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.)
|                                                               |                                     
|1907 Wayzata Blvd, #205, Wayzata, Minnesota                    | 55391                               
|(Address of principal executive offices)                       | (Zip Code)                          



(952) 479-1923

(Registrant’s telephone number, including
area code)










N/A

(Former name, former address and former
fiscal year, if changed since last report)










Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.    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 15, 2020, Mill City Ventures
III, Ltd. had 11,067,402 shares of common stock, and no other classes of capital stock, outstanding.















- 2 -




MILL CITY VENTURES III, LTD.



Index to Form 10-Q

for the Quarter Ended March 31, 2020





|           |                                                                                                     | Page No.
|---------- | --------------------------------------------------------------------------------------------------- | --------
|PART I.    | FINANCIAL INFORMATION                                                                               |         
|           |                                                                                                     |         
|Item 1.    | Financial Statements (unaudited)                                                                    | 3       
|           |                                                                                                     |         
|           | Condensed Balance Sheets – March 31, 2020 and December 31, 2019                                     | 3       
|           |                                                                                                     |         
|           | Condensed Statements of Operations – Three months ended March 31, 2020 and March 31, 2019           | 4       
|           |                                                                                                     |         
|           | Condensed Statements of Shareholders’ Equity – Three months ended March 31, 2020 and March 31, 2019 | 5       
|           |                                                                                                     |         
|           | Condensed Statements of Cash Flows – Three months ended March 31, 2020 and March 31, 2019           | 6       
|           |                                                                                                     |         
|           | Condensed Schedule of Investments – March 31, 2020 and Schedule of Investments – December 31, 2019  | 7       
|           |                                                                                                     |         
|           | Condensed Notes to Financial Statements – March 31, 2020                                            | 9       
|           |                                                                                                     |         
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations               | 18      
|           |                                                                                                     |         
|Item 4.    | Controls and Procedures                                                                             | 21      
|           |                                                                                                     |         
|PART II.   | OTHER INFORMATION                                                                                   |         
|           |                                                                                                     |         
|Item 6.    | Exhibits                                                                                            | 22      
|           |                                                                                                     |         
|SIGNATURES | 22                                                                                                 








- 3 -




PART I. FINANCIAL INFORMATION



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



MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS



|                                                                                                         |  | March 31, 2020 (unaudited) |            |   | December 31, 2019 |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ----------------- | -
|ASSETS                                                                                                   |  |                            |            |   |                   |  
|Investments, at fair value:                                                                              |  | $                          | 4,485,908  |   |                   | $
|Non-control/non-affiliate investments (cost: $5,107,388
    and $1,976,370 respectively)                 |  |                            |            |   |                   |  
|Cash                                                                                                     |  |                            | 5,027,693  |   |                   |  
|Note receivable                                                                                          |  |                            | 250,000    |   |                   |  
|Prepaid expenses                                                                                         |  |                            | 11,559     |   |                   |  
|Interest and dividend receivables                                                                        |  |                            | 49,472     |   |                   |  
|Right-of-use lease asset                                                                                 |  |                            | 36,533     |   |                   |  
|Property and equipment, net                                                                              |  |                            | 1,428      |   |                   |  
|Total Assets                                                                                             |  | $                          | 9,862,593  |   |                   | $
|                                                                                                         |  |                            |            |   |                   |  
|LIABILITIES                                                                                              |  |                            |            |   |                   |  
|Accounts payable                                                                                         |  | $                          | 35,652     |   |                   | $
|Lease liability                                                                                          |  |                            | 40,326     |   |                   |  
|Total Liabilities                                                                                        |  |                            | 75,978     |   |                   |  
|Commitments and Contingencies                                                                            |  |                            |            |   |                   |  
|                                                                                                         |  |                            |            |   |                   |  
|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                                                                |  |                            | (2,318,278 | ) |                   |  
|Accumulated undistributed net realized gains on investment transactions                                  |  |                            | 3,100,318  |   |                   |  
|Net unrealized depreciation in value of investments                                                      |  |                            | (621,480   | ) |                   |  
|Total Shareholders' Equity (net assets)                                                                  |  |                            | 9,786,615  |   |                   |  
|Total Liabilities and Shareholders' Equity                                                               |  | $                          | 9,862,593  |   |                   | $
|Net Asset Value Per Common Share                                                                         |  | $                          | 0.88       |   |                   | $



See accompanying Notes to Financial Statements








- 4 -




MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                                           |  | Three Months Ended |           
|-------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                           |  | March 31, 2020     |           
|Investment Income                                                          |  |                    |           
|Interest income                                                            |  | $                  | 178,245   
|Dividend income                                                            |  |                    | 6,734     
|Total Investment Income                                                    |  |                    | 184,979   
|                                                                           |  |                    |           
|Operating Expenses                                                         |  |                    |           
|Professional fees                                                          |  |                    | (16,232   
|Payroll                                                                    |  |                    | 58,497    
|Insurance                                                                  |  |                    | 20,453    
|Occupancy                                                                  |  |                    | 16,562    
|Director's fees                                                            |  |                    | 22,500    
|Depreciation and amortization                                              |  |                    | 643       
|Other general and administrative                                           |  |                    | 2,969     
|Total Operating Expenses                                                   |  |                    | 105,392   
|Net Investment Gain (Loss)                                                 |  | $                  | 79,587    
|                                                                           |  |                    |           
|Realized and Unrealized Gain (Loss) on Investments                         |  |                    |           
|Net realized gain on investments                                           |  |                    | 24,502    
|Net change in unrealized depreciation on investments                       |  |                    | (386,007  
|Net Realized and Unrealized Gain (Loss) on Investments                     |  |                    | (361,505  
|Net Increase (Decrease) in Net Assets Resulting from Operations            |  | $                  | (281,918  
|                                                                           |  |                    |           
|Net Increase (Decrease) in Net Assets Resulting from Operations per share: |  |                    |           
|Basic and diluted                                                          |  | $                  | (0.03     
|                                                                           |  |                    |           
|Weighted-average number of common shares outstanding                       |  |                    | 11,067,402



See accompanying Notes to Financial Statements








- 5 -




MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)



|Three Months Ended
    March 31, 2020                          |  | Common

    Shares |            |  | Par
    
Value |   |        | Additional
    Paid
 In Capital |  |   | Accumulated

    Deficit |  |  | Accumulated
    Undistributed Net  Investment Loss |            |   | Accumulated

    Undistributed
 Net Realized
 Gain on
 Investments
 Transactions |   |            | Net
    Unrealized
 Appreciation
 (Depreciation) in 
value of
 Investments |  |   | Total

    Shareholders'
 Equity | 
|-------------------------------------------------------------- |  | ------------------ | ---------- |  | -------------- | - | ------ | ------------------------------- |  | - | ------------------------ |  |  | -------------------------------------------------- | ---------- | - | -------------------------------------------------------------------------------- | - | ---------- | -------------------------------------------------------------------------- |  | - | -------------------------------- | 
|Balance as of December 31, 2019                                |  |                    | 11,067,402 |  |                | $ | 11,067 |                                 |  | $ | 10,774,653               |  |  | $                                                  | (1,159,665 | ) |                                                                                  | $ | (2,397,865 | )                                                                          |  | $ | 3,075,816                        | 
|Undistributed net investment
    loss                          |  |                    |            |  |                |   | —      |                                 |  |   | —                        |  |  |                                                    | —          |   |                                                                                  |   | 79,587     |                                                                            |  |   | —                                | 
|Undistributed net realized
    gain on investment transactions |  |                    |            |  |                |   | —      |                                 |  |   | —                        |  |  |                                                    | —          |   |                                                                                  |   | —          |                                                                            |  |   | 24,502                           | 
|Depreciation in value of
    investments                       |  |                    |            |  |                |   | —      |                                 |  |   | —                        |  |  |                                                    | —          |   |                                                                                  |   | —          |                                                                            |  |   | —                                | 
|Balance as of March 31, 2020                                   |  |                    | 11,067,402 |  |                | $ | 11,067 |                                 |  | $ | 10,774,653               |  |  | $                                                  | (1,159,665 | ) |                                                                                  | $ | (2,318,278 | )                                                                          |  | $ | 3,100,318                        | 



|Three Months
    Ended March 31, 2019                          |  | Common

    Shares |            |  | Par

    Value |   |        | Additional
    Paid 
In Capital |  |   | Accumulated

    Deficit |  |  | Accumulated

    Undistributed Net 
Investment Loss |            |   | Accumulated

    Undistributed
 Net Realized
 Gain on
 Investments
 Transactions |   |            | Net
    Unrealized
 Appreciation in
 value of
 Investments |  |   | Total

    Shareholders'
 Equity |  
|-------------------------------------------------------------- |  | ------------------ | ---------- |  | -------------- | - | ------ | ------------------------------- |  | - | ------------------------ |  |  | --------------------------------------------------- | ---------- | - | -------------------------------------------------------------------------------- | - | ---------- | ---------------------------------------------------------- |  | - | -------------------------------- | -
|Balance as of December 31, 2018                                |  |                    | 11,067,402 |  |                | $ | 11,067 |                                 |  | $ | 10,774,653               |  |  | $                                                   | (1,159,665 | ) |                                                                                  | $ | (1,725,097 | )                                                          |  | $ | 376,566                          |  
|Dividend distribution                                          |  |                    |            |  |                |   | —      |                                 |  |   | —                        |  |  |                                                     | —          |   |                                                                                  |   | —          |                                                            |  |   | (553,370                         | )
|Undistributed net investment
    loss                          |  |                    |            |  |                |   | —      |                                 |  |   | —                        |  |  |                                                     | —          |   |                                                                                  |   | (157,917   | )                                                          |  |   | —                                |  
|Undistributed net realized
    loss on investment transactions |  |                    |            |  |                |   | —      |                                 |  |   | —                        |  |  |                                                     | —          |   |                                                                                  |   | —          |                                                            |  |   | 3,070,846                        |  
|Appreciation in value of
    investments                       |  |                    |            |  |                |   | —      |                                 |  |   | —                        |  |  |                                                     | —          |   |                                                                                  |   | —          |                                                            |  |   | —                                |  
|Balance as of March 31, 2019                                   |  |                    | 11,067,402 |  |                | $ | 11,067 |                                 |  | $ | 10,774,653               |  |  | $                                                   | (1,159,665 | ) |                                                                                  | $ | (1,883,014 | )                                                          |  | $ | 2,894,042                        |  



See accompanying Notes to Financial Statements








- 6 -




MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                                                                                                   |  | Three Months Ended |           
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                                                                                                   |  | March 31, 2020     |           
|Cash flows from operating activities:                                                                                                              |  |                    |           
|Net increase (decrease) in net assets resulting from operations                                                                                    |  | $                  | (281,918  
|Adjustments to reconcile net increase (decrease) in net
    assets resulting 
from operations to net cash provided (used) in operating activities: |  |                    |           
|Net change in unrealized depreciation on investments                                                                                               |  |                    | 386,007   
|Net realized gain on investments                                                                                                                   |  |                    | (24,502   
|Payments for purchases of investments                                                                                                              |  |                    | (3,328,296
|Proceeds from sales of investments                                                                                                                 |  |                    | 221,780   
|Depreciation & amortization expense                                                                                                                |  |                    | 643       
|Changes in operating assets and liabilities:                                                                                                       |  |                    |           
|Prepaid expenses and other assets                                                                                                                  |  |                    | 24,288    
|Interest and dividends receivable                                                                                                                  |  |                    | (42,972   
|Receivable for investment sales                                                                                                                    |  |                    | —         
|Accounts payable and other liabilities                                                                                                             |  |                    | 6,007     
|Net cash provided (used) in operating activities                                                                                                   |  |                    | (3,038,963
|Cash flows from financing activities:                                                                                                              |  |                    |           
|Payments for common stock dividend                                                                                                                 |  |                    | —         
|Net cash used by financing activities                                                                                                              |  |                    | —         
|Net increase (decrease) in cash                                                                                                                    |  |                    | (3,038,963
|Cash, beginning of period                                                                                                                          |  |                    | 8,066,656 
|Cash, end of period                                                                                                                                |  | $                  | 5,027,693 
|                                                                                                                                                   |  |                    |           
|Non-cash financing activities:                                                                                                                     |  |                    |           
|Tax withholding for dividend payment                                                                                                               |  | $                  | —         



See accompanying Notes to Financial Statements








- 7 -




MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

MARCH 31, 2020



|Investment / Industry           |  | Cost |            |  | Fair Value |   |           | Percentage
 of Net
 Assets | 
|------------------------------- |  | ---- | ---------- |  | ---------- | - | --------- | -------------------------- | 
|Short-Term Non-banking Loans    |  |      |            |  |            |   |           |                            | 
|Real Estate - 15% secured loans |  | $    | 3,254,000  |  |            | $ | 3,254,000 |                            | 
|                                |  |      |            |  |            |   |           |                            | 
|Common Stock                    |  |      |            |  |            |   |           |                            | 
|Financial                       |  |      | 219,751    |  |            |   | 134,968   |                            | 
|Publishing                      |  |      | 504,507    |  |            |   | 465,000   |                            | 
|Real Estate                     |  |      | 36,392     |  |            |   | 40,900    |                            | 
|Total Common Stock              |  |      | 760,650    |  |            |   | 640,868   |                            | 
|                                |  |      |            |  |            |   |           |                            | 
|Preferred Stock                 |  |      |            |  |            |   |           |                            | 
|Information Technology          |  |      | 150,000    |  |            |   | 300,000   |                            | 
|                                |  |      |            |  |            |   |           |                            | 
|Warrants                        |  |      |            |  |            |   |           |                            | 
|Advertising                     |  |      | —          |  |            |   | —         |                            | 
|Healthcare                      |  |      | 679        |  |            |   | —         |                            | 
|Total Warrants                  |  |      | 679        |  |            |   | —         |                            | 
|                                |  |      |            |  |            |   |           |                            | 
|Other Equity                    |  |      |            |  |            |   |           |                            | 
|Consumer                        |  |      | 101,019    |  |            |   | —         |                            | 
|Leisure & Hospitality           |  |      | 291,040    |  |            |   | 291,040   |                            | 
|Oil & Gas                       |  |      | 550,000    |  |            |   | —         |                            | 
|Total Other Equity              |  |      | 942,059    |  |            |   | 291,040   |                            | 
|                                |  |      |            |  |            |   |           |                            | 
|Total Investments               |  |      | 5,107,388  |  |            |   | 4,485,908 |                            | 
|                                |  |      |            |  |            |   |           |                            | 
|Total Cash                      |  |      | 5,027,693  |  |            |   | 5,027,693 |                            | 
|                                |  |      |            |  |            |   |           |                            | 
|Total Investments and Cash      |  | $    | 10,135,081 |  |            | $ | 9,513,601 |                            | 





|                                                  |  | Fair Value |           |  | Percentage
    of Net
    Assets | 
|------------------------------------------------- |  | ---------- | --------- |  | -------------------------------- | 
|Investments greater than 5% of net assets:        |  |            |           |  |                                  | 
|Tailwind Real Estate, LLC :                       |  |            |           |  |                                  | 
|15% short-term non-banking loan maturing 10/21/20 |  | $          | 3,000,000 |  |                                  | 










- 8 -




MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2019



|Investments
    (1)                 |  | Investment

    Type (5)          |  | Interest

    Rate (2)(6) |  | Expiration
    Date (7) |  | 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 (8)                      |  | n/a                       |  | 12/28/2020              |  |              | 35,714  |  |      | $ | —          |                |  | $ | —                             |  |  |                                     | 0.00  | % |                                     | $ | —       |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Consumer                            |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Tzfat Spirits of Israel, LLC        |  | LLC Membership Units (8)          |  | n/a                       |  | n/a                     |  |              | 55,000  |  |      |   | 101,019    |                |  |   | 15,000                        |  |  |                                     |       |   |                                     |   | —       |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 101,019    |                |  |   | 15,000                        |  |  |                                     | 0.15  | % |                                     |   | —       |                                                  | 
|Financial                           |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Manning & Napier, Inc.              |  | Common Stock                      |  | n/a                       |  | n/a                     |  |              | 86,700  |  |      |   | 188,969    |                |  |   | 150,858                       |  |  |                                     |       |   |                                     |   | —       |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 188,969    |                |  |   | 150,858                       |  |  |                                     | 1.50  | % |                                     |   | —       |                                                  | 
|Healthcare                          |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Reshape Life Sciences Inc.          |  | Warrants (8)                      |  | n/a                       |  | 8/16/2024               |  |              | 67,860  |  |      |   | 679        |                |  |   | —                             |  |  |                                     |       |   |                                     |   | —       |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 679        |                |  |   | —                             |  |  |                                     | 0.00  | % |                                     |   | —       |                                                  | 
|Information Technology              |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Kwikbit Inc. (fka MAX 4G)           |  | Preferred Stock (8)               |  | n/a                       |  | n/a                     |  |              | 300,000 |  |      |   | 150,000    |                |  |   | 300,000                       |  |  |                                     |       |   |                                     |   | 150,000 |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 150,000    |                |  |   | 300,000                       |  |  |                                     | 2.98  | % |                                     |   | 150,000 |                                                  | 
|Leisure & Hospitality               |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|DBR Enclave US Investors,
    LLC   |  | LLC Units                         |  | n/a                       |  | n/a                     |  |              | 369,200 |  |      |   | 369,200    |                |  |   | 369,200                       |  |  |                                     |       |   |                                     |   | —       |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 369,200    |                |  |   | 369,200                       |  |  |                                     | 3.67  | % |                                     |   | —       |                                                  | 
|Oil & Gas                           |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Northern Capital Partners
    I, LP |  | Limited Partnership Units
    (8) |  | n/a                       |  | n/a                     |  |              | 550,000 |  |      |   | 550,000    |                |  |   | 150,000                       |  |  |                                     |       |   |                                     |   | —       |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 550,000    |                |  |   | 150,000                       |  |  |                                     | 1.49  | % |                                     |   | —       |                                                  | 
|Publishing                          |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Educational Development Corp.       |  | Common Stock                      |  | n/a                       |  | n/a                     |  |              | 122,304 |  |      |   | 616,503    |                |  |   | 755,839                       |  |  |                                     | 7.50  | % |                                     |   | 150,106 |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Total Equity
    Investments        |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 1,976,370  |                |  |   | 1,740,897                     |  |  |                                     | 17.29 | % |                                     |   | 300,106 |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Total Cash                          |  |                                   |  |                           |  |                         |  |              |         |  |      |   | 8,066,656  |                |  |   | 8,066,656                     |  |  |                                     | 80.12 | % |                                     |   | —       |                                                  | 
|                                    |  |                                   |  |                           |  |                         |  |              |         |  |      |   |            |                |  |   |                               |  |  |                                     |       |   |                                     |   |         |                                                  | 
|Total
    Investments and Cash      |  |                                   |  |                           |  |                         |  |              |         |  |      | $ | 10,043,026 |                |  | $ | 9,807,553                     |  |  |                                     | 97.41 | % |                                     | $ | 300,106 |                                                  | 





|(1) | All investments and all cash, restricted cash
    and cash equivalents 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.                                                                                                                                                                           
|(5) | In the case of warrants, warrants provide for
    the right to purchase common equity of the issuer.                                                                                                                      
|(6) | In the case of preferred stock, this represents
    the right to annual cumulative dividends calculated on a per annum basis.                                                                                             
|(7) | In the case of warrants, purchase rights under
    the warrants will expire at the close of business on this date.                                                                                                        
|(8) | Investment is not an income-producing investment.                                                                                                                                                                         
|    | At December 31, 2019, aggregate non-qualifying
    assets represented approximately 0.9% of our total assets.                                                                                                             
|    | At December 31, 2019, the estimated net unrealized
    loss for federal tax purposes was $58,586, based on a tax cost basis of $1,799,483.                                                                                
|    | At December 31, 2019, the estimated aggregate
    gross unrealized gain for federal income tax purposes was $300,106 and the estimated aggregate gross unrealized loss for federal
    income tax purposes was $358,692   










- 9 -




MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020



NOTE 1 – ORGANIZATION



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



We were incorporated in Minnesota in January
2006. On February 7, 2013, we filed Form N-54A to become a business development company (“BDC”) under the 1940 Act.
We operated as a BDC until we withdrew our election to be treated as a BDC by filing a Form N-54C with SEC on December 27, 2019.
As of the time of this filing, we remain a public reporting company that files periodic reports with the SEC, and we are seeking
opportunities to invest in short-term non-bank lending and specialty finance. Nevertheless, any investment we make in business
will be limited and structured in such a way as to ensure that no more than 40% of our total assets consist of investment securities.



Because we operated as a BDC or investment company
from 2013 through December 27, 2019, the comparative financial statements for the periods during or ending on December 31, 2019
in this report reflect our operations as a business development company, or “BDC,” under the Investment Company Act
of 1940 (the “1940 Act”). During that time, we were primarily focused on investing in or lending to privately held
and small capitalization publicly traded U.S. companies, and making managerial assistance available to such companies. A majority
of our investments by dollar amount were structured as purchases of preferred or common stock or loans evidenced by promissory
notes that may have been convertible into stock by their terms or that may have been accompanied by the issuance to us of warrants
or similar rights to purchase stock. Our investment objective was to generate income and capital appreciation that ultimately became
realized 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, 2020 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2020.



The condensed balance sheet as of December
31, 2019 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, 2019.



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, and the differences could be material. For more information, see the “Valuation of portfolio investments”
caption below, and “Note 7 – Fair Value of Financial Instruments” below. The Company is an investment company
following accounting and reporting guidance in ASC 946.



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



Valuation of 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.








- 10 -




MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020



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.



Income taxes:

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



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



The Company files income tax
returns in the U.S. Federal jurisdiction and various state jurisdictions.  Based on its evaluation, the Company believes it
has no significant unrecognized tax positions.  The Company’s evaluation was performed for the tax years ended December
31, 2016 through 2019, which are the tax years that remain subject to examination by major tax jurisdictions as of March 31, 2020. 
The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.



Prior to the business model
change in 2019, we operated as a BDC under the 1940 Act.  As such, we planned to be taxed as a regulated investment company,
or “RIC”. Compliance with the requirements of the Internal Revenue Code applicable to RICs required us to distribute
at least 90% of our investment company taxable income to shareholders. Our intention was to distribute (or retain through a deemed
distribution) all of our investment company taxable income and net capital gain, therefore we have made no provision for income
taxes prior to 2019. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book
and tax differences were reclassified to paid-in capital.  For more information of the current year provision, see Note 6,
 “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. Loan origination fees are recognized when loans are issued. Accrued and unpaid interest
is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be
recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual
loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are
likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and
is in the process of collection.



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



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








- 11 -




MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020



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.



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.



Recently adopted accounting pronouncements

In August 2018, the FASB issued ASU No.
2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes, modifies
and adds certain disclosure requirements for fair value measurements. Among other changes, entities will no longer be required
to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing
of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the
range and weighted average of significant observable inputs used to develop Level 3 fair value measurements held at the end of
the reporting period. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU. The adoption of the ASU
effective January 1, 2020 did not have a material impact on the Company’s financial statements.



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, 2020 (together with the corresponding percentage of
the fair value of our total portfolio of investments):



|                             |  | As of March 31, 2020           |          
|---------------------------- |  | ------------------------------ | ---------
|                             |  | Investments at
 Amortized Cost |          
|Short-term Non-banking Loans |  | $                              | 3,254,000
|Preferred Stock              |  |                                | 150,000  
|Common Stock                 |  |                                | 760,650  
|Warrants                     |  |                                | 679      
|Other Equity                 |  |                                | 942,059  
|Total                        |  | $                              | 5,107,388



The following table shows the composition of our investment
portfolio by major class, at amortized cost and fair value, as of December 31, 2019 (together with the corresponding percentage
of the fair value of our total portfolio of investments):



|                |  | As of December 31, 2019               |          
|--------------- |  | ------------------------------------- | ---------
|                |  | Investments
    at
    Amortized Cost |          
|Preferred Stock |  | $                                     | 150,000  
|Common Stock    |  |                                       | 805,472  
|Warrants        |  |                                       | 679      
|Other Equity    |  |                                       | 1,020,219
|Total           |  | $                                     | 1,976,370






- 12 -




MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020



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



|                       |  | As of March 31, 2020                                                                                         |          
|---------------------- |  | ------------------------------------------------------------------------------------------------------------ | ---------
|                       |  | Investments
                                         at 
                                         Fair Value |          
|Consumer               |  | $                                                                                                            | —        
|Financial              |  |                                                                                                              | 134,968  
|Information Technology |  |                                                                                                              | 300,000  
|Leisure & Hospitality  |  |                                                                                                              | 291,040  
|Oil & Gas              |  |                                                                                                              | —        
|Publishing             |  |                                                                                                              | 465,000  
|Real Estate            |  |                                                                                                              | 3,294,900
|Total                  |  | $                                                                                                            | 4,485,908



The following table shows the composition of our investment
portfolio by industry grouping, based on fair value as of December 31, 2019:



|                       |  | As of December 31, 2019    |          
|---------------------- |  | -------------------------- | ---------
|                       |  | Investments at
 Fair Value |          
|Consumer               |  | $                          | 15,000   
|Financial              |  |                            | 150,858  
|Information Technology |  |                            | 300,000  
|Leisure & Hospitality  |  |                            | 369,200  
|Oil & Gas              |  |                            | 150,000  
|Publishing             |  |                            | 755,839  
|Total                  |  | $                          | 1,740,897



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, 2020. 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------








- 13 -






MILL CITY VENTURES III, LTD. 
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 March 31, 2020



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,
2020 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, 2020, according to the fair value hierarchy:





|                             |  | As of March 31, 2020 |        
|---------------------------- |  | -------------------- | -------
|                             |  | Level 1              |        
|Short-term Non-banking Loans |  | $                    | —      
|Preferred Stock              |  |                      |        
|Common Stock                 |  |                      | 640,868
|Warrants                     |  |                      | —      
|Other Equity                 |  |                      | —      
|Total                        |  | $                    | 640,868





The following table presents the fair value
measurements of our portfolio investments by major class, as of December 31, 2019, according to the fair value hierarchy:





|                |  | As of December 31, 2019 |        
|--------------- |  | ----------------------- | -------
|                |  | Level 1                 |        
|Preferred Stock |  | $                       | —      
|Common Stock    |  |                         | 906,697
|Warrants        |  |                         | —      
|Other Equity    |  |                         | —      
|Total           |  | $                       | 906,697





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, 2020:





|                                                         |  | For
    the three months ended March 31, 2020 |          
|-------------------------------------------------------- |  | --------------------------------------------- | ---------
|                                                         |  | Short-term
    Non-banking Loans              |          
|Balance
    as of January 1, 2020                        |  | $                                             | —        
|Net
    change in unrealized appreciation (depreciation) |  |                                               | —        
|Purchases
    and other adjustments to cost              |  |                                               | 3,254,000
|Sales
    and redemptions                                |  |                                               | —        
|Net
    realized gain (loss)                             |  |                                               | —        
|Balance
    as of March 31, 2020                         |  | $                                             | 3,254,000



The net change in unrealized depreciation
for the three months ended March 31, 2020 attributable to Level 3 portfolio investments still held as of March 31, 2020 is $165,000.








- 14 -




MILL CITY VENTURES III, LTD. 
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 March 31, 2020



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





|Security Type        |  | 3/31/20 FMV |           |  | Valuation Technique |                                             | Unobservable Inputs |                                                                                     | Range | 
|-------------------- |  | ----------- | --------- |  | ------------------- | ------------------------------------------- | ------------------- | ----------------------------------------------------------------------------------- | ----- | 
|ST Non-banking Loans |  | $           | 3,254,000 |  |                     | discounted cash flow                        |                     | market rate for similar debt                                                        |       | 
|Other Equity         |  |             | 291,040   |  |                     | last secured funding known by company       |                     | economic changes since purchase                                                     |       | 
|                     |  |             | —         |  |                     | illiquidity of company                      |                     | economic changes since last funding                                                 |       | 
|                     |  |             | —         |  |                     | discounted cash flow illiquidity of company |                     | cash flow based on oil market price per 
barrel economic changes since last funding |       | 
|Preferred Stock      |  |             | 300,000   |  |                     | last funding secured by company             |                     | economic changes since last funding                                                 |       | 
|                     |  | $           | 3,845,040 |  |                     |                                             |                     |                                                                                     |       | 



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, 2019:





|                                                         |  | For
    the year ended December 31, 2019 |          
|-------------------------------------------------------- |  | ---------------------------------------- | ---------
|                                                         |  | Preferred
    Stock                      |          
|Balance
    as of January 1, 2019                        |  | $                                        | 1,014,258
|Net
    change in unrealized appreciation (depreciation) |  |                                          | 12,478   
|Purchases
    and other adjustments to cost              |  |                                          | —        
|Sales
    and redemptions                                |  |                                          | (726,691 
|Net
    realized gain (loss)                             |  |                                          | (45      
|Balance as of December
    31, 2019                      |  | $                                        | 300,000  



The net change in unrealized depreciation
for the year ended December 31, 2019 attributable to Level 3 portfolio investments still held as of December 31, 2019 is $348,629,
and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.



The following table lists our level 3 investments
held as of December 31, 2019 and the unobservable inputs used to determine their valuation:





|Security Type   |  | 12/31/19 FMV |         |  | Valuation Technique |                                       |  | Unobservable Inputs |                                                | Range | 
|--------------- |  | ------------ | ------- |  | ------------------- | ------------------------------------- |  | ------------------- | ---------------------------------------------- | ----- | 
|Other Equity    |  | $            | 384,200 |  |                     | last secured funding known by company |  |                     | economic changes since last funding            |       | 
|                |  |              | 150,000 |  |                     | discounted cash flow                  |  |                     | cash flow based on oil market price per barrel |       | 
|Preferred Stock |  |              | 300,000 |  |                     | last funding secured by company       |  |                     | economic changes since last funding            |       | 
|                |  | $            | 834,200 |  |                     |                                       |  |                     |                                                |       | 



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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------








- 15 -




MILL CITY VENTURES III, LTD. 
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 March 31, 2020



| | · | On August 10, 2018, we entered into a loan transaction with a shareholder and her spouse who own approximately 1,500,000 shares
of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory
note bears interest payable monthly at the rate of 10% per annum. The note is secured by the debtors pledge to us of 625,000 shares
of our common stock. The pledged shares are held in physical custody for us by our custodial agent Milliennium Trust
Company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 6 – INCOME TAXES



Prior to December 27, 2019, before we withdrew our election
to be treated as a Business Development Company, we planned to be taxed as a regulated investment company (RIC). Compliance with
the requirements of the Internal Revenue Code applicable to RICs required us to distribute at least 90% of our investment company
taxable income to shareholders. Our intention was to distribute (or retain through a deemed distribution) all of our investment
company taxable income and net capital gain, therefore we have made no provision for income taxes prior to December 27, 2019. Now
that the election to be an RIC has passed and as of December 27, 2019 we are a C-Corporation for tax purposes. Income taxes as
of March 31, 2020 are described below.



As of March 31, 2020 and December 31, 2019, the
Company maintained a full valuation allowance against its net deferred tax assets of $453,553 and $446,000, respectively.
The Company's determination of the realizable deferred tax assets requires the exercise of significant judgment, based in
part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future
periods, the Company may need to adjust the valuation allowance, which could materially impact our financial position and results
of operations. The Company will continue to assess the need for a valuation allowance in future periods. Because of the full valuation
allowance, the Company's effective tax rate is expected to be near 0% and therefore the income tax expense is not material for
any period presented.



As of March 31, 2020, the Company had a federal NOL of
approximately$276,413. The federal NOL may be carried forward to offset future taxable
income, subject to applicable provisions of the Internal Revenue Code (the "Code"). If not used, these NOLs will expire
in years 2036 and 2037. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely. The 2019 tax
return has not been filed as of the date of this report, however the estimated federal NOL that does not expire included in the
total above is $356,000. States may vary in their treatment of post 2017 NOLs. The Company has state NOL carryforwards arising
from both combined and separate filings. The state NOL carryforwards may expire in 2036 and 2037.



NOTE 7 – SHAREHOLDERS’ EQUITY



At March 31, 2020, we had 11,067,402 shares of common stock
issued and outstanding.



On February 15, 2019 we announced that our board of directors
had approved a special cash dividend of $0.05 per common share. The dividend was paid on March 15, 2019 to stockholders
of record as of the close of business on March 8, 2019.



NOTE 8 – PER-SHARE INFORMATION



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

|                                                                            |  | For the Three Months Ended March 31, |           
|--------------------------------------------------------------------------- |  | ------------------------------------ | ----------
|                                                                            |  | 2020                                 |           
|Numerator:  Net Increase (Decrease) in Net Assets Resulting from Operations |  | $                                    | (281,918  
|Denominator:  Weighted-average number of common shares outstanding          |  |                                      | 11,067,402
|Basic and diluted net gain (loss) per common share                          |  | $                                    | (0.03     








- 16 -






MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020



NOTE 9 – OPERATING LEASES



On January 1, 2019 we adopted ASU No. 2016-2, Leases (Topic
842), and its amendments and elected the effective date transition method.

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



Because our lease does not provide an implicit rate, we use
our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents
an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized
basis over the term of a lease. The weighted average discount rate as of December 31, 2019 was 4.5% and the weighted average remaining
lease term is 2 years.



Under ASC 840, rent expense for office facilities for the three
months ended March 31, 2020 and March 31, 2019 was $16,562 and $24,481, respectively.



The components of our operating lease were as follows for the
three months ended March 31, 2020:



|Operating lease costs |  | $ | 4,779  | 
|--------------------- |  | - | ------ | 
|Variable lease cost   |  |   | 4,351  | 
|Short-term lease cost |  |   | 7,432  | 
|Total                 |  | $ | 16,562 | 



Variable lease costs consist primarily of property taxes, insurance,
and common area or other maintenance costs for our leased facility.



The following is a schedule of the aggregate
required annual minimum lease payments.



|Year                               |  | Amount |       
|---------------------------------- |  | ------ | ------
|2020                               |  | $      | 15,413
|2021                               |  |        | 21,162
|2022                               |  |        | 5,449 
|Total lease payments               |  |        | 42,024
|Less: interest                     |  |        | (1,698
|Present value of lease liabilities |  | $      | 40,326








- 17 -




MILL CITY VENTURES III, LTD.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020



NOTE 10 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the
three months ended March 31, 2020 through 2016:



|                                                                |  | Three Months Ended |           
|--------------------------------------------------------------- |  | ------------------ | ----------
|                                                                |  | March 31, 2020     |           
|Per Share Data (1)                                              |  |                    |           
|Net asset value at beginning of period                          |  | $                  | 0.91      
|Net investment income (loss)                                    |  |                    | —         
|Net realized and unrealized gains (losses)                      |  |                    | (0.03     
|Payment of common stock dividend                                |  |                    | —         
|Net asset value at end of period                                |  | $                  | 0.88      
|                                                                |  |                    |           
|Ratio / Supplemental Data                                       |  |                    |           
|Per share market value of investments at end of period          |  | $                  | 0.41      
|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                                     |  | $                  | 9,786,615 
|Average net assets (2)                                          |  | $                  | 9,927,574 
|Total investment return                                         |  |                    | (3.30     
|Portfolio turnover rate (3)                                     |  |                    | 0.75      
|Ratio of operating expenses to average net assets (3)           |  |                    | (7.82     
|Ratio of net investment income (loss) to average net assets (3) |  |                    | 0.87      
|Ratio of realized gains (losses) to average net assets (3)      |  |                    | 1.00      



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

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

| | (3) | Ratios are annualized.
| | --- | ----------------------



NOTE 11 – General Uncertainty



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








- 18 -




| | 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. was 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 provide non-bank lending and specialty
finance to companies and individuals on both a secured and unsecured basis. The loans we provide typically have maturities that
range from 9 to 12 months and may involve a pledge of collateral or, in the case of loans made to companies, personal guarantees
by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale; other real estate
projects; title loans; cash inventory needs; inventory financing, or for other purposes. We intend to remain opportunistic, however,
and may engage in transactions that involve other rights (such as stock, warrants or other equity-linked investments) or that
are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and
capital appreciation from any related investments we make.



Our principal sources of income are interest,
dividends and other fees associated with lending such as origination fees, closing fees or exit fees. We may also receive reimbursement
of legal costs associated with loan documentation. Our statement of operations also reflect increases and decreases in the carrying
value of our asset and investments (i.e. unrealized appreciation and depreciation). Our principal expenses relate to operating
expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.



Our MD&A should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 2019, 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.



PORTFOLIO AND INVESTMENT ACTIVITY



During the three months ended March 31,
2020, we made $3,328,963 of investments in portfolio companies and had $221,780 of redemptions and repayments, resulting in net
investments at amortized cost of $5,107,388 as of March 31, 2020.



During the three months ended March 31,
2019, we made $120,053 of investments in portfolio companies and had $2,806,578 of redemptions and repayments, resulting in net
investments at amortized cost of $7,343,748 as of March 31, 2019.








- 19 -




Our portfolio composition by major class,
based on fair value at March 31, 2020, was as follows:



|                             |  | Investments at Fair Value |           |  | Percentage of Fair Value | 
|---------------------------- |  | ------------------------- | --------- |  | ------------------------ | 
|Short-term Non-banking Loans |  | $                         | 3,254,000 |  |                          | 
|Equity/Other                 |  |                           | 1,231,908 |  |                          | 
|Total                        |  | $                         | 4,485,908 |  |                          | 



RESULTS OF OPERATIONS



Our operating results for the three months
ended March 31, 2020 and March 31, 2019 were as follows:



|                           |  | For the three months ended March 31, |         
|-------------------------- |  | ------------------------------------ | --------
|                           |  | 2020                                 |         
|Total investment income    |  | $                                    | 184,979 
|Total expenses             |  |                                      | (105,392
|Net investment gain (loss) |  | $                                    | 79,587  



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, 2020
and 2019, our total investment income was $184,979 and $39,419, respectively. The increase is due to the change in our business
structure which now focuses on short-term non-bank lending. Our loan portfolio generates interest income, with an average rate
on the loans of 15%.



Professional Fees



For the three months ended March 31, 2020
and 2019, we had ($16,232) and $52,096 professional fees expense, respectively. The decrease is due to a refund received during
the first quarter of $59,957 which related to expenses incurred during 2018 and 2019.



Net Realized Gain from Investments



For the three months ended March 31, 2020,
we had $221,780 of proceeds from sale of investments, resulting in $24,502 of realized gains. For the three months ended March
31, 2019, we had $2,806,578 of proceeds from sale of investments, resulting in $3,070,846 of realized gains, due primarily to the
acquisition of our holding in BiteSquad LLC by Waitr Holdings.



Net Change in Unrealized Appreciation
(Depreciation) on Investments



For the three months ended March 31, 2020,
our investments included $386,007 of unrealized depreciation. For the three months ended March 31, 2019, our investments included
$1,748,260 of unrealized depreciation.



Changes in Net Assets from Operations



For the three months ended March 31, 2020,
we recorded a net decrease in net assets from operations of $281,918. Based on the weighted-average number of shares of common
stock outstanding for the three months ended March 31, 2020, our per-share net decrease in net assets from operations was $0.03.
For the three months ended March 31, 2019, we recorded a net increase in net assets from operations of $1,164,669. Based on the
weighted-average number of shares of common stock outstanding for the three months ended March 31, 2019, our per-share net increase
in net assets from operations was $0.11.



Cash Flows for the Three Months Ended
March 31, 2020 and 2019



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, 2020, net cash used in operating activities was $3,038,963. Cash flows used in operating
activities for the three months ended March 31, 2020 were primarily related to purchases of investments totaling $3,328,296
offset by repayments of investments of $221,780. For the three months ended March 31, 2019, net cash provided in operating
activities was $2,521,322. Cash flows provided in operating activities for the three months ended March 31, 2020 were
primarily related to redemptions and repayments of investments of $2,806,578, offset mostly by purchases of investments
totaling $120,653.








- 20 -




FINANCIAL CONDITION



As of March 31, 2020, we had cash of $5,027,693,
a decrease of $3,038,963 from December 31, 2019. 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, 2020.



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.



RELATED-PARTY TRANSACTIONS



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



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, refer to our Annual Report on Form
K for the year ended December 31, 2019.



OFF-BALANCE-SHEET ARRANGEMENTS



During the three months ended March 31, 2020, 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:








- 21 -




| | · | 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;
| | - | -------------------------------------------

| | · | 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, 2020 (related to our year ended December 31, 2019)
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.



| | 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, 2020, 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, 2020.



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.








- 22 -






PART II. OTHER INFORMATION



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



|Exhibit 
Number |   |  | Description                                                                                                                                                                              
|--------------- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1             |   |  | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 23, 2013)                          
|3.2             |   |  | Amended and Restated Bylaws of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10-SB filed on January 29, 2008)
|31.1            | * |  | Section 302 Certification of the Chief Executive Officer                                                                                                                                 
|31.2            | * |  | Section 302 Certification of the Chief Financial Officer                                                                                                                                 
|32.1            | * |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                   










* 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
                                       15, 2020 | By: | /s/
                                         Douglas M. Polinsky
|      |                                                     |     | Douglas
    M. Polinsky                                         
|      |                                                     |     | Chief
    Executive Officer                                     
|      |                                                     |     |                                                                 
|Date: | May
    15, 2020                                    | By: | /s/
    Joseph A. Geraci, II                                    
|      |                                                     |     | Joseph
    A. Geraci, II                                        
|      |                                                     |     | Chief
    Financial Officer