UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



x
   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,
2013



OR



 ̈
   TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to
_______



Commission File Number 814-00991



MILL CITY VENTURES III, LTD.



(Exact name of registrant as specified in
its charter)



|Minnesota                                                      | 20-4709758                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)



130 West Lake Street, Suite 300, Wayzata,
MN

(Address of Principal Executive Offices)



(952) 473-3442

(Registrant’s telephone number, including
area code)



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



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes xNo
 ̈



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈No
x



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



|Large accelerated filer  ̈                                             | Accelerated filer  ̈        
|--------------------------------------------------------------------- | ---------------------------
|Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company  ̈



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes  ̈No
x



As of May 14, 2013 there were 12,169,422 shares of the issuer’s
common stock, $0.001 par value, outstanding.











Table of Contents



Index



|                                                                                              |  | Page
|--------------------------------------------------------------------------------------------- |  | ----
|PART I. FINANCIAL INFORMATION                                                                 |  |     
|Item 1. Financial Statements                                                                  |  | 1   
|                                                                                              |  |     
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|                                                                                              |  |     
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 19  
|                                                                                              |  |     
|Item 4. Controls and Procedures                                                               |  | 19  
|                                                                                              |  |     
|PART II. OTHER INFORMATION                                                                    |  |     
|Item 6. Exhibits                                                                              |  | 20  
|                                                                                              |  |     
|SIGNATURES                                                                                    |  | 21  











PART I – FINANCIAL INFORMATION



Item 1. Financial Statements.



Mill City Ventures III, Ltd.

(formerly Poker Magic, Inc.)

Balance Sheets



|                                                                                                                                               |  | March 31, 2013 (unaudited) |            |   | December 31, 2012 (audited) |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | --------------------------- | -
|ASSETS                                                                                                                                         |  |                            |            |   |                             |  
|                                                                                                                                               |  |                            |            |   |                             |  
|Investments, at fair value (cost of $525,000)                                                                                                  |  | $                          | 525,000    |   |                             | $
|                                                                                                                                               |  |                            |            |   |                             |  
|Cash                                                                                                                                           |  |                            | 10,180,800 |   |                             |  
|Prepaid expenses                                                                                                                               |  |                            | 132,206    |   |                             |  
|Total Assets                                                                                                                                   |  | $                          | 10,838,006 |   |                             | $
|                                                                                                                                               |  |                            |            |   |                             |  
|LIABILITIES                                                                                                                                    |  |                            |            |   |                             |  
|                                                                                                                                               |  |                            |            |   |                             |  
|Current Liabilities                                                                                                                            |  |                            |            |   |                             |  
|Accounts payable                                                                                                                               |  |                            | 215,962    |   |                             |  
|Accrued wages                                                                                                                                  |  |                            | 80,737     |   |                             |  
|Accrued royalty                                                                                                                                |  |                            | 619        |   |                             |  
|Notes payable – related-party short-term                                                                                                       |  |                            | -          |   |                             |  
|Interest payable                                                                                                                               |  |                            | 236        |   |                             |  
|Total Current Liabilities                                                                                                                      |  |                            | 297,554    |   |                             |  
|                                                                                                                                               |  |                            |            |   |                             |  
|Long-Term Liabilities                                                                                                                          |  |                            |            |   |                             |  
|Subscription payable                                                                                                                           |  |                            | -          |   |                             |  
|Total Long-Term Liabilities                                                                                                                    |  |                            | -          |   |                             |  
|                                                                                                                                               |  |                            |            |   |                             |  
|Total Liabilities                                                                                                                              |  |                            | 297,554    |   |                             |  
|                                                                                                                                               |  |                            |            |   |                             |  
|Commitments and contingencies                                                                                                                  |  |                            |            |   |                             |  
|                                                                                                                                               |  |                            |            |   |                             |  
|SHAREHOLDERS’ EQUITY                                                                                                                           |  |                            |            |   |                             |  
|Common Stock, par value $0.001 per share (250,000,000 common shares authorized; 12,169,422 and 1,504,422 issued and outstanding, respectively) |  |                            | 12,169     |   |                             |  
|Additional Paid-in Capital                                                                                                                     |  |                            | 11,875,571 |   |                             |  
|Accumulated Deficit                                                                                                                            |  |                            | (1,347,288 | ) |                             |  
|Total Shareholders’ Equity                                                                                                                     |  |                            | 10,540,452 |   |                             |  
|                                                                                                                                               |  |                            |            |   |                             |  
|Total Liabilities and Shareholders’ Equity                                                                                                     |  | $                          | 10,838,006 |   |                             | $
|                                                                                                                                               |  |                            |            |   |                             |  
|Net Asset Value Per Common Share                                                                                                               |  | $                          | 0.87       |   |                             | $



See accompanying notes to financial statements.



1







Mill City Ventures III, Ltd.

(formerly Poker Magic, Inc.)

Statement of Operations

(unaudited)



|                                                               |  | As a Business Development Company |          
|-------------------------------------------------------------- |  | --------------------------------- | ---------
|                                                               |  | Three Months Ended March 31, 2013 |          
|Investment Income                                              |  |                                   |          
|Interest income                                                |  | $                                 | 3,562    
|Total Investment Income                                        |  |                                   | 3,562    
|                                                               |  |                                   |          
|Operating Expenses                                             |  |                                   |          
|Professional fees                                              |  |                                   | 82,259   
|Payroll expense                                                |  |                                   | 80,737   
|Registration statement expense                                 |  |                                   | 23,305   
|Insurance expense                                              |  |                                   | 2,641    
|Other general and administrative expenses                      |  |                                   | 2,243    
|Total Operating Expenses                                       |  |                                   | 191,185  
|Net Investment Loss                                            |  |                                   | (187,623 
|                                                               |  |                                   |          
|Net Decrease in Shareholders’ Equity Resulting from Operations |  | $                                 | (187,623 
|                                                               |  |                                   |          
|Basic and diluted net loss per common share                    |  | $                                 | (0.04    
|                                                               |  |                                   |          
|Weighted-average number of common shares outstanding           |  |                                   | 4,262,366



See accompanying notes
to financial statements.



2







Mill City Ventures III, Ltd.

(formerly Poker Magic, Inc.)

Statement of Operations

(unaudited)



|                                                     |  | Prior to Becoming a Business Development Company |          
|---------------------------------------------------- |  | ------------------------------------------------ | ---------
|                                                     |  | Three Months Ended  March 31, 2012               |          
|Revenues                                             |  | $                                                | -        
|                                                     |  |                                                  |          
|Cost of revenues                                     |  |                                                  | -        
|                                                     |  |                                                  |          
|Gross loss                                           |  |                                                  | -        
|                                                     |  |                                                  |          
|Operating expenses:                                  |  |                                                  |          
|Selling, general and administrative                  |  |                                                  | 42,859   
|                                                     |  |                                                  |          
|Operating Loss                                       |  |                                                  | (42,859  
|                                                     |  |                                                  |          
|Other Expense                                        |  |                                                  |          
|Interest expense                                     |  |                                                  | (6,410   
|Total Other Expense                                  |  |                                                  | (6,410   
|                                                     |  |                                                  |          
|Net Loss                                             |  | $                                                | (49,269  
|                                                     |  |                                                  |          
|Basic and diluted net loss per common share          |  | $                                                | (0.05    
|                                                     |  |                                                  |          
|Weighted-average number of common shares outstanding |  |                                                  | 1,043,657



See accompanying notes
to financial statements.



3







Mill City Ventures III, Ltd.

(formerly Poker Magic, Inc.)

Statements of Cash Flows

(unaudited)



|                                                                                                                                   |  | As a Business Development Company  |            |   | Prior to Becoming a Business Development Company |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ---------- | - | ------------------------------------------------ | -
|                                                                                                                                   |  | Three Months Ended  March 31, 2013 |            |   | Three Months Ended  March 31, 2012               |  
|Cash flows from operating activities:                                                                                              |  |                                    |            |   |                                                  |  
|Net decrease in net assets  / Net loss from operations                                                                             |  | $                                  | (187,623   | ) |                                                  | $
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Adjustments to reconcile net decrease in net assets / net loss resulting from operations to net cash used in operating activities: |  |                                    |            |   |                                                  |  
|Payments for purchases of investments                                                                                              |  |                                    | (525,000   | ) |                                                  |  
|Officers compensation paid in stock                                                                                                |  |                                    | -          |   |                                                  |  
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Changes in operating assets and liabilities:                                                                                       |  |                                    |            |   |                                                  |  
|Prepaid expenses                                                                                                                   |  |                                    | (132,206   | ) |                                                  |  
|Accounts payable                                                                                                                   |  |                                    | 190,800    |   |                                                  |  
|Interest payable                                                                                                                   |  |                                    | (14,434    | ) |                                                  |  
|Accrued payroll                                                                                                                    |  |                                    | 80,737     |   |                                                  |  
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Net cash used in operating activities                                                                                              |  |                                    | (587,726   | ) |                                                  |  
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Cash flows from financing activities:                                                                                              |  |                                    |            |   |                                                  |  
|Proceeds from issuance of common stock                                                                                             |  |                                    | 10,165,000 |   |                                                  |  
|Payment on notes payable related party                                                                                             |  |                                    | (95        | ) |                                                  |  
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Net cash provided by financing activities                                                                                          |  |                                    | 10,164,905 |   |                                                  |  
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Net increase (decrease) in cash                                                                                                    |  |                                    | 9,577,179  |   |                                                  |  
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Cash, beginning of the period                                                                                                      |  |                                    | 603,621    |   |                                                  |  
|Cash, end of the period                                                                                                            |  | $                                  | 10,180,800 |   |                                                  | $
|                                                                                                                                   |  |                                    |            |   |                                                  |  
|Non-cash financing activities:                                                                                                     |  |                                    |            |   |                                                  |  
|Accrued interest converted into note payable                                                                                       |  | $                                  | -          |   |                                                  | $
|Conversion of subscription payable to common stock                                                                                 |  | $                                  | 500,000    |   |                                                  | $



See accompanying notes to financial statements.



4







Mill City Ventures III, Ltd.

(formerly Poker Magic, Inc.)

Financial Highlights



|                                                           |  | As a Business Development Company |           
|---------------------------------------------------------- |  | --------------------------------- | ----------
|                                                           |  | Three Months Ended March 31, 2013 |           
|                                                           |  |                                   |           
|Per Share Data                                             |  |                                   |           
|Net asset value at beginning of the period                 |  | $                                 | 0.04      
|Net investment loss                                        |  |                                   | (0.02     
|Net increase in net assets as a result of private offering |  |                                   | 0.85      
|Net asset value at end of period                           |  | $                                 | 0.87      
|                                                           |  |                                   |           
|Ratio / Supplemental Data                                  |  |                                   |           
|Per share market value at end of period                    |  | $                                 | 0.04      
|Shares outstanding at end of period                        |  |                                   | 12,169,422
|Average weighted shares outstanding for period             |  |                                   | 4,262,366 
|Net assets at end of period                                |  | $                                 | 10,540,452
|Average net assets (1)                                     |  | $                                 | 3,921,511 
|Portfolio turnover rate (2)                                |  |                                   | 66.45     
|Ratio of operating expenses to average net assets (2)      |  |                                   | (18.03    
|Ratio of net investment loss to average net assets (2)     |  |                                   | (18.35    



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

(2) Ratios are annualized.



See accompanying notes to financial statements.



5







Mill City Ventures III, Ltd.

(formerly Poker Magic, Inc.)

Schedule of Investments

As of March 31, 2013



Percentages shown represent the percentage of fair value
to net assets.



|                                       |  | Industry  |  | Investments                           |  | Shares |         |  | Cost |   |         | Fair Value | 
|-------------------------------------- |  | --------- |  | ------------------------------------- |  | ------ | ------- |  | ---- | - | ------- | ---------- | 
|PRIVATE INVESTMENTS (5.0%)             |  |           |  |                                       |  |        |         |  |      |   |         |            | 
|Great Plains Sands, LLC (1.0%)         |  | Oil & Gas |  | Limited Liability 
Company Investment |  |        | 105,000 |  |      | $ | 105,000 |            | 
|Southern Plains Resources, Inc. (4.0%) |  | Oil & Gas |  | Common Stock                          |  |        | 400,000 |  |      |   | 420,000 |            | 
|                                       |  |           |  |                                       |  |        |         |  |      |   |         |            | 
|TOTAL INVESTMENTS                      |  |           |  |                                       |  |        |         |  |      | $ | 525,000 |            | 



See accompanying notes to financial statements.



6







Mill City Ventures III, Ltd.

(formerly
Poker Magic, Inc.)

Notes to Financial Statements

March 31, 2013



NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of operations and basis
of presentation



Mill City Ventures III, Ltd. (the “Company”) is
s business development company that was incorporated in the State of Minnesota on January 10, 2006 under the name Poker Magic,
Inc.  Our business from January 10, 2006 (inception) through December 12, 2012 consisted primarily of marketing and licensing
a new form of poker-based table game to casinos and on-line gaming facilities in the United States.



On December 13, 2012, we filed a Form N-8A with the SEC, notifying
the SEC that we are an internally managed, non-diversified, closed-end investment Company under the 1940 Act. On February 7, 2013,
we filed Form N-54A, notifying the SEC of our election to become a business development company (“BDC”). Subsequently,
on May 13, 2013, we filed Form N-8F to deregister as a registered investment company based upon our prior filing to become a BDC.
We are regulated as a BDC and plan to be taxed as a regulated investment company. As a BDC, we primarily focus on investing in
or lending to private companies and making managerial assistance available to such companies. A BDC provides shareholders with
the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits of investing in emerging-growth
or expansion-stage companies that are privately owned.



Our future revenues will relate to the earnings we receive from
our portfolio investments. The Company’s objective is to obtain superior returns from investments in securities and other
investment opportunities available to BDCs under the 1940 Act. We intend to invest capital in portfolio companies for purposes
of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. Buyouts generally include transactions
that involve the acquisition of a controlling interest in an entity, either by management or other investors. Organic growth refers
to growth through the internal operations of the company, through investments in marketing initiatives, capital expenditures or
other internal growth initiatives, rather than growth by means of an acquisition. We plan to identify potential investments through
multiple sources, including private equity sponsors, investment bankers, brokers, fundless sponsors, and owners and operators of
businesses. We will base our investment decisions on analyses of potential customers’ business operations and asset valuations,
utilizing risk management methods, pricing tools, due diligence methodologies and data management processes designed to help us
assess risk, establish appropriate pricing, and maximize our return on investment. Subject to applicable BDC regulations set forth
in the 1940 Act, we plan to invest in private companies, small-cap public stocks, notes and other forms of debt, investment contracts,
and other investments commonly referred to as securities.



On January 17, 2013, the Company amended
and restated its Articles of Incorporation.  The amendment and restatement included a change in the Company's name from "Poker
Magic, Inc." to "Mill City Ventures III, Ltd."



Interim financial information



The balance sheet as of December 31, 2012, which has been derived
from audited financial statements, and the unaudited interim condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
have been omitted pursuant to such rules and regulations. Operating results for the three months ended March 31, 2013 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2013 or any other period. The accompanying financial
statements and related notes should be read in conjunction with the audited Financial Statements of the Company, and notes thereto,
contained in our Annual Report on Form 10-K for the year ended December 31, 2012. The financial information furnished in this report
is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary
to fairly present the results of the interim periods presented in order to make the financial statements not misleading.



Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management 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 and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.



7







Cash Deposits



The Company maintains its cash balances in financial institutions.
Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.



Fair Value of Financial Instruments



The carrying amounts of certain of the Company’s financial
instruments, including cash, accounts payable and notes payable approximate fair value due to their relatively short maturities.



In the normal course of business, the Company may utilize derivative
financial instruments (principally options) in connection with its proprietary trading activities. The Company records its derivative
activities at fair value. Gains and losses from derivative financial instruments are included in net gain (loss) on investments
in the statement of operations.



Investment Valuation



Investment transactions are recorded on the trade date. Realized
gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis
of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during
the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal
of previously recorded unrealized gains or losses when gains or losses are realized.



Investments for which market quotations are readily available
are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine
if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities
that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith
by our board of directors, based on, among other things, the input of our executive management, audit committee and independent
third-party valuation expert that may be engaged by management to assist in the valuation of our portfolio investments.



Due to the inherent uncertainty of determining the fair value
of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to
period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had
a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further 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.



In addition, changes in the market environment and other events
that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different
than the unrealized gains or losses reflected in the valuations currently assigned.



Allocation of Net Gains and Losses



All income, gains, losses, deductions and credits for any investment
are allocated to shareholders whose capital was used to purchase such investments. Allocations are made in a manner proportionate
to the shares owned.



Income Taxes



The Company accounts for income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be
realized.



8







Combination (Reverse Split) of Common Stock



On July 18, 2012, the Company’s Board of Directors approved
a 1-to-11 reverse stock split subject to approval by the Company’s stockholders. The reverse stock split, approved by the
Company’s stockholders on September 7, 2012, became effective on September 10, 2012. The reverse stock split did not result
in a reduction in the number of authorized shares of common stock. The accompanying financial statements and footnotes have been
adjusted retroactively to reflect the reverse stock split.



Revenue recognition – Prior
to becoming an Investment Company



Revenue from sales under a license agreement is recognized when
the following four criteria are met: 1) persuasive evidence of an arrangement exists (fully executed license agreement); 2) delivery
of the Winner’s Pot Poker game, felt and instructions have been rendered and for which the licensee is responsible to replace
either through damage or normal wear and tear; 3) the price is fixed or determinable; and 4) collectability under the license agreement
is reasonably assured. We did not generate any revenues for the year ended December 31, 2012.



Interest and Dividend Income Recognition –
As an Investment Company



Interest income is recorded on an accrual basis and includes
the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized
into interest income over the life of the respective security using the effective yield method. The amortized cost of investments
represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any.



Loans are generally placed on non-accrual status when principal
or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected
in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received
on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability.
Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment,
are likely to remain current. The Company may make exceptions to this if the 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.



Our investment portfolio investments at March 31, 2013 and December
31, 2012 were $525,000 and $0, respectively.



Management and Service Fees



The Company does not incur expenses related to management and
service fees. Our executive management team provides the investment advisory, management and service of the Company’s investments
as part of their employment responsibilities.



Conversion to Investment Company



The results of operations for the three month period ended March
31, 2012 reflects the Company’s results prior to operating as an investment company under the 1940 Act, as amended while
the three month period ended March 31, 2013 reflects the Company’s results as an investment company under the 1940 Act, as
amended. Accounting principles used in the preparation of the financial statements as an investment company under the 1940 Act
are different than those of prior periods and, therefore, the financial position and results of operations of these periods are
not directly comparable. The primary differences in accounting principles relate to the carrying value of investments.



NOTE 2— NET LOSS PER COMMON SHARE



Basic net loss per common share is computed by dividing net
loss by the weighted average number of vested common shares outstanding during the period. A reconciliation of the numerator and
denominator used in the calculation of basic and diluted net loss per common share follows:



9







|                                                                   |  | For the Three Months  Ended March 31, 2013 |           |   | For the Three Months Ended March 31, 2012 |  
|------------------------------------------------------------------ |  | ------------------------------------------ | --------- | - | ----------------------------------------- | -
|Numerator:  Net Loss                                               |  | $                                          | (187,623  | ) |                                           | $
|Denominator:  Weighted-average number of common shares outstanding |  |                                            | 4,262,366 |   |                                           |  
|Basic and diluted net loss per common share                        |  | $                                          | (0.04     | ) |                                           | $



At March 31, 2013 and 2012, the Company did not have any options
or warrants outstanding or any other dilutive common equivalent shares.



NOTE 3—COMMITMENTS AND CONTINGENCIES



The asset purchase agreement with Select Video dated March
10, 2006, provides that when the Company receives any revenue generated by Winner’s Pot Poker and other similar games, Select
Video will be entitled to receive an amount equal to five percent (5%) of all gross proceeds generated by these games.



At March 31, 2013 and March 31, 2012, $619 was owed to Select
Video under this agreement.



NOTE 4—SHAREHOLDERS’ DEFICIT



Common stock



On March 6, 2013, the Company converted a $500,000 subscription
payable to 500,000 shares of common stock at $1.00 per share.



On March 6, 2013, the Company raised cash of $8,850,000 from
a private placement of common stock at a per-share price of $1.00 and issued 8,850,000 shares of common stock.



On March 20, 2013 the Company raised cash of $1,315,000 from
a private placement of common stock at a per-share price of $1.00 and issued 1,315,000 shares of common stock.



At March 31, 2013, a total of 12,169,422 shares of common stock
were issued and outstanding.



NOTE 5—FAIR VALUE OF INVESTMENTS



Investment Risks



The Company’s investments are subject to a variety of
risks. Those risks include the following:



Market Risk



Market risk represents the potential loss that can be caused
by a change in the fair value of the instrument.



Credit Risk



Credit risk represents the risk that the Company would incur
if the counterparties failed to perform pursuant to the terms of their agreements with the Company.



Fair Value Hierarchy



The fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels is explained below:



Level 1



Valuations based on unadjusted quoted prices in active markets
for identical assets or liabilities that the Company has the ability to access. Valuation adjustments are not applied to Level
1 securities. Because valuations are based on quoted prices that are readily and regularly available in an active market, valuation
of these securities does not entail a significant degree of judgment.



10







Level 2



Pricing inputs are other than used in Level 1, which include
the closing bid price for unlisted marketable securities, which are available in active or inactive markets for identical investments
or liabilities, other direct or indirect observable inputs that can be corroborated by market data or the use of models or other
valuation methodologies as of the reporting date.



Level 3



Pricing inputs are unobservable for the investment and include
situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require
significant management judgment or estimation.



The table below presents the balances of assets measured at
fair value on a recurring basis by level within the hierarchy.



|                                |  | As of March 31, 2013 |  
|------------------------------- |  | -------------------- | -
|                                |  | Level 1              |  
|Great Plains Sand, LLC          |  | $                    | -
|Southern Plains Resources, Inc. |  |                      | -
|                                |  |                      |  
|Total                           |  | $                    | -



The changes in Level 3 assets and liabilities measured at fair
value on a recurring basis are summarized as follows:



|                                                                       |  | Fair Value |        
|---------------------------------------------------------------------- |  | ---------- | -------
|Balance, December 31, 2012                                             |  | $          | -      
|Net losses (realized and unrealized) included in change in investments |  |            | -      
|Transfers into/out of Level 3                                          |  |            | -      
|Purchases and sales, net                                               |  |            | 525,000
|                                                                       |  |            |        
|Balance, March 31, 2013                                                |  | $          | 525,000



NOTE 6—MINIMUM ASSET COVERAGE



We plan to be treated as a BDC. As such, we are required to
meet various regulatory tests. Among other things, these tests will require us to invest at least 70% of our total assets in private
or small-cap public U.S.-based companies, and to maintain a coverage ratio of total net assets to total senior securities and borrowings
(including accrued interest payable) of at least 200%. As of March 31, 2013, the Company had total net assets of $10,540,452 and
total senior securities and borrowings (including accrued interest payable) of $236, which asset coverage is in excess of
the minimum coverage ratio for a BDC.



NOTE 7—INCOME TAXES



We plan to be regulated as a regulated investment company and
intend to comply with the requirements of the Internal Revenue Code, applicable to regulated investment companies. We are required
to distribute at least 90% of our investment company taxable income and intend to distribute (or retain through a deemed distribution)
all of our investment company taxable income and net capital gain to shareholders; therefore, we have made no provision for income
taxes. The character of income and gains that we will distribute is determined in accordance with income tax regulations that may
differ from GAAP. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and
tax differences are reclassified to paid-in-capital. The Company did not have any taxable income for the three month period ended
March 31, 2013.



NOTE 8—NOTES PAYABLE RELATED PARTY



On October 19, 2010, Douglas Polinsky and Joseph A. Geraci,
II, both officers of the Company, each loaned the Company $5,000 under terms and conditions set forth in a related unsecured term
promissory note. Each promissory note provided for simple interest to accrue on the unpaid principal balance of the promissory
notes at the rate of 12% per annum, and required that accrued interest be paid on a monthly basis until October 18, 2011, at which
time the entire unpaid principal balance of $5,000 together with the unpaid accrued interest of $569 (accrued at 12% per annum)
became due and payable. Messrs. Polinsky and Geraci both agreed to renew the promissory notes and interest payable totaling $11,139
on September 30, 2011 for a term of six months. Subsequently, Messrs. Polinsky and Geraci both again agreed to renew the promissory
notes and interest payable totaling $11,807 on March 31, 2012 for a term of three years. The promissory notes have the same terms
as those contained in the original promissory notes and have a maturity date of March 31, 2015.



11







From July 30, 2009 to July 15, 2011, Lantern Advisers, LLC,
a Minnesota limited liability company owned equally by Douglas Polinsky and Joseph A. Geraci, II (each of whom is an officer and
director of the Company), loaned the Company a total of $150,000 under terms and conditions set forth in unsecured term promissory
notes.  The promissory notes provided for simple interest to accrue on the unpaid principal balance of the promissory note
at the rate of 12% per annum, and required that accrued interest be paid on a monthly basis until maturity, at which time the entire
unpaid principal balance of the promissory note became due. On September 30, 2011, Lantern Advisers and the Company consolidated
these promissory notes and the accrued but unpaid interest into a new promissory note in the amount of $172,364. The new promissory
note had the same terms as those contained in the original promissory notes and had a maturity date of March 31, 2012. On December
30, 2011, Lantern Advisers, LLC loaned the Company an additional $25,000 under terms and conditions set forth in an unsecured term
promissory note. The Company consolidated this promissory note with the promissory note referenced above with a principal amount
of $172,364 and unpaid interest of $5,172 for a new promissory note in the amount of $202,536. The new unsecured promissory note
had the same terms as those contained in the original promissory notes and had a maturity date of June 30, 2012. Subsequently,
Lantern Advisers agreed to renew the unsecured term promissory note and interest payable totaling $214,688 on June 30, 2012 for
a term of three years. The promissory note had the same terms as those contained in the original promissory note and had a maturity
date of June 30, 2015.



On June 1, 2012 and October 31, 2012, Lantern Advisers loaned
the Company $25,000 and $50,000, respectively, under terms and conditions set forth in an unsecured term promissory notes for a
term of three years.  The promissory notes provided for simple interest to accrue on the unpaid principal balance of the promissory
note at the rate of 12% per annum, and required that accrued interest be paid on a monthly basis until maturity.



On December 10, 2012, the parties agreed to convert $301,400
of principal balance to 301,400 shares of common stock $1.00 per share. The remaining principal balance of $95 and significantly
all of the accrued and unpaid interest owing were paid on March 6, 2013.



The Company incurred interest expense associated with the related
party notes of $0 and $6,410 for the three month period ended March 31, 2013 and 2012, respectively.



Total short-term related-party notes at March 31, 2013 and December
31, 2012 were $0 and $95, respectively.



NOTE 9—SUBSEQUENT EVENTS



On May 3, 2013, the Company entered into a securities purchase
agreement with CombiMatrix Corporation (“CombiMatrix”) to purchase for $400,000 a total of 400 shares of Series C Preferred
Stock and warrants to purchase an aggregate of 163,934 shares of common stock of CombiMatrix, to occur in two separate closings. 
The first closing occurred on May 3, 2013, pursuant to which the Company paid $200,000 for 200 shares of Series C Preferred Stock
and a warrant to purchase 81,967 shares of CombiMatrix at an exercise price of $3.77 per share.  The second closing will occur
when certain events and milestones are achieved by CombiMatrix, including, but not limited to, the approval of the issuance of
additional shares by the stockholders of CombMatrix.



12







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 set forth below should be read in conjunction with our audited financial statements, and
notes thereto, contained in our Form N-2 filed with the SEC on April 1, 2013 and our Form 10-K filed with the SEC on March 29,
2013 related to our year ended December 31, 2012.



Forward-Looking Statements



Some of the statements made in this section of our report are
forward-looking statements based on the current expectations of the management of our company, Mill City Ventures III, Ltd. These
expectations involve substantial risks and uncertainties which 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. We generally identify forward-looking statements 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 originate new investments, achieve certain margins and levels of profitability, the availability of additional
capital, and the ability to maintain certain debt-to-asset ratios. In light of these and other uncertainties, the inclusion of
a projection or forward-looking statement in this prospectus should not be regarded as a representation by us that our plans or
objectives will be achieved.



Some of the forward-looking statements contained in this prospectus
include statements as to:



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



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



| | · | the impact of investments that we expect to make;
| | - | -------------------------------------------------



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



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



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



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



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



| | · | our ability to operate as a business development company and to be taxed as a regulated investment company;
| | - | -----------------------------------------------------------------------------------------------------------



| | · | 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.  In light of
the foregoing, prospective investors are cautioned that the forward-looking statements included in this filing may ultimately prove
to be inaccurate—even materially inaccurate.  Because of the significant uncertainties inherent in such forward-looking
statements, the inclusion of such information should not be regarded as a representation or warranty by Mill City Ventures III,
Ltd. 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 report. The forward-looking statements made in this prospectus 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.



General Overview



Mill City Ventures III, Ltd., formerly known as Poker Magic,
Inc. (“MCVT,” the “Company” or “we”) is a Minnesota corporation that was incorporated in January
2006. Until December 13, 2012, we were a development-stage company that previously focused on promoting and placing our Winner’s
Pot Poker game online and into casinos and entertainment facilities nationwide, including those located in Native American tribal
lands.On December 13, 2012, we filed a Form N-8A with the Securities and Exchange Commission
(“SEC”), notifying the SEC of our intent to register as an internally managed, non-diversified, closed-end investment
company under the Investment Company Act of 1940 (the “1940 Act”). On February 7, 2013, we filed Form N-54A, Notification
of Election to be Subject to Sections 55 through 65 of the 1940 Act, to be regulated as a business development company (“BDC”).
Subsequently, on May 13, 2013, we filed Form N-8F to deregister as a registered investment company based upon our prior filing
to become a BDC. We are regulated as a BDC and plan to be taxed as a regulated investment company.



13







Business Model and Strategy



As a BDC, we primarily focus on investing in or lending to private
companies and making managerial assistance available to such companies. A BDC provides shareholders with the ability to retain
the liquidity of a publicly traded stock, while sharing in the possible benefits of investing in emerging-growth or expansion-stage
companies that are privately owned.



Our future revenues will relate to the earnings we receive from
our portfolio investments. The Company’s objective is to obtain superior returns from investments in securities and other
investment opportunities available to business development companies under the 1940 Act. We intend to invest capital in portfolio
companies for purposes of financing acquisitions, recapitalizations, buyouts, organic growth and working capital. Buyouts generally
include transactions that involve the acquisition of a controlling interest in an entity, either by management or other investors.
Organic growth refers to growth through the internal operations of the company, through investments in marketing initiatives, capital
expenditures or other internal growth initiatives, rather than growth by means of an acquisition.



We plan to identify potential investments through multiple sources,
including private equity sponsors, investment bankers, brokers and owners and operators of businesses. We will base our investment
decisions on analyses of potential customers’ business operations and asset valuations, utilizing risk management methods,
pricing tools, due diligence methodologies and data management processes designed to help us assess risk, establish appropriate
pricing, and maximize our return on investment. Subject to applicable BDC regulations set forth in the 1940 Act, we plan to invest
in private companies, small-cap public stocks, notes and other forms of debt, investment contracts, and other investments commonly
referred to as securities.



Highlights for the Three Months Ended March 31, 2013



Investment Transactions



On March 6, 2013, we purchased 400,000 shares of Southern Plains’
common stock, representing 1.45% of its outstanding capital stock, for a purchase price of $420,000. Southern Plains is engaged
in the business of acquiring acreage in prospective natural resource lands across the Rocky Mountain region and Williston Basin
in the United States, with a primary focus on crude oil, acting as a non-operating participant in oil and gas exploration
and development. Southern Plains is located at 510 East Locust Street, Second Floor, Des Moines, Iowa 50309.



On March 1, 2013, we entered into a subscription agreement with
Great Plains Sand, LLC for the purchase of 1 Class A Membership Unit for $105,000, representing 0.5% of its outstanding Class A
Membership Units. Great Plains mines, processes and distributes frac sand in Jordan, Minnesota. Great Plains is located at 15870
Johnson Memorial Drive, Jordan, Minnesota 55352.



Material Changes in Assets and Liabilities



Our prepaid expenses for the three month period ended March
31, 2013 was $132,206 compared to $0 for the year ended December 31, 2012. The increase relates to our annual insurance and fidelity
bond premiums which will be amortized ratably over the covered period.



Our accounts payable for the three month period ended March
31, 2013 were $215,962 compared to $25,162 for the year ended December 31, 2012. The increase is primarily due to one-time professional
fees related to our change from an operating company to a BDC, fees related to our private offering, and our annual insurance and
fidelity bond premiums.



Our accrued payroll for the three month period ended March 31,
2013 was $80,737 compared to $0 for the year ended December 31, 2012. The increase relates to executive salary and bonus compensation.
Prior to December 13, 2012, our executive management were compensated through stock issuances.



14







Results of Operations for the Three Months Ended March 31,
2013 Compared to the Three Months Ended March 31, 2012



The results of operations for the three month period ended March
31, 2013 reflects the Company’s results as a BDC under the 1940 Act. The results for the three month period ended March 31,
2012 reflect the Company’s results prior to operating as a BDC. Accounting principles used in the preparation of the financial
statements for the three month period ended March 31, 2013 are different than those for the three month period ended March 31,
2012 and, therefore, the financial position and results of operations of these periods are not directly comparable.



|                                           |  | As a BDC                                         |          |   | Prior to Becoming a BDC | 
|------------------------------------------ |  | ------------------------------------------------ | -------- | - | ----------------------- | 
|Item                                       |  | For the Three Month Period Ended  March 31, 2013 |          |   | % of 2013  Net Loss     | 
|Investment Income                          |  | $                                                | 3,562    |   |                         | 
|                                           |  |                                                  |          |   |                         | 
|Operating Expenses:                        |  |                                                  |          |   |                         | 
|Professional fees                          |  |                                                  | 82,259   |   |                         | 
|Payroll expense                            |  |                                                  | 80,737   |   |                         | 
|Registration statement expense             |  |                                                  | 23,305   |   |                         | 
|Insurance expense                          |  |                                                  | 2,641    |   |                         | 
|Executive management compensation in stock |  |                                                  | -        |   |                         | 
|Interest expense                           |  |                                                  | -        |   |                         | 
|Other general and administrative           |  |                                                  | 2,243    |   |                         | 
|Net Investment Loss / Net Loss             |  | $                                                | (187,623 | ) |                         | 



As the table above demonstrates,
we incurred operating expenses of $191,185 and $49,269 for the three month periods ended March 31, 2013 and 2012, respectively.A discussion and analysis of the material components of our operating expenses appears below.



Professional fees. Our professional fees were
$30,412 for the three month period ended March 31, 2012 compared to $82,259 for the three month period ended March 31, 2013 which
included non-recurring professional fees relating to our conversion to a BDC, our private placement offering and expenses related
to the appointment of additional directors to our Board.



Payroll expense and executive management compensation.
During the three month period ended March 31, 2013, we incurred $80,737 in payroll expense for our executive management. During
the three month period ended March 31 2012, our executive management compensation of $12,000 was in common stock issuances.



Registration statement expense. Our registration
statement expenses for the three month periods ended March 31, 2013 and 2012 were $23,305 and $0. Our expenses incurred during
the three month period ended March 31, 2013 relate to the preparation and filing of our Form N-2 Registration Statement filed with
the SEC on April 1, 2013.



Interest expense for the three month period ended March 31,
2013 was $0 and $6,410 for the three month period ended March 31, 2012. On December 10, 2012, the majority of the outstanding promissory
note balances owed to Lantern Advisers, Douglas Polinsky and Joseph A. Geraci, II were converted to shares of common stock.



For the three month period ended March 31, 2013, our net investment
loss was $187,623. Our net loss for the three month period ended March 31, 2012 was $49,269.



We anticipate our compensation expense for our executive management,
professional fees and insurance expenses to increase in 2013 given our operation as a BDC.



15







Liquidity and Capital Resources



Summary cash flow data is as follows:



|                                |  | Three Months Ended March 31, |           
|------------------------------- |  | ---------------------------- | ----------
|                                |  | 2013                         |           
|Cash flows provided (used) by : |  |                              |           
|Operating activities            |  | $                            | (587,726  
|Investing activities            |  |                              | -         
|Financing activities            |  |                              | 10,164,905
|Net increase (decrease) in cash |  |                              | 9,577,179 
|Cash, beginning of period       |  |                              | 603,621   
|Cash, end of period             |  | $                            | 10,180,800



The cash used in operating activities for the three month period
ended March 31, 2013 was primarily from our investment transactions offset in part by an increase in accrued liabilities. The cash
used in operating activities for the three month period ended March 31, 2012 was primarily from an increase in interest expense
and accrued liabilities.



On November 9, 2012, the Company received $500,000 from an accredited
investor. The terms within the subscription agreement were finalized on March 6, 2013, which resulted in the issuance of 500,000
shares of common stock at a per-share price of $1.00.



On March 7, 2013, the Company closed on a total of $8,850,000
from a private placement of common stock at a per-share price of $1.00 and issued 8,850,000 shares of common stock. On March 20,
2013, the Company closed on an additional $1,315,000 from a private placement of common stock at a per-share price of $1.00, and
issued 1,315,000 shares of common stock.



Regulation as a BDC



As a BDC, we are regulated by the 1940 Act. A BDC must be organized
in the United States for the purpose of investing in or lending to primarily private companies, or certain small-cap public companies,
and, with limited exceptions, making managerial assistance available to them. A BDC may use capital provided by public shareholders
and from other sources to make long-term, private investments in businesses. A BDC provides shareholders the ability to retain
the liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned
or small-cap public companies.



We may not change the nature of our business so as to cease
to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding voting securities, as required
by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a)
67% or more of such company’s voting securities present at a meeting if more than 50% of the outstanding voting securities
of such company are present or represented by proxy; or (b) more than 50% of the outstanding voting securities of such company.
We do not anticipate any substantial change in the nature of our business.



As with other companies regulated by the 1940 Act, a BDC must
adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not “interested
persons,” as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by
a reputable fidelity insurance company to protect the BDC. Furthermore, as a business development company, we are prohibited from
protecting any director or officer against any liability to us or our shareholders arising from willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.



We are generally not able to sell our common stock at a price
below net asset value per share. We may, however, sell our common stock at a price below net asset value per share (i) in connection
with a rights offering to our existing shareholders, (ii) with the consent of shareholders holding a majority of our common
stock, or (iii) under such other circumstances as the SEC may permit. For example, we may sell our common stock at a price below
the then-current net asset value of our common stock if our Board of Directors determines that such sale is in our best interests
and the best interests of our shareholders, and our shareholders approve our policy and practice of making such sales. In addition,
we may generally issue new shares of our common stock at a price below net asset value in rights offerings to our existing shareholders,
in payment of dividends and in certain other limited circumstances. No such offerings have occurred as of the date of this filing.



16







Senior Securities; Coverage Ratio



As a BDC, we are generally required to meet an asset-coverage
ratio, defined under the 1940 Act as the ratio of our gross assets (less all liabilities and indebtedness not represented by senior
securities) to our outstanding senior securities, of at least 200% after each issuance of senior securities. We may also be prohibited
under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors
who are not interested persons and, in some cases, prior approval by the SEC.



As a BDC, we are generally not permitted to invest in any portfolio
company in which our investment adviser or any of its affiliates currently have an investment or to make any co-investments with
our investment adviser or its affiliates without an exemptive order from the SEC, subject to certain exceptions.



Qualifying Assets and Significant Managerial Assistance



Under the 1940 Act, a BDC may not acquire any asset other than
assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as “qualifying assets,” unless, at
the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s gross assets.
The principal categories of qualifying assets relevant to our proposed business are the following:



(1) Securities purchased in
transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions)
is an “eligible portfolio company,” (as defined in the 1940 Act) or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as
may be prescribed by the SEC. The 1940 Act defines an “eligible portfolio company” as any issuer which: (a) is organized
under the laws of, and has its principal place of business in, the United States; (b) is not an investment company (other than
a wholly owned small business investment company) or a company that would be an investment company but for certain exclusions under
the 1940 Act; and (c) satisfies any one of the following three criteria:



| | · | (i) does not have any class of securities that is traded on a national securities exchange or (ii) has a class of securities
listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity
of less than $250 million;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | is controlled by us or a group of companies including us (with “control” being presumed to exist where we or our
group holds at least 25% of the voting securities of the issuer) and we have an affiliated person who is a director of the eligible
portfolio company; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | is a small and solvent company having gross assets of not more than $4.0 million and capital and surplus of not less than $2.0
million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



(2) Securities of any eligible
portfolio company which we control.



(3) Securities purchased in
a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, from any
other person or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer,
immediately prior to the purchase of its securities, was unable to meet its obligations as they came due without material assistance
other than conventional lending or financing arrangements.



(4) Securities of an eligible
portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already
own 60% of the outstanding equity of the eligible portfolio company.



(5) Securities received in exchange
for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants
or rights relating to such securities.



(6) Cash, cash equivalents,
U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.



In addition, a BDC must either control the issuer of the securities
or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant
managerial assistance; except that, where the business development company purchases such securities in conjunction with one or
more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making
available managerial assistance means, among other things, any arrangement whereby the business development company, through its
directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning
the management, operations or business objectives and policies of a portfolio company. We will offer to provide managerial assistance
to our portfolio companies.

17







In addition to the foregoing description of “qualifying
assets,” (i) certain types of follow-on investments in issuers that no longer satisfy the definition of “eligible portfolio
company” may nonetheless be “qualifying assets” as well as (ii) office furniture, equipment, real estate interests
and leasehold improvements (as described in Sections 55(a)(1)(B) and 55(a)(7), respectively, of the 1940 Act).



Temporary Investments



Temporary 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.



Capital Expenditures



The Company did not have and does not plan to have any material
commitments for capital expenditures in 2012 or 2013. Given the Company’s business model as a BDC, material investments in
capital resources is not required.



Critical Accounting Policies



Investment Valuation



Investment transactions are recorded on the trade date. Realized
gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis
of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during
the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal
of previously recorded unrealized gains or losses when gains or losses are realized.



Investments for which market quotations are readily available
are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine
if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities
that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith
by our board of directors, based on, among other things, the input of our executive management, audit committee and independent
third-party valuation expert that may be engaged by management to assist in the valuation of our portfolio investments.



Interest and Dividend Income
Recognition



Interest income is recorded on an accrual basis and includes
the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized
into interest income over the life of the respective security using the effective yield method. The amortized cost of investments
represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any.



Loans are generally placed on non-accrual status when principal
or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected
in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received
on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability.
Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment,
are likely to remain current. The Company may make exceptions to this if the 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.



Further information on our critical accounting policies and
use of estimates can be found in our financial statements and notes thereto included in this report and in our Annual Report on
Form 10-K filed with the SEC in March 2013.  There have been no material changes to our critical accounting policies
and estimates from those disclosed in our Annual Report on Form 10-K.



18







Off-Balance Sheet Arrangements



During the three months ended March
31, 2013, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.



Item 3.  Quantitative and Qualitative Disclosures
About Market Risk.



We are subject to financial market
risks, including changes in interest rates. Interest rate risk is the sensitivity of our current and future earnings to interest
rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities
and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net
investment income, which is the difference between the interest income earned on interest earning assets and our interest expense
incurred in connection with our interest bearing debt and liabilities. Changes in interest rates can also affect, among other things,
our ability to acquire and originate loans and securities and the value of our investment portfolio. At this time none of our investments
are tied to any variable interest rates, but in the future we mayplan to borrow money at fixed or variable interest rates
to make investments. In such circumstances, our net investment income will be dependent upon the difference between the rate at
which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant
change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest
rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase
in interest income generated by variable rate assets in our investment portfolio.



We do not currently engage in any hedging activities. However,
we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options,
and forward contracts. While hedging activities may insulate us against changes in interest rates, they may also limit our ability
to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with respect
to our portfolio of investments. During the three-month period ended March 31, 2013, we did not engage in interest rate hedging
activities.



Item 4. Controls and Procedures.



Evaluation of Disclosure 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, 2013, 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, 2013.



Changes in Internal Controls



There were no 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, except as described below.



During the fiscal quarter covered by this report, we began to
develop and revise our processes and related internal controls to reflect our conversion to a BDC, including but not limited to,
valuation of our investments and the oversight role of our Audit Committee.



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PART II – OTHER INFORMATION



Item 6. Exhibits.



|Exhibit No. |  | Description                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|31.1        |  | Certification of Chief Executive Officer (filed herewith).                                                                                      
|31.2        |  | Certification of Chief Financial Officer (filed herewith).                                                                                      
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|            |  |                                                                                                                                                 



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SIGNATURES



Pursuant to the requirements of the Securities 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.
| | ----------------------------
| |                             
| | /s/ Douglas Polinsky        
| | Douglas Polinsky            
| | Chief Executive Officer     
| |                             
| | Dated:  May 15, 2013        
| |                             
| | /s/ Joseph A. Geraci, II    
| | Joseph A. Geraci, II        
| | Chief Financial Officer     
| |                             
| | Dated:  May 15, 2013        



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