BDC, we are required to comply with
certain regulatory requirements. For example, we must invest at least 70% of our total assets in “qualifying assets,”
including securities of private or small-cap publicly traded U.S. companies and cash, cash equivalents, U.S. government securities
and high quality debt investments that mature in one year or less. We may from time to time invest up to 30% of our assets opportunistically
in other types of investments, including the securities of larger public companies and foreign securities. In addition, we will
be permitted, under certain conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock,
but only if our “asset coverage,” as defined in the 1940 Act, is at least equal to 200% immediately after each such
issuance. In addition, while any senior securities remain outstanding, we must not make any dividend distribution to our shareholders
or repurchase securities unless we meet the applicable asset-coverage ratios at the time of the dividend distribution or repurchase.
We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes.



Our MD&A should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 2017, as well as our reports on Forms 10-Q and 8-K and other
publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations
and financial condition should be read in the context of this overview.



20







PORTFOLIO AND INVESTMENT ACTIVITY



During the three months ended March 31,
2018, we made $628,252 of investments in portfolio companies and had $78,531 of redemptions and repayments, resulting in net investments
at amortized cost of $7,602,218 for the period.



During the three months ended March 31,
2017, we made $694,120 of investments in portfolio companies and had $2,321,114 of redemptions and repayments, resulting in net
investments at amortized cost of $6,483,185 for the period.



Our portfolio composition by major class,
based on fair value at March 31, 2018, was as follows:



|                     |  | Investments at Fair Value |           |  | Percentage of Fair Value | 
|-------------------- |  | ------------------------- | --------- |  | ------------------------ | 
|Senior Secured Loans |  | $                         | 500,000   |  |                          | 
|Unsecured Loans      |  |                           | -         |  |                          | 
|Equity/Other         |  |                           | 7,982,227 |  |                          | 
|Total                |  | $                         | 8,482,227 |  |                          | 



RESULTS OF OPERATIONS



Our operating results for the three months
ended March 31, 2018 and March 31, 2017 were as follows:



|                        |  | For the three months ended March 31, |         
|----------------------- |  | ------------------------------------ | --------
|                        |  | 2018                                 |         
|Total investment income |  | $                                    | 34,525  
|Total expenses          |  |                                      | (186,581
|Net investment loss     |  | $                                    | (152,056



Investment Income



We generate revenue primarily in the form
of interest income and capital gains, if any, on the debt securities we own. We may also generate revenue from dividends and capital
gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire. In some cases, the interest
on our investments may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together
with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. We may
also generate revenue in the form of commitment, origination, structuring, diligence, or consulting fees. Any such fees will be
recognized as earned.



For the three months ended March 31, 2018,
our total investment income was $34,525, and was attributable to interest income from two eligible portfolio companies, Bravo Financial,
LLC and DBR Enclave LLC, and dividend payments received on account of investments in two eligible portfolio companies - OTC Markets
Group Cl A, and Simulations Plus, Inc.



For the three months ended March 31, 2017, our total investment
income was $36,564, and was attributable to interest income from two eligible portfolio companies, Bravo Financial, LLC and DBR
Enclave LLC, and dividend payments received on account of investments in five eligible portfolio companies - OTC Markets Group
Cl A, Simulations Plus, Inc., Tessco Technologies, Inc., Escalade Inc., and National American University Holdings, Inc., and dividends
received on account of investments in three non-eligible portfolio companies.



21







Operating Expenses



The composition of our operating expenses for the three months
ended March 31, 2018 and March 31, 2017 was as follows:



|Expense item                     |  | Three months ended March 31, 2018 |         |  | Three months ended March 31, 2017 |  
|-------------------------------- |  | --------------------------------- | ------- |  | --------------------------------- | -
|Professional fees                |  | $                                 | 60,281  |  |                                   | $
|Payroll                          |  |                                   | 61,053  |  |                                   |  
|Occupancy                        |  |                                   | 22,755  |  |                                   |  
|Insurance                        |  |                                   | 18,891  |  |                                   |  
|Directors’ fees                  |  |                                   | 15,000  |  |                                   |  
|Depreciation and amortization    |  |                                   | 2,671   |  |                                   |  
|Other general and administrative |  |                                   | 5,930   |  |                                   |  
|Total                            |  | $                                 | 186,581 |  |                                   | $



Net Realized Gain from Investments



For the three months ended March 31, 2018,
we had $78,531 of principal repayments, resulting in $51,752 of realized gains. For the three months ended March 31, 2017, we had
$2,321,114 of principal repayments, resulting in $712,271 of realized gains.



Net Change in Unrealized Appreciation
(Depreciation) on Investments



For the three months ended March 31, 2018,
our investments had $639,894 of unrealized appreciation. For the three months ended March 31, 2017, our investments had $603,139
of unrealized depreciation.



Changes in Net Assets from Operations



For the three months ended March 31, 2018,
we recorded a net increase in net assets from operations of $539,590. Based on the weighted-average number of shares of common
stock outstanding for the three months ended March 31, 2018, our per-share net increase in net assets from operations was $0.05.
For the three months ended March 31, 2017, we recorded a net decrease in net assets from operations of $20,518. Based on the weighted-average
number of shares of common stock outstanding for the three months ended March 31, 2017, our per-share net decrease in net assets
from operations was $0.00.



Cash Flows for the Three Months Ended
March 31, 2018 and 2017



The level of cash flows used in or provided
by operating activities is affected by the timing of purchases, redemptions and repayments of portfolio investments, among other
factors. For the three months ended March 31, 2018, net cash used in operating activities was $393,046. Cash flows used in operating
activities for the three months ended March 31, 2018 were primarily related to purchases of investments of $628,252, offset mostly
by redemptions and repayments of investments totaling $78,531. For the three months ended March 31, 2017, net cash provided in
operating activities was $1,726,115. Cash flows provided in operating activities for the three months ended March 31, 2017 were
primarily related to redemptions and repayments of $2,321,114 offset mostly by purchases of investments totaling $694,120.



FINANCIAL CONDITION



As of March 31, 2018, we had cash of $1,765,268,
a decrease of $393,046 from December 31, 2017. The primary use of our existing funds and any funds raised in the future is expected
to be for our investments in portfolio companies, cash distributions to our shareholders or for other general corporate purposes,
including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment
in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt
securities maturing in one year or less from the time of investment, which we refer to collectively as “temporary investments.”
As of the date of this filing, we expect that substantially all of our temporary investments will be redeployed into portfolio
company investments by December 31, 2018.



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



RELATED-PARTY TRANSACTIONS



See Note 5 to our Financial Statements for disclosure of our
related-party transactions and potential conflicts of interest.



22







CRITICAL ACCOUNTING ESTIMATES



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



In preparing the financial statements,
management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements,
management also will utilize available information, including our past history, industry standards and the current economic environment,
among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost
certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability
of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe
additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate
to the valuation of our portfolio investments, and revenue recognition. For more information, see Note 2 “Significant Accounting
Policies.”



OFF-BALANCE-SHEET ARRANGEMENTS



During the three months ended March 31, 2018, we did not engage
in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.



FORWARD-LOOKING STATEMENTS



Some of the statements made in this section
of our report are forward-looking statements based on our management’s current expectations for our company. These expectations
involve assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially
from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events
or our future financial performance, and can ordinarily be identified by terminology such as “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “could,” “intends,”
“targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of these terms or other similar words. Important assumptions
include our ability to identify and consummate new investments, achieve certain margins and levels of profitability, the availability
of any needed additional capital, and the ability to maintain compliance with regulations applicable to us. Some of the forward-looking
statements contained in this report relate to, and are based our current assumptions regarding, the following:



| | · | our future operating results;
| | - | -----------------------------

| | · | our business prospects and the prospects of our portfolio companies;
| | - | --------------------------------------------------------------------

| | · | the outcome of compliance inspections conducted from time to time by the SEC’s Office of Compliance and Inspections;
| | - | --------------------------------------------------------------------------------------------------------------------

| | · | the success of our investments;
| | - | -------------------------------

| | · | our relationships with third parties;
| | - | -------------------------------------

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

| | · | the ability of our portfolio companies to achieve their objectives;
| | - | -------------------------------------------------------------------

| | · | our expected financings and investments;
| | - | ----------------------------------------

| | · | our regulatory structure and tax treatment;
| | - | -------------------------------------------

| | · | our ability to operate as a BDC and to be taxed as a RIC;
| | - | ---------------------------------------------------------

| | · | the adequacy of our cash resources and working capital; and
| | - | -----------------------------------------------------------

| | · | the timing of cash flows, if any, from the operations of our portfolio companies.
| | - | ---------------------------------------------------------------------------------



The foregoing list is not exhaustive. For
a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking
statements, please refer to our Annual Report on Form 10-K filed on March 30, 2018 (related to our year ended December 31, 2017)
and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in
forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation
or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing
will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect
events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only
to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section
21E of the Securities Exchange Act of 1934.



23







| | ITEM 4. | CONTROLS AND PROCEDURES
| | ------- | -----------------------



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



As of March 31, 2018, our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined
in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded our disclosure controls and procedures are effective as of March 31, 2018.



There were no significant changes in our internal controls over
financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably
likely to materially affect such controls.



24







PART II. OTHER INFORMATION



| | ITEM 6. | EXHIBITS
| | ------- | --------



|ExhibitNumber |   | 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                   








* Filed herewith



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: May 11, 2018 | By: | /s/ Douglas M. Polinsky     
|                   |     | Douglas M. Polinsky         
|                   |     | Chief Executive Officer     
|                   |     |                             
|Date: May 11, 2018 | By: | /s/ Joseph A. Geraci, II    
|                   |     | Joseph A. Geraci, II        
|                   |     | Chief Financial Officer     



25