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 September 30, 2015 OR



| |  ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------

For the transition period fromto



Commission File Number 814-00991



MILL CITY VENTURES III, LTD.



(Exact name of registrant as specified in
its charter)



|Minnesota                                                      |  | 90-0316651                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



328 Barry Avenue South #210, Wayzata, MN
55391

(Address of Principal Executive Offices)



(952) 479-1923

(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 x     No  ̈



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  ̈



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 ̈   | (Do not check if a smaller reporting company) | Smaller reporting companyx



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 September 30, 2015, there were 12,151,493 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 | 14  
|                                                                                              |     
|Item 4. Controls and Procedures                                                               | 24  
|                                                                                              |     
|PART II. OTHER INFORMATION                                                                    |     
|                                                                                              |     
|Item 6 . Exhibits                                                                             | 24  
|                                                                                              |     
|SIGNATURES                                                                                    | 25  











PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



Mill City Ventures III, Ltd.

Balance Sheets



|                                                                                                                                 |  | September 30, 2015 |            |   | December 31, 2014 |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | -
|                                                                                                                                 |  | (unaudited)        |            |   | (audited)         |  
|ASSETS                                                                                                                           |  |                    |            |   |                   |  
|Investments, at fair value                                                                                                       |  |                    |            |   |                   |  
|Non-control / Non-affiliate investments (cost of $7,762,465 and $5,797,518, respectively)                                        |  | $                  | 5,854,004  |   |                   | $
|                                                                                                                                 |  |                    |            |   |                   |  
|Cash                                                                                                                             |  |                    | 2,444,226  |   |                   |  
|Prepaid expenses                                                                                                                 |  |                    | 58,588     |   |                   |  
|Receivable from sale of investments                                                                                              |  |                    | -          |   |                   |  
|Interest and dividends receivable                                                                                                |  |                    | 107,552    |   |                   |  
|Leasehold improvements, net                                                                                                      |  |                    | 25,800     |   |                   |  
|Property and equipment, net                                                                                                      |  |                    | 15,407     |   |                   |  
|Total Assets                                                                                                                     |  | $                  | 8,505,577  |   |                   | $
|                                                                                                                                 |  |                    |            |   |                   |  
|LIABILITIES                                                                                                                      |  |                    |            |   |                   |  
|                                                                                                                                 |  |                    |            |   |                   |  
|Current Liabilities                                                                                                              |  |                    |            |   |                   |  
|Accounts payable                                                                                                                 |  | $                  | 30,881     |   |                   | $
|Deferred interest income                                                                                                         |  |                    | 13,145     |   |                   |  
|Deferred rent                                                                                                                    |  |                    | 10,882     |   |                   |  
|Total Current Liabilities                                                                                                        |  |                    | 54,908     |   |                   |  
|                                                                                                                                 |  |                    |            |   |                   |  
|Total Liabilities                                                                                                                |  |                    | 54,908     |   |                   |  
|                                                                                                                                 |  |                    |            |   |                   |  
|SHAREHOLDERS’ EQUITY                                                                                                             |  |                    |            |   |                   |  
|Common Stock, par value $0.001 per share (250,000,000 common shares authorized; 12,151,493 and12,151,493 issued and outstanding) |  |                    | 12,151     |   |                   |  
|Additional paid-in capital                                                                                                       |  |                    | 11,857,660 |   |                   |  
|Accumulated deficit                                                                                                              |  |                    | (1,159,665 | ) |                   |  
|Accumulated undistributed investment loss                                                                                        |  |                    | (1,075,916 | ) |                   |  
|Accumulated undistributed net realized gains on investment transactions                                                          |  |                    | 724,900    |   |                   |  
|Net unrealized appreciation (depreciation) in value of investments                                                               |  |                    | (1,908,461 | ) |                   |  
|Total Shareholders’ Equity                                                                                                       |  |                    | 8,450,669  |   |                   |  
|                                                                                                                                 |  |                    |            |   |                   |  
|Total Liabilities and Shareholders’ Equity                                                                                       |  | $                  | 8,505,577  |   |                   | $
|                                                                                                                                 |  |                    |            |   |                   |  
|Net Asset Value Per Common Share                                                                                                 |  | $                  | 0.69       |   |                   | $



See accompanying notes to financial statements.



1







Mill City Ventures III, Ltd.

Statement of Operations

(unaudited)



|                                                                           |  | Three Months Ended September 30, 2015 |            |   | Three Months Ended September 30, 2014 |  |            | Nine Months Ended September 30, 2015 |  |   | Nine Months Ended September 30, 2014 |  
|-------------------------------------------------------------------------- |  | ------------------------------------- | ---------- | - | ------------------------------------- |  | ---------- | ------------------------------------ |  | - | ------------------------------------ | -
|Investment Income                                                          |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Interest income                                                            |  | $                                     | 108,679    |   |                                       |  | 59,882     |                                      |  | $ | 365,001                              |  
|Dividend income                                                            |  |                                       | 10,673     |   |                                       |  | 32,483     |                                      |  |   | 65,276                               |  
|Total Investment Income                                                    |  |                                       | 119,352    |   |                                       |  | 92,365     |                                      |  |   | 430,277                              |  
|                                                                           |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Operating Expenses                                                         |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Professional fees                                                          |  |                                       | 61,245     |   |                                       |  | 29,986     |                                      |  |   | 148,713                              |  
|Payroll expense                                                            |  |                                       | 40,422     |   |                                       |  | 40,473     |                                      |  |   | 122,377                              |  
|Insurance expense                                                          |  |                                       | 21,682     |   |                                       |  | 24,830     |                                      |  |   | 67,856                               |  
|Occupancy                                                                  |  |                                       | 22,798     |   |                                       |  | 21,521     |                                      |  |   | 68,416                               |  
|Directors’ fees expense                                                    |  |                                       | 15,000     |   |                                       |  | 15,000     |                                      |  |   | 45,000                               |  
|Depreciation and amortization expense                                      |  |                                       | 3,213      |   |                                       |  | 3,212      |                                      |  |   | 9,637                                |  
|Other general and administrative expenses                                  |  |                                       | 6,608      |   |                                       |  | 4,403      |                                      |  |   | 15,771                               |  
|Total Operating Expenses                                                   |  |                                       | 170,968    |   |                                       |  | 139,425    |                                      |  |   | 477,770                              |  
|Net Investment Income (Loss)                                               |  |                                       | (51,616    | ) |                                       |  | (47,060    | )                                    |  |   | (47,493                              | )
|                                                                           |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Realized and Unrealized Gain (Loss) on Investments                         |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Net realized gain on investments                                           |  |                                       | 20,781     |   |                                       |  | 91,537     |                                      |  |   | 306,924                              |  
|Net change in unrealized appreciation (depreciation) on investments        |  |                                       | (2,604,807 | ) |                                       |  | 1,482,535  |                                      |  |   | (3,282,452                           | )
|Net Realized and Unrealized Gain (Loss) on Investments                     |  |                                       | (2,584,026 | ) |                                       |  | 1,574,072  |                                      |  |   | (2,975,528                           | )
|Net Increase (Decrease) in Net Asset Value Resulting from Operations       |  | $                                     | (2,635,642 | ) |                                       |  | 1,527,012  |                                      |  | $ | (3,023,021                           | )
|                                                                           |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Net Increase (Decrease) in Net Assets Resulting from Operations per share: |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|                                                                           |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Basic and diluted                                                          |  | $                                     | (0.22      | ) |                                       |  | 0.13       |                                      |  | $ | (0.25                                | )
|                                                                           |  |                                       |            |   |                                       |  |            |                                      |  |   |                                      |  
|Weighted-average number of common shares outstanding                       |  |                                       | 12,151,493 |   |                                       |  | 12,167,064 |                                      |  |   | 12,151,493                           |  



See accompanying notes to financial statements.



2







Mill City Ventures III, Ltd.

Statements of Cash Flows

(unaudited)



|                                                                                                                                   |  | Nine Months Ended  |            |   | Nine Months Ended  |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | -
|                                                                                                                                   |  | September 30, 2015 |            |   | September 30, 2014 |  
|Cash flows from operating activities:                                                                                              |  |                    |            |   |                    |  
|Net increase (decrease) in net asset value resulting from operations                                                               |  | $                  | (3,023,021 | ) |                    | $
|                                                                                                                                   |  |                    |            |   |                    |  
|Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: |  |                    |            |   |                    |  
|Net change in unrealized (appreciation) depreciation on investments                                                                |  |                    | 3,282,452  |   |                    |  
|Net realized gain on investments                                                                                                   |  |                    | (306,924   | ) |                    |  
|Payments for purchases of investments                                                                                              |  |                    | (3,121,399 | ) |                    |  
|Proceeds from sales of investments                                                                                                 |  |                    | 1,463,376  |   |                    |  
|Depreciation and amortization expense                                                                                              |  |                    | 9,637      |   |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Changes in operating assets and liabilities:                                                                                       |  |                    |            |   |                    |  
|Prepaid expenses                                                                                                                   |  |                    | (8,965     | ) |                    |  
|Receivable from sale of investments                                                                                                |  |                    | 82,103     |   |                    |  
|Interest and dividends receivable                                                                                                  |  |                    | (47,758    | ) |                    |  
|Accounts payable                                                                                                                   |  |                    | (5,217     | ) |                    |  
|Deferred interest income                                                                                                           |  |                    | 13,145     |   |                    |  
|Accrued royalty                                                                                                                    |  |                    | -          |   |                    |  
|Deferred rent                                                                                                                      |  |                    | 886        |   |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Net cash used in operating activities                                                                                              |  |                    | (1,661,685 | ) |                    |  
|Cash flows from investing activities:                                                                                              |  |                    |            |   |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Purchases of property and equipment                                                                                                |  |                    | -          |   |                    |  
|Purchases of leasehold improvements                                                                                                |  |                    | -          |   |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Net cash used by investing activities                                                                                              |  |                    | -          |   |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Cash flows from financing activities:                                                                                              |  |                    |            |   |                    |  
|Purchase of retired shares of common stock                                                                                         |  |                    | -          |   |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Net cash provided by financing activities                                                                                          |  |                    | -          |   |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Net decrease in cash                                                                                                               |  |                    | (1,661,685 | ) |                    |  
|                                                                                                                                   |  |                    |            |   |                    |  
|Cash, beginning of the period                                                                                                      |  |                    | 4,105,911  |   |                    |  
|Cash, end of the period                                                                                                            |  | $                  | 2,444,226  |   |                    | $



See accompanying notes to financial statements.



3







Mill City Ventures III, Ltd.

Financial Highlights

(unaudited)





|                                                         |  | Nine Months Ended |           
|-------------------------------------------------------- |  | ----------------- | ----------
|                                                         |  | September 30,     |           
|                                                         |  | 2015              |           
|Per Share Data                                           |  |                   |           
|Net asset value at beginning of the period               |  | $                 | 0.94      
|Net investment income                                    |  |                   | 0.00      
|Net realized and unrealized losses                       |  |                   | (0.25     
|                                                         |  |                   |           
|Net asset value at end of period                         |  | $                 | 0.69      
|                                                         |  |                   |           
|Ratio / Supplemental Data                                |  |                   |           
|Per share market value of investments at end of period   |  | $                 | 0.48      
|Shares outstanding at end of period                      |  |                   | 12,151,493
|Average weighted shares outstanding for period           |  |                   | 12,151,493
|Net assets at end of period                              |  | $                 | 8,450,669 
|Average net assets (1)                                   |  | $                 | 11,131,655
|Portfolio turnover rate (2)                              |  |                   | 13.15     
|Ratio of operating expenses to average net assets (2)    |  |                   | (5.16     
|Ratio of net investment income to average net assets (2) |  |                   | (0.57     
|Ratio of realized gains to average net assets (2)        |  |                   | 3.70      



| | (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.



4







Mill City Ventures III, Ltd.

Schedule of Investments

As of September 30, 2015

(Unaudited)



|Portfolio Company                        |  | Description of Securities                          |  | Cost |           |  | Fair Value |  
|---------------------------------------- |  | -------------------------------------------------- |  | ---- | --------- |  | ---------- | -
|Creative Realities Inc.                  |  | 12% Convertible Promissory Note (Mat. 8/18/16 ) †  |  | $    | 1,000,000 |  |            | $
|                                         |  | 1,515,152 $0.38 Cashless Warrants (Exp. 2/18/20)*† |  |      | -         |  |            |  
|BioLife Solutions Inc.                   |  | $4.70 Cashless Warrants (Exp. 3/20/21)*            |  |      | -         |  |            |  
|Combimatrix Corp.                        |  | $1.97 Cashless Warrants (Exp. 12/29/2018)*         |  |      | -         |  |            |  
|                                         |  | $3.12 Cashless Warrants (Exp. 12/19/2018)*         |  |      | -         |  |            |  
|Bite Squad, LLC                          |  | Series B Convertible Preferred Stock*†             |  |      | 780,000   |  |            |  
|Mix 1 Life Inc.                          |  | 12% Convertible Promissory Note (Mat. 2/6/16)      |  |      | 500,000   |  |            |  
|                                         |  | 12% Promissory Note (Mat. 3/13/16)†                |  |      | 250,000   |  |            |  
|                                         |  | Common Stock*                                      |  |      | -         |  |            |  
|Pacific Oil & Gas, LLC                   |  | 12% Promissory Note (Mat. 12/31/15)†               |  |      | 25,000    |  |            |  
|Tzfat Spirits of Israel, LLC             |  | Class A Membership Units*†                         |  |      | 101,019   |  |            |  
|Bravo Financial, LLC                     |  | 12% Promissory Note (Mat. 12/31/15)†               |  |      | 500,000   |  |            |  
|Insite Software Solutions, Inc.          |  | $0.01 Warrants (Change Of Control) (Exp 12/30/23)* |  |      | -         |  |            |  
|MAX 4G Wireless, Inc.                    |  | Series B Convertible Preferred Stock*†             |  |      | 150,000   |  |            |  
|Calamos Convertible and High Income Fund |  | Closed End Fund                                    |  |      | 128,357   |  |            |  
|Powershares KBW High Dividend            |  |                                                    |  |      |           |  |            |  
|Yield Financial                          |  | ETF                                                |  |      | 253,510   |  |            |  
|Solar Senior Capital, Ltd.               |  | Common Stock                                       |  |      | 91,983    |  |            |  
|DBR Phase III US Investors, LLC          |  | Membership Units†                                  |  |      | 1,000,000 |  |            |  
|The Igloo, LLC                           |  | 20% Senior Secured Note (Mat. 12/31/16)†           |  |      | 500,000   |  |            |  
|Discovery Communications Inc.            |  | Common Stock Series A                              |  |      | 149,609   |  |            |  
|Dala Petroleum Inc.                      |  | Series A 6% Convertible Preferred Stock            |  |      | 500,000   |  |            |  
|                                         |  | 714,286 $1.35 Cashless Warrants (Exp. 6/3/17 )*    |  |      | -         |  |            |  
|Northern Capital Partners I, LP          |  | Membership Units*†                                 |  |      | 500,000   |  |            |  
|Southern Plains Resources, Inc.          |  | Common Stock*†                                     |  |      | 730,000   |  |            |  
|Hi-Crush Partners, LP                    |  | Limited Partnership Units                          |  |      | 183,660   |  |            |  
|AT&T Inc.                                |  | Common Stock                                       |  |      | 175,260   |  |            |  
|Century Link Inc.                        |  | Common Stock                                       |  |      | 157,360   |  |            |  
|Communications Sales & Leasing Inc.      |  | Common Stock                                       |  |      | 65,620    |  |            |  
|Windstream Holdings, Inc.                |  | Common Stock                                       |  |      | 21,087    |  |            |  
|                                         |  | Total Investments                                  |  | $    | 7,762,465 |  |            | $



†Restricted security

*Indicates
securities are not income producing



5







Mill City Ventures III, Ltd.

Portfolio Investments by Industry

As of September 30, 2015

(Unaudited)



|                                       |  |                        |  | Date of    |  |                  |  | Quantity |           |  |      |   |           |                |  |   | % of      | 
|-------------------------------------- |  | ---------------------- |  | ---------- |  | ---------------- |  | -------- | --------- |  | ---- | - | --------- | -------------- |  | - | --------- | 
|                                       |  |                        |  | Initial    |  |                  |  | or Face  |           |  |      |   |           |                |  |   | Net       | 
|Security
    Name                      |  | Industry               |  | Investment |  | Investment       |  | Value    |           |  | Cost |   |           | Fair
    Value |  |   | Assets    | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Creative Realities, Inc.               |  | Advertising            |  | 2/19/2015  |  | Promissory Note  |  |          | 1,000,000 |  |      | $ | 1,000,000 |                |  | $ | 1,000,000 | 
|Creative Realities, Inc.               |  | Advertising            |  | 2/19/2015  |  | Warrants         |  |          | 1,515,152 |  |      |   | —         |                |  |   | —         | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 1,000,000 |                |  |   | 1,000,000 | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Bio Life Solutions, Inc.               |  | Bio-technology         |  | 3/21/2014  |  | Warrants         |  |          | 100,000   |  |      |   | —         |                |  |   | —         | 
|Combimatrix Corporation                |  | Bio-technology         |  | 5/6/2013   |  | Warrants         |  |          | 413,934   |  |      |   | —         |                |  |   | —         | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | —         |                |  |   | —         | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Bite Squad, LLC                        |  | Consumer               |  | 9/21/2015  |  | Preferred Stock  |  |          | 60,000    |  |      |   | 780,000   |                |  |   | 780,000   | 
|Mix 1 Life, Inc.                       |  | Consumer               |  | 2/6/2014   |  | Promissory Note  |  |          | 500,000   |  |      |   | 500,000   |                |  |   | 500,000   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Mix 1 Life, Inc.                       |  | Consumer               |  | 3/9/2015   |  | Promissory Note  |  |          | 250,000   |  |      |   | 250,000   |                |  |   | 250,000   | 
|Mix 1 Life, Inc.                       |  | Consumer               |  | 8/7/2014   |  | Common Stock     |  |          | 292,690   |  |      |   | —         |                |  |   | 288,478   | 
|Tzfat Spirits of Israel,
    LLC       |  | Consumer               |  | 10/14/2013 |  | Membership Units |  |          | 55,000    |  |      |   | 101,019   |                |  |   | 25,000    | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 1,631,019 |                |  |   | 1,843,478 | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Bravo Financial, LLC                   |  | Financial              |  | 9/1/2015   |  | Promissory Note  |  |          | 500,000   |  |      |   | 500,000   |                |  |   | 500,000   | 
|Communication Sales & Leasing, Inc.    |  | Financial              |  | 4/24/2015  |  | Common Stock     |  |          | 2,000     |  |      |   | 65,620    |                |  |   | 35,800    | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 565,620   |                |  |   | 535,800   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Insite Software Solutions, Inc.        |  | Information Technology |  | 12/30/2013 |  | Warrants         |  |          | 108,960   |  |      |   | —         |                |  |   | —         | 
|MAX 4G                                 |  | Information Technology |  | 6/14/2013  |  | Preferred Stock  |  |          | 300,000   |  |      |   | 150,000   |                |  |   | 150,000   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 150,000   |                |  |   | 150,000   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Calamos Convertible & High Income Fund |  | Investment Fund        |  | 11/5/2013  |  | Common Stock     |  |          | 10,000    |  |      |   | 128,357   |                |  |   | 108,700   | 
|Powershares High Dividend Yield        |  | Investment Fund        |  | 5/12/2014  |  | Common Stock     |  |          | 10,000    |  |      |   | 253,510   |                |  |   | 219,500   | 
|Solar Senior Capital Ltd               |  | Investment Fund        |  | 1/16/2015  |  | Common Stock     |  |          | 6,047     |  |      |   | 91,983    |                |  |   | 85,989    | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 473,850   |                |  |   | 414,189   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|DBR Phase III US Investors, LLC        |  | Leisure & Hospitality  |  | 2/7/2014   |  | LP Units         |  |          | 1,000,000 |  |      |   | 1,000,000 |                |  |   | 1,000,000 | 
|The Igloo LLC                          |  | Leisure & Hospitality  |  | 12/31/2014 |  | Promissory Note  |  |          | 500,000   |  |      |   | 500,000   |                |  |   | —         | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 1,500,000 |                |  |   | 1,000,000 | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Discovery Communications Inc.          |  | Media                  |  | 1/23/2015  |  | Common Stock     |  |          | 5,000     |  |      |   | 149,609   |                |  |   | 130,150   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Dala Petroleum, Inc.                   |  | Oil & Gas              |  | 6/3/2014   |  | Preferred Stock  |  |          | 500       |  |      |   | 500,000   |                |  |   | —         | 
|Dala Petroleum, Inc.                   |  | Oil & Gas              |  | 6/3/2014   |  | Warrants         |  |          | 714,286   |  |      |   | —         |                |  |   | —         | 
|HI Crush Partners                      |  | Oil & Gas              |  | 2/24/2015  |  | Common Stock     |  |          | 5,000     |  |      |   | 183,660   |                |  |   | 37,450    | 
|Northern Capital, LP                   |  | Oil & Gas              |  | 6/16/2014  |  | Membership Units |  |          | 500,000   |  |      |   | 500,000   |                |  |   | 444,208   | 
|Pacific Oil & Gas, LLC                 |  | Oil & Gas              |  | 5/29/2015  |  | Promissory Note  |  |          | 25,000    |  |      |   | 25,000    |                |  |   | —         | 
|Southern Plains Resources,
    Inc.    |  | Oil & Gas              |  | 3/13/2013  |  | Common Stock     |  |          | 600,000   |  |      |   | 730,000   |                |  |   | —         | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 1,938,660 |                |  |   | 481,658   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|AT&T                                   |  | Telecommunications     |  | 10/25/2013 |  | Common Stock     |  |          | 5,000     |  |      |   | 175,260   |                |  |   | 162,900   | 
|CenturyLink, Inc.                      |  | Telecommunications     |  | 10/28/2013 |  | Common Stock     |  |          | 5,000     |  |      |   | 157,360   |                |  |   | 125,600   | 
|Windstream Holdings Inc.               |  | Telecommunications     |  | 11/6/2013  |  | Common Stock     |  |          | 1,666     |  |      |   | 21,087    |                |  |   | 10,229    | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   | 353,707   |                |  |   | 298,729   | 
|                                       |  |                        |  |            |  |                  |  |          |           |  |      |   |           |                |  |   |           | 
|Total Investments                      |  |                        |  |            |  |                  |  |          |           |  |      | $ | 7,762,465 |                |  | $ | 5,854,004 | 



6







Mill City Ventures
III, Ltd.

Notes to Financial
Statements

September 30, 2015



NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of Operations and Basis of Presentation



Mill City Ventures III, Ltd. is an investment company that was
incorporated in the State of Minnesota on January 10, 2006 under the name WPP Acquisition, Inc. The Company’s name was subsequently
changed to 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. Throughout these
notes, we collectively refer to Mill City Ventures III, Ltd. as “we,” the “Company,” and “us.”



On December 13, 2012, we filed a Form N-8A with the SEC, notifying
the SEC that we intended to convert the Company to 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 a Form N-54A, notifying the SEC
of our election to become a business development company (“BDC”). Subsequently, on May 13, 2013, we filed a Form N-8F
to deregister as a registered investment company based upon our prior filing to become a BDC. On September 25, 2013, the SEC issued
an order under Section 8(f) of the 1940 Act declaring that the Company has ceased to be an investment company. We are regulated
as a BDC and plan to be taxed as a regulated investment company, although we currently have not elected this tax status. As a BDC,
we primarily focus on investing in or lending to privately held and publicly traded companies and making managerial assistance
available to such companies. A BDC may provide 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. Our future revenues will relate
to the earnings we receive from the sale of securities, dividends and interest from our portfolio investments. The Company’s
objective is to obtain 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 as well as financing structure, 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 regulations set forth in the 1940 Act and applicable to BDCs, 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 our Articles
of Incorporation. The amendment and restatement included a change in our name from "Poker Magic, Inc." to "Mill
City Ventures III, Ltd."



On February 7, 2013, the Company filed a Form N-54A, Notification
of Election to be Subject to Sections 55 through 65 of the 1940 Act notifying the SEC that we are closed-end company that will
be operated for the purpose of making investments primarily in securities described in section 55(a)(1) through (3) of the 1940
Act and will make available significant managerial assistance with respect to issuers of such securities to the extent required
by the 1940 Act.



Interim Financial Information



The balance sheet as of December 31, 2014, 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
(“GAAP”) have been omitted pursuant to such rules and regulations. Operating results for the three and nine months
ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015
or any other period. The accompanying financial statements and related notes should be read in conjunction with our audited financial
statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2014. 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.



7







Use of Estimates



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



Cash Deposits



The Company maintains its 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.



Fair Value of Financial Instruments



The carrying amounts of certain of the Company’s financial
instruments, including cash, receivable from sale of investments, interest and dividends receivable, prepaid expenses, 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 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 on investments 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 on investments previously recognized, and include investments
charged off during the period, net of recoveries. Unrealized gains or losses on investments 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 or the Valuation Committee of the board, 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, but in all cases consistent with our written valuation policies and procedures.



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 in a manner proportionate to the shares owned.



8







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.



Realized Gains and Losses, Interest and Dividend Income Recognition



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



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 portfolio investments at September 30, 2015 and December
31, 2014 were $5,854,004 and $7,171,509, respectively.



Management and Service Fees



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



Recent Accounting Pronouncements



No other new accounting pronouncement issued or effective during
the fiscal quarter has had or is expected to have a material impact on the condensed financial statements.



NOTE 2—NET GAIN (LOSS) PER COMMON SHARE



Basic net gain (loss) per common share is computed by dividing
net gain (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 gain (loss) per common share follows:



|                                                                                |  | For the Three Months Ended September 30, |           
|------------------------------------------------------------------------------- |  | ---------------------------------------- | ----------
|                                                                                |  | 2015                                     |           
|Numerator: Net Increase (Decrease) in Net Asset Value Resulting from Operations |  | $                                        | (2,635,642
|Denominator: Weighted-average number of common shares outstanding               |  |                                          | 12,151,493
|Basic and diluted net loss per common share                                     |  | $                                        | (0.22     



|                                                                                |  | For the Nine Months Ended September 30, |           
|------------------------------------------------------------------------------- |  | --------------------------------------- | ----------
|                                                                                |  | 2015                                    |           
|Numerator: Net Increase (Decrease) in Net Asset Value Resulting from Operations |  | $                                       | (3,023,021
|Denominator: Weighted-average number of common shares outstanding               |  |                                         | 12,151,493
|Basic and diluted net gain (loss) per common share                              |  | $                                       | (0.25     



9







At September 30, 2015 and December 31, 2014, the Company did
not have any options or warrants outstanding or any other dilutive common equivalent shares.



NOTE 3—COMMITMENTS AND CONTINGENCIES



The Company has an agreement to lease approximately 1,917 square
feet of commercial space and two parking spots, for a period of 62 months. The 62-month lease term began October 1, 2013 and runs
through November 30, 2018. The total rent expense for the three and nine - month periods ended September 30, 2015 was $22,798 and
$68,416.



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



|Year  |  | Amount |        
|----- |  | ------ | -------
|2015  |  |        | 11,102 
|2016  |  |        | 46,179 
|2017  |  |        | 50,311 
|2018  |  |        | 46,988 
|TOTAL |  | $      | 154,580



NOTE 4—SHAREHOLDERS’ EQUITY



Common stock



On August 29, 2014, we purchased and retired 2,973 shares of
common stock at a per-share price of $0.83.



On September 3, 2014, we purchased and retired 4,510 shares
of common stock at a per-share price of $0.80.



On December 19, 2014, we purchased and retired 10,446 shares
of common stock at a per-share price of $0.84.



At September 30, 2015, a total of 12,151,493 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 we have 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 within respective industries.



|                                       |  | As of September 30, 2015 |          
|-------------------------------------- |  | ------------------------ | ---------
|                                       |  | Level 1                  |          
|AT&T                                   |  | $                        | 162,900  
|Calamos Convertible & High Income Fund |  |                          | 108,700  
|CenturyLink, Inc.                      |  |                          | 125,600  
|Communication Sales & Leasing,Inc.     |  |                          | 35,800   
|Discovery Communications Corp.         |  |                          | 130,150  
|Hi Crush Partners, LP                  |  |                          | 37,450   
|Windstream Holdings, Inc.              |  |                          | 10,229   
|Solar Senior Capital Ltd               |  |                          | 85,989   
|Powershares High Yield Dividend Fund   |  |                          | 219,500  
|Bite Squad, LLC                        |  |                          | -        
|Bravo Financial, LLC                   |  |                          | -        
|Pacific Oil & Gas, Inc.                |  |                          | -        
|Southern Plains Resources, Inc.        |  |                          | -        
|Max 4G                                 |  |                          | -        
|Tzfat Spirits of Israel, LLC           |  |                          | -        
|DBR Phase III US Investors, LLC        |  |                          | -        
|Mix 1 Life, Inc. Convertible Note      |  |                          | -        
|Mix 1 Life, Inc. Promissory Note       |  |                          | -        
|Mix 1 Life, Inc. Common Stock          |  |                          | 288,478  
|Dala Petroleum Inc.                    |  |                          | -        
|The Igloo, LLC                         |  |                          | -        
|Creative Realities, Inc.               |  |                          | -        
|Northern Capital Partners I, LP        |  |                          | -        
|                                       |  |                          |          
|Total                                  |  | $                        | 1,204,796



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



|                                                                                                                                         |  | Fair Value |           
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ----------
|Fair value, December 31, 2014                                                                                                            |  | $          | 4,225,000 
|Change in unrealized appreciation                                                                                                        |  |            | (1,380,792
|Net realized and unrealized loss                                                                                                         |  |            | (1,380,792
|Purchases of portfolio investments                                                                                                       |  |            | 2,555,000 
|Sales of portfolio investments                                                                                                           |  |            | (750,000  
|Fair value, September 30, 2015                                                                                                           |  | $          | 4,649,208 
|                                                                                                                                         |  |            |           
|Net unrealized losses included in the net increase in net assets resulting from operations relating to assets held at September 30, 2015 |  | $          | (1,380,792



11







Portfolio Investments



At September 30, 2015, we held investments in 15 eligible
portfolio investments, which had an amortized cost of $6,536,019 and a fair value of $4,937,686. At December 31, 2014, we
held investments in 11 eligible portfolio investments, which had an amortized cost of $4,946,019 and a fair value of
$6,265,399.



On March 1, 2013, we entered into a subscription agreement with
Great Plains Sand, LLC through a private placement of common stock for the purchase of 1 Class A Membership Unit for $105,000.
On May 24, 2013, Great Plains Sand, LLC sold its company to Fairmount Minerals, Ltd. for a sale price of $65 million subject to
certain adjustments for the final working capital settlement and the retention of a limited amount of the sale consideration to
pay certain post-closing expenses. After expenses, we received approximately $182,176 in cash with the potential of an additional
$18,750 in escrow to be paid within 60 days of closing and a potential earnout of $18,750 to be paid within one year of closing.
On February 25, 2014, $7,500 was received in satisfaction of post-closing payment rights under the acquisition agreement. On August
7, 2014, an additional $28,000 was received and on December 31, 2014, $258 was received in final satisfaction of post-closing payment
rights under the acquisition agreement.



On March 6, 2013, we entered into a purchase and sale agreement
with Mill City Ventures II, LP, wherein we purchased 400,000 shares of Southern Plains Resources, Inc. (“Southern Plains”)
common stock from Mill City Ventures II, LP for $420,000. On July 11, 2013, the Company entered into a subscription agreement with
Southern Plains through a private placement of common stock to purchase an additional 200,000 shares of common stock at $1.55 per
share for $310,000. Our cost of the Southern Plains investment at September 30, 2015 was $730,000 and the fair value was $0.



On May 3, 2013, we entered into a securities purchase agreement
with CombiMatrix Corporation (“CombiMatrix”) to purchase Series C Convertible Preferred Stock and warrants in two separate
closings. In the May 6, 2013 closing, we purchased 200 shares of Series C preferred stock convertible into common stock at $2.86
per share and warrants to purchase up to 81,967 common shares at an exercise price of $3.77 per share. In the June 28, 2013 closing,
we purchased 200 shares of Series C preferred stock convertible into common stock at $2.86 per share and warrants to purchase up
to 81,967 common shares at an exercise price of $3.55 per share. On August 9, 2013, we converted 100 shares of the CombiMatrix
6% Series C shares to 34,994 shares of CombiMatrix common stock at $2.86 per share. An additional 207 shares of common stock were
issued in lieu of accrued dividend on the converted principal amount. Our cost for the CombiMatrix investment was $400,600 and
the fair value at September 30, 2013 was $400,675. On November 21, 2013, we converted 300 shares of the CombiMatrix 6% series C
shares to 104,983 shares of CombiMatrix common stock at $2.86 per share. An additional 3,710 shares of common stock were issued
in lieu of accrued dividend on the converted principal balance. On December 18, 2013, we purchased 515 Series D Convertible preferred
shares of CombiMatrix Corporation for $1,000 per share for a total purchase price of $515,000 with a warrant to purchase up to
250,000 shares of common stock at an exercise price of $3.12 per share. Each Series D Convertible share is convertible into common
stock at $2.06 per share. The warrant has an expiration date of December 18, 2018. On December 19, we converted 515 Series D Convertible
preferred shares into 250,000 shares of common stock. During the first quarter ended March 31, 2014, we sold 204,850 shares of
the common stock for $615,394, resulting in a realized gain of $193,403. During the third quarter ended September 30, 2014, we
sold the remaining 45,150 shares of the common stock for $61,252, resulting in a realized loss of $31,756. On February 13, 2015,
CombiMatrix modified the conversion price of the 81,967 warrants at $3.77 per share and the 81,967 warrants at $3.55 to a $1.97
per share conversion price for the duration of the life of the warrants. The modification was made in accordance with anti-dilution
price-protection provisions in the warrant. At September 30, 2015 the cost and fair value of the warrants was $0.



On May 29, 2013, we entered into a subscription and investment
letter with MAX4G, Inc. (“MAX4G”) to purchase 300,000 shares of MAX4G's Series B Convertible Preferred Stock, $.001
par value per share, at $0.50 per share, for a total of $150,000. At September 30, 2015, the cost and fair value of the MAX4G investment
was $150,000.



On October 14, 2013, we entered into subscription agreement
with Tzfat Spirits of Israel, LLC (“Tzfat”), to purchase 55,000 Class A Membership Units at $1.8367 per unit for a
total of $101,019. At September 30, 2015, the cost and fair value of the Tzfat investment was $101,019 and $25,000, respectively.



On December 30, 2013, we entered into a Promissory Note and
Warrant Purchase Agreement with Insite Software Solutions, Inc. (“Insite Software”) and in connection therewith purchased
a $750,000 promissory note and received a warrant to purchase 108,960 shares of Insite Software common stock at $0.01 per share.
The warrant has a 10-year term expiring December 30, 2023. On April 27, 2015, we received the principal amount of $750,000 plus
$5,825.34 in accrued interest in full on redemption of the promissory note. At September 30, 2015, the cost and fair value of the
warrant was $0.



On February 6, 2014, we entered into a Senior
Secured Convertible Promissory Note and Warrant Purchase Agreement with Mix 1 Life, Inc. (“Mix 1 Life”) and in
connection therewith purchased a $500,000 senior secured convertible promissory note and received a warrant to purchase up to
1,600,000 shares of Mix 1 Life common stock at $0.50 per share. The note currently is convertible into shares of common stock
at $1.08 per share (post split). The warrant had a five-year term expiring February 6, 2019. On August 7, 2014 we elected to
exercise, on a cashless basis, our warrants into 1,121,912 shares of common stock. On September 11, 2014, a 1-for-3 reverse
split on those common shares reduced our holdings to 373,971 common shares. At September 30, 2015, the cost and fair value of
the promissory note was $500,000 and the cost and fair value of the common stock was $0 and $288,478, respectively. Our
director, Christopher Larson, is currently the Chief Financial Officer and a director of Mix 1 Life as well as a 5%
shareholder in Mix 1 Life. Mr. Larson was appointed the Chief Financial Officer and a director of Mix 1 Life on June 24,
2014, after our initial investment in Mix 1 Life.



On February 7, 2014, we entered into a Purchase Agreement
for $1,000,000 of limited liability company interests with DBR Phase III US Investors, LLC and in connection therewith funded
a first capital call of $350,000. We funded a second capital call of $350,000 on May 9, 2014 and a final capital call on
October 21, 2014 in the amount of $300,000. At September 30, 2015, the cost and fair value of the interests was
$1,000,000.



12







On June 3, 2014, we entered into a subscription and warrant purchase agreement with Dala Petroleum
Corporation (fka Westcott Products Corporation) (“Dala Petroleum”) to purchase 500 shares of Series A 6%
Convertible Preferred Stock, $.01 par value per share, at $1,000 per share, for a total of $500,000 and received a warrant to
purchase up to 714,286 shares of Dala Petroleum common stock at an exercise price of $1.35 per share. The preferred stock
converts into common stock at $0.70. The warrant has a three-year term, expiring June 3, 2017. On May 25, 2015, we entered
into an agreement to defer the receipt of the quarterly dividend distribution on the preferred shares until October 1, 2015.
The company did not make the prescribed payment and has subsequently notified us of its inability to make the payment. The
deferred dividend of $7,500 for each of the quarters ended June 30 and September 30, 2015 was deemed uncollectible and
removed from Dividend Income on the Statement of Operations as of September 30, 2015. At September 30, 2015, the cost and
fair value of the preferred stock was $500,000 and $0, respectively, and the cost and fair value of the warrant was $0. Other
holders of Dala Petroleum’s preferred stock have proposed a plan for additional funding for the company and reducing
the conversion price of the preferred stock and associated warrants. There can be no assurance the plan for additional
funding will be agreed upon by all preferred holders or that any additional financings would have a beneficial effect on Dala
Petroleum’s operations or future prospects.



On May 16, 2014, we entered into a Purchase
Agreement for $500,000 of limited partnership interests with Northern Capital Partners I, LP and in connection therewith funded
a first capital call of $50,000 on June 16, 2014. We funded a second capital call of $125,000 on August 26, 2014, a third capital
call of $200,000 on October 21, 2014 and the fourth and final capital call of $125,000 on December 26, 2014. At September 30, 2015,
the cost and fair value of the interests was $500,000 and $444,208, respectively.



On December 31, 2014, we entered into a Promissory Note Agreement
for $500,000 with The Igloo, LLC (“The Igloo”) and in connection therewith funded a $500,000 promissory note. At September
30, 2015, the cost and fair value of the note was $500,000 and $0, respectively. The Igloo no longer operates the facility and
has been blocked by the landlord, who has filed a lawsuit seeking monetary damages under The Igloo’s lease agreement. We
are pursuing our rights under the note agreement with respect to the claim on collateral.



On February 19, 2015, we purchased a 12% convertible note
from Creative Realities, Inc. for $1,000,000 principal amount. The note bears 12% annual interest paid monthly in arrears and
is due August 18, 2016. The outstanding principal amount is convertible into common stock at $0.33 per share. In conjunction
with the financing, we received a warrant to purchase up to 1,515,152 common shares at a conversion price of $0.38 per share.
The warrant has a cashless conversion provision and expires February 17, 2020. At September 30, 2015, the cost and fair value
of the note was $1,000,000. The cost and value of the warrant is $0.



On March 13, 2015, we purchased a 12% senior
secured promissory note from Mix 1 Life, Inc $250,000 principal amount. At closing, 12 months of interest was prepaid by Mix 1
Life. The note is due on March 13, 2016. At September 30, 2015, the cost and fair value of the note was $250,000. Our director,
Christopher Larson, is also a director and the Chief Financial Officer of Mix 1 Life as well as a 5% shareholder in Mix 1 Life.



On June 1, 2015, we purchased a 12% promissory note from Pacific
Oil & Gas, LLC (“POG”) for $25,000 principal amount. The note plus accrued interest is due on December 31, 2015.
At September 30, 2015, the cost and fair value of the note was $25,000 and $0, respectively. POG is a related entity to Dala Petroleum,
another portfolio company, and has not been successful in deploying capital with the intended result of successful oil production.
We believe due to financial constraints POG will not be able to meet its financial obligations to us.



On August 31, 2015, we entered into a promissory note agreement
with Bravo Financial, LLC for $1,000,000 principal amount. A first advance in the amount of $500,000 was therein funded on September
1, 2015. The note bears 12% annual interest paid monthly in arrears and is due August 31, 2018. At September 30, 2015, the cost
and fair value of the note was $500,000.



On September 21, 2015, we entered into purchase agreement with Bite
Squad, LLC to purchase 60,000 shares of Series A Convertible Preferred Stock at $13 per share, for a total of $780,000. The preferred
stock converts to common at $13 per share. At September 30, 2015, the cost and fair value of the note was $780,000.



NOTE 6—MINIMUM ASSET COVERAGE



As a BDC, we are required to meet various regulator 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 September 30, 2015, approximately 84% of our investments (by fair value at that date) were in
private or small-cap public U.S.-based companies and our coverage ratio was 100%.



NOTE 7—INCOME TAXES



We plan to be regulated as a regulated investment company (“RIC”)
and intend to comply with the requirements of the Internal Revenue Code, applicable to regulated investment companies. Currently,
we have not elected to be treated as a RIC. 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 characterization of income and gains that we will
distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating
to shareholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.



13







NOTE 8—SUBSEQUENT EVENTS



On October 15, 2015 ,we received from Creative Realities, Inc. (“Creative
Realities”) an early repayment of all of the outstanding principal of $1,000,000 and interest due of $46,684.93 under the
note agreement relating to the 12% convertible note purchased on February 19, 2015. The note had a 12% annual interest to be paid
monthly in arrears and was due August 18, 2016. The outstanding principal amount was convertible into common stock at $0.33 per
share. In conjunction with the financing, we received a warrant to purchase up to 1,515,152 common shares with a conversion price
of $0.38 per share. The warrant has a cashless conversion provision and expires February 17, 2020.



On October 22, 2015, we notified The Igloo, LLC of its default
on its financial obligations to relating to the 20% promissory note we purchased from The Igloo, LLC (“The
Igloo”) for $500,000 principal amount on December 30, 2014. The interest payment due September1, 2015
remains unpaid. The note plus accrued interest is due on December 31, 2016. If we are unsuccessful in recovering the money
due to us, we plan to commence a formal lawsuit and exercise our rights with respect to the security interests in various
pledged collateral. We have retained counsel to assist in pursuing our rights under the note agreement.



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 Annual Report on Form 10-K filed with the SEC on March 31, 2015 related to our fiscal year ended December 31,
2014.



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. 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 report 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 report
include statements as to:



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



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



| |  ̈ | the outcome of a pending compliance inspection by the
SEC Office of Compliance and Inspections;
| | - | -----------------------------------------------------------------------------------------------



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



14







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. 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 31, 2015 (related to our year
ended December 31, 2014) and in particular the section thereof entitled “Risk Factors.” Because of the significant
uncertainties inherent in the forward-looking statements pertaining to our company, the inclusion of such information 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 report 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
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.



General Overview



Mill City Ventures III, Ltd. 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 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 a 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
a Form N-8F to deregister as a registered investment company based upon our prior filing to become a BDC. On September 25, 2013,
the SEC issued an order under Section 8(f) of the 1940 Act declaring that we had ceased to be an investment company. We are regulated
as a BDC and we plan to be taxed as a regulated investment company (“RIC”) although we have not made an election to
be taxed as a RIC at this time. Throughout this report, we collectively refer to Mill City Ventures III, Ltd. as “we,”
the “Company,” and “us.”



Business Model and Strategy



As a BDC, we primarily focus on investing in, lending to and making
managerial assistance available to privately held and publicly traded companies. A BDC may provide 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.



Our future revenues will relate to the earnings we receive from
our portfolio investments. Our objective is to obtain superior returns from investments in securities and other investment opportunities
available to BDC’s 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, our Board of Directors, owners and operators of businesses and
other persons within our professional network. We will base our investment decisions primarily on analyses of potential growth
prospects of business operations and asset valuations. 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 Nine Months Ended September 30, 2015



Investment Transactions



On February 19, 2015, we purchased a 12% convertible note
from Creative Realities, Inc. for $1,000,000 principal amount. The note bears 12% annual interest paid monthly in arrears and
is due August 18, 2016. The outstanding principal amount is convertible into common stock at $0.33 per share. In conjunction
with the financing, we received a warrant to purchase up to 1,515,152 common shares at a conversion price of $0.38 per share.
The warrant has a cashless conversion provision and expires February 17, 2020. At September 30, 2015, the cost and fair value
of the note was $1,000,000. The cost and value of the warrant is $0.



On March 13, 2015, we purchased a 12% senior
secured promissory note from Mix 1 Life, Inc. (“Mix 1 Life”) for $250,000 principal amount. At closing, 12 months of
interest was prepaid by Mix 1 Life. The note is due on March 13, 2016. At September 30, 2015, the cost and fair value of the note
was $250,000. Our director, Christopher Larson, is also a director and the Chief Financial Officer of Mix 1 Life as well as a 5%
shareholder in Mix 1 Life.



On April 27, 2015, we received $750,000 plus $5,825.34 in accrued
interest in full on redemption of the promissory note purchased from Insite Software Solutions, Inc. on December 30, 2013 in the
principal amount of $750,000.



15







On May 25, 2015, we entered into an agreement to defer the receipt
of the quarterly dividend distribution on the preferred shares of Dala Petroleum Corporation (“Dala Petroleum”) until
October 1, 2015. The deferred dividend of $7,500 for each of the quarters ended June 30 and September 30, 2015 were deemed uncollectible
and removed from Dividend Income on the Statement of Operations as of September 30, 2015. At September 30, 2015, the cost and fair
value of the preferred stock was $500,000 and $0, respectively, and the cost and fair value of the warrant was $0.



On June 1, 2015, we purchased a 12% promissory note from Pacific
Oil & Gas, LLC (“POG”) for $25,000 principal amount. The note plus accrued interest is due on December 31, 2015.
The deferred interest for each of the quarters ended June 30 and September 30, 2015 were deemed uncollectible and removed from
the Interest Income on the Statement of Operations as of September 30, 2015. At September 30, 2015, the cost and fair value of
the note was $25,000 and $0, respectively.



On August 31, 2015, we entered into a promissory note agreement
with Bravo Financial, LLC for $1,000,000 principal amount. A first advance in the amount of $500,000 was therein funded on September
1, 2015. The note bears 12% annual interest paid monthly in arrears and is due August 31, 2018. At September 30, 2015, the cost
and fair value of the note was $500,000.



On September 21, 2015, we entered into purchase agreement with Bitesquad.com,
LLC to purchase 60,000 shares of Series A Convertible Preferred Stock at $13 per share, for a total of $780,000. The preferred
stock converts to common at $13 per share. At September 30, 2015, the cost and fair value of preferred stock was $780,000.



Material Changes in Assets and Liabilities



Our prepaid expenses as of September 30, 2015 were $58,588 compared
to $49,623 for the year ended December 31, 2014. The increase relates to our annual insurance and fidelity bond premiums. These
premiums will be amortized ratably over the covered period.



Our receivable from sale of investments as
of September 30, 2015 were $0 compared to $82,103 for the year ended December 31, 2014. The decrease relates to the executions
of trades as of December 31, 2014, which settled in January, 2015. As of September 30, 2015, we had no trades executed, which had
not yet settled.



Our interest and dividends receivable at September 30, 2015 were
$107,552 compared to $59,794 for the year ended December 31, 2014. The increase relates to our investments in DBR Phase III US
Investors, LLC, Mix 1 Life, and Creative Realities.



Our accounts payable as of September 30, 2015 were $30,881 compared
to $36,098 for the year ended December 31, 2014. The decrease relates to a reduction in accounting and other professional fees.



Our deferred interest income at September 30, 2015 was $13,145 compared
to $0 at December 31, 2014. This relates to the interest received in advance on the Mix 1 Life, Inc. $250,000 promissory note entered
into on March 13, 2015. The advanced interest is being amortized over the period of the note until maturity on March 16, 2016.



16







Results of Operations for the Nine Months Ended September
30, 2015 Compared to the Nine Months Ended September 30, 2014



Operating Expenses







|                                 |  | For the      |         |   | For the      |  
|-------------------------------- |  | ------------ | ------- | - | ------------ | -
|                                 |  | Nine-Month   |         |   | Nine-Month   |  
|                                 |  | Period Ended |         |   | Period Ended |  
|Item                             |  | September    |         |   | September    |  
|                                 |  | 30, 2015     |         |   | 30, 2014     |  
|                                 |  |              |         |   |              |  
|Investment Income                |  | $            | 430,277 |   |              | $
|                                 |  |              |         |   |              |  
|Operating Expenses:              |  |              |         |   |              |  
|Professional fees                |  |              | 148,713 |   |              |  
|Payroll expense                  |  |              | 122,377 |   |              |  
|Occupancy expense                |  |              | 68,416  |   |              |  
|Insurance expense                |  |              | 67,856  |   |              |  
|Directors’ fees expense          |  |              | 45,000  |   |              |  
|Depreciation and amortization    |  |              | 9,637   |   |              |  
|Other general and administrative |  |              | 15,771  |   |              |  
|Net Investment Loss              |  | $            | (47,493 | ) |              | $





As the table above demonstrates, we incurred operating expenses of $477,770 and $433,722 for the nine-month
periods ended September 30, 2015 and 2014, respectively. A discussion and analysis of the material components of our operating
expenses appears below.



Professional fees.Our professional fees were
$148,713 for the nine-month period ended September 30, 2015, compared to $102,368 for the nine-month period ended September 30,
2014. The increase in professional fees is due to increased legal fees associated with the preparation of the Company’s OTCQX
application and listing fees and N-1 statement preparation



Payroll expense and executive management compensation.During the nine-month period ended September 30, 2015, we incurred $122,377 in payroll expense for our executive management
compared to $122,392 incurred during the nine-month period ended September 30, 2014.



Insurance expense.During the nine-month period
ended September 30, 2015, we incurred $67,856 in insurance expense compared to $82,946 for the nine-month period ended September
30, 2014. Insurance expense relates to our annual director and officer insurance, fidelity bond premiums and business insurance
amortized ratably over the covered period.



Directors’ fees expense.Our directors’
fees expense for the nine-month periods ended September 30, 2015 and 2014 were $45,000.



Occupancy expense.Our occupancy expenses for
the nine-month periods ended September 30, 2015 and 2014 were $68,416 and $59,722, respectively.



Results of Operations for the Three Months Ended September
30, 2015 Compared to the Three Months Ended September 30, 2014



Operating Expenses



|                                 |  | For the      |         |   | For the      |  
|-------------------------------- |  | ------------ | ------- | - | ------------ | -
|                                 |  | Three-Month  |         |   | Three-Month  |  
|                                 |  | Period Ended |         |   | Period Ended |  
|Item                             |  | September    |         |   | September    |  
|                                 |  | 30, 2015     |         |   | 30, 2014     |  
|Investment Income                |  | $            | 119,352 |   |              | $
|                                 |  |              |         |   |              |  
|Operating Expenses:              |  |              |         |   |              |  
|Professional fees                |  |              | 61,245  |   |              |  
|Payroll expense                  |  |              | 40,422  |   |              |  
|Occupancy expense                |  |              | 22,798  |   |              |  
|Insurance expense                |  |              | 21,682  |   |              |  
|Directors’ fees expense          |  |              | 15,000  |   |              |  
|Depreciation and amortization    |  |              | 3,213   |   |              |  
|Other general and administrative |  |              | 6,608   |   |              |  
|Net Investment Loss              |  | $            | (51,616 | ) |              | $



17







As the table above demonstrates, we incurred operating expenses
of $170,968 and $139,425 for the three-month periods ended September 30, 2015 and 2014, respectively. A discussion and analysis
of the material components of our operating expenses appears below.



Professional fees.Our professional fees were $61,245
for the three-month period ended September 30, 2015, compared to $29,986 for the three-month period ended September 30, 2014. The
increase in professional fees is due to increased legal fees associated with the preparation of the Company’s OTCQX application
and listing fees and N-1 statement preparation.



Payroll expense and executive management compensation.During the three-month period ended September 30, 2015, we incurred $40,422 in payroll expense for our executive management
compared to $40,473 incurred during the three-month period ended September 30, 2014.



Insurance expense.During the three-month period
ended September 30, 2015, we incurred $21,682 in insurance expense compared to $24,830 for the three-month period ended September
30, 2014. Insurance expense relates to our annual director and officer insurance, fidelity bond premiums and business insurance
amortized ratably over the covered period.



Directors’ fees expense.Our directors’
fees expense for the three-month periods ended September 30, 2015 and 2014 were $15,000.



Occupancy expense. Our occupancy expenses for the
three-month periods ended September 30, 2015 and 2014 were $22,798 and $21,521, respectively.



Net Investment Income (Loss)



Net investment income (loss) represents the difference between investment
income and operating expenses. Our net investment income (loss) for the nine-month period ended September 30, 2015 and 2014 was
($47,493) and ($214,578), respectively. The decrease in net investment loss was due to an increase in interest and dividends for
the comparable period.



18







Net Realized Gains, Increase in Net Assets from Net Changes
in Unrealized Appreciation



Net realized gains on investments for the nine-month
period ended September 30, 2015 was $306,924. A net realized gain of $372,792 was due to our sale of 72,154 shares of Mix 1 Life,
Inc. common stock, and a $115,308 realized loss was due to our sale of 50,000 common shares of Bio Life Solutions, Inc.



The net decrease in net assets from changes in unrealized appreciation
or depreciation was ($3,282,452), primarily caused by the decline in the value of our Mix 1 Life common stock position as well
as our mark downs in the value of our investments in The Igloo, Dala Petroleum, POG and Southern Plains Resources, Inc.



Inflation



We do not believe that inflation has had a material impact on our
business and operating results during the periods presented.



Liquidity and Capital Resources



Summary cash flow data is as follows:



|                          |  | Nine Months Ended |           
|------------------------- |  | ----------------- | ----------
|                          |  | September 30,     |           
|                          |  | 2015              |           
|Cash flows used by:       |  |                   |           
|Operating activities      |  | $                 | (1,661,685
|Investing activities      |  |                   | -         
|Financing activities      |  |                   | -         
|Net decrease in cash      |  |                   | (1,661,685
|Cash, beginning of period |  |                   | 4,105,911 
|Cash, end of period       |  | $                 | 2,444,226 



The cash used in operating activities for the nine-month
period September 30, 2015 was primarily from our investment transactions.



On October 15, 2015, we received from Creative Realities, Inc.
(“Creative Realities”) an early repayment of all of the outstanding principal of $1,000,000 and interest due of $46,684.93
under the note agreement relating to the 12% convertible note purchased on February 19, 2015. The note had a 12% annual interest
to be paid monthly in arrears and was due August 18, 2016. The outstanding principal amount was convertible into common stock at
$0.33 per share. In conjunction with the financing, we received a warrant to purchase up to 1,515,152 common shares with a conversion
price of $0.38 per share. The warrant has a cashless conversion provision and expires February 17, 2020.



On March 13, 2015, we purchased a 12% senior
secured promissory note from Mix 1 Life for $250,000 principal amount. At closing, 12 months of interest was prepaid by Mix 1 Life.
The note is due on March 13, 2016. At September 30, 2015, the cost and fair value of the note was $250,000. Our director, Christopher
Larson, is also a director and the Chief Financial Officer of Mix 1 Life as well as a 5% shareholder in Mix 1 Life.



On April 27, 2015 we received $750,000 plus $5,825.34 in accrued
interest in full on redemption of the promissory note purchased from Insite Software Solutions, Inc. on December 30, 2013 in the
principal amount of $750,000.



On June 1, 2015, we purchased a 12% promissory note from Pacific
Oil & Gas, LLC for $25,000 principal amount. The note plus accrued interest is due on December 31, 2015. The note is currently
deemed uncollectible. At September 30, 2015, the cost and fair value of the note was $25,000 and $0, respectively.



On August 31, 2015, we entered into a promissory note agreement
with Bravo Financial, LLC for $1,000,000 principal amount. A first advance in the amount of $500,000 was therein funded on September
1, 2015. The note bears 12% annual interest paid monthly in arrears and is due August 31, 2018.



On September 21, 2015, we entered into purchase agreement with Bitesquad.com,
LLC to purchase 60,000 shares of Series A Convertible Preferred Stock at $13 per share, for a total of $780,000. The preferred
stock converts to common at $13 per share. At September 30, 2015, the cost and fair value of the note was $780,000.



As of September 30, 2015, we had approximately $2.4 million in
cash. Pending investment of our current cash, we expect to hold cash in conformity with our disclosures under
“Regulation as a BDC – Temporary Investments” below. Presently, we expect to have substantially all of our
cash invested by December 31, 2016.



19







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 may provide 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 BDC, 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.



20







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.



We will be permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock senior to our common stock, but only if our “asset coverage,” as defined
in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain
outstanding, we must not make any dividend distribution to our shareholders or repurchase securities unless we meet the applicable
asset-coverage ratios at the time of the dividend distribution or repurchase. We may also borrow amounts up to 5% of the value
of our total assets for temporary or emergency purposes.



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



We will be periodically examined by the SEC for compliance with
the 1940 Act, the rules and regulations thereunder, and good governance practices. In this regard, we believe that SEC’s
Office of Compliance and Inspections has completed its examination of our Company for the period of time beginning with its initial
filings under the 1940 Act through June 30, 2013. Presently, we are unaware of any further action that the Office of Compliance
and Inspections proposes to take or recommend with respect to their examination of our Company.



We will not “concentrate” our investments (i.e., invest
25% or more of our assets in any particular industry, determined at the time of investment). We will be required to provide and
maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as
a BDC, we are prohibited from indemnifying any director or officer against any liability to our shareholders arising from willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal
securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation.



Qualifying Assets



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



(1)	Securities of an “eligible
portfolio company” purchased from the issuer of such securities or from a person who is, or who was within the prior 13 months
of the date of purchase, an affiliate of the issuer or from any other person (subject to limitation by SEC rules), in any case
in transactions not involving any public offering. 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 or a company that
would be an investment company but for certain exclusions under the 1940 Act; and



(c)	satisfies one of the following:



| | (i) | does not have outstanding any class of securities with
respect to which a broker or dealer may extend margin credit (or, if a broker or dealer may in fact extend or maintain margin
credit to a customer with respect to such securities, then at the time of purchase of the issuer’s securities (A) the BDC
owns at least 50% of the greatest number of outstanding and issuable equity securities of such issuer (i.e., 50% determined on
a fully diluted basis) and the greatest amount of debt securities of such issuer), (B) the BDC is one of the 20 largest holders
of record of the issuer’s outstanding voting securities);
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | is controlled by a BDC or a group of companies acting
together that includes a BDC, the BDC does in fact exercise a controlling influence over the management or policies of the issuer,
and, as a result of such control, the BDC has an affiliated person serving as a director of the eligible portfolio company;
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | is a small and solvent company having total assets of
not more than $4 million and capital and surplus of not less than $2 million, subject to adjustment by SEC rules; or
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (iv) | by virtue of SEC Rule 2a-46, (A) does not have any class
of securities listed on a national securities exchange, or (B) has a class of securities listed on a national securities exchange
but an aggregate market value (as computed under such rule) of outstanding voting and non-voting common equity of less than $250
million.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(2)	Securities of any eligible
portfolio company (as defined above) that we control through having a person serving on the board of directors of the issuer.



(3)	Securities purchased from
an issuer, or from a person who is, or was in the prior 13 months of the date of purchase, an affiliate of the issuer, which issuer
is organized under the laws of, and has its principal place of business in, the United States and is not an investment company
(or a company that would be an investment company but for certain exclusions under the 1940 Act), and which is in bankruptcy and
subject to reorganization (or where the issuance of securities is consummated pursuant to or in consummation of a bankruptcy or
reorganization plan or arrangement).



(4)	Securities of an eligible
portfolio company (as defined above) purchase from any person in a transaction not involving a public offering, if there is no
ready market for such securities and if immediately prior to such purchase the BDC owns at least 60% of the outstanding equity
securities of such issuer, as determined on a fully diluted basis.



(5)	Securities received in exchange
for or distributed on or with respect to securities described above, or pursuant to the conversion 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.



(7)	Office furniture and equipment,
interests in real estate and leasehold improvement and facilities maintained to conduct the business operations of the BDC, deferred
organization and operating expenses, and other non-investment assets necessary and appropriate to its operations as a BDC, including
notes of indebtedness of directors, officers, employees and general partners held by the BDC as payment for securities of such
company issued in connection with an executive compensation plan described in Section 57(j) of the 1940 Act.



In addition to the foregoing description of “qualifying assets,”
certain types of follow-on investments in issuers that no longer satisfy the definition of “eligible portfolio company”
may nonetheless be “qualifying assets.”



Significant Managerial Assistance or Control



A BDC must have been organized and have its principal place of business
in the United States and must be operated for the purpose of making investments in the types of securities described above. Nevertheless,
to count portfolio securities as qualifying assets for the purpose of the foregoing 70% test, the BDC must either control the issuer
of the securities or 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 BDC 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
significant managerial assistance means, among other things, any arrangement whereby the BDC, whether through its directors, officers
or employees, offers to provide, and, if accepted, does in fact so provide, significant guidance and counsel concerning the management,
operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective
participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational
or financial guidance.



Temporary Investments



Pending investment in other types of qualifying assets, as described
above, 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, so that at least 70%
of our assets are qualifying assets. We plan to invest in U.S. treasury bills or in repurchase agreements, provided that such agreements
are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the
purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an
agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest
rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However,
if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the diversification
tests imposed on us by the Internal Revenue Code to qualify for tax treatment as a RIC for federal income tax purposes. Thus, we
do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the creditworthiness
of the counterparties with which we enter into repurchase agreement transactions.



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Capital Expenditures



We did not have and do not plan to have any material commitments
for capital expenditures in 2014 or 2015. Given our business model and status as a BDC, we do not require material investments
in capital resources.



Certain Potential Conflicts of Interest



Our Company maintains 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 applicable
BDC regulations generally describe as “affiliate transaction.” Nevertheless, from time to time we may hold investments
in portfolio companies in which certain members of our management are also directly or indirectly invested. Our Board of Directors
has recently adopted a policy to require our disclosure of these instances in our periodic filings with the SEC. Presently, each
of Messrs. Geraci and Polinsky have direct and indirect interests in Southern Plains Resources, Inc. We invested in Southern Plains
Resources in each of March and July 2013. In addition, our director Christopher Larson has a direct interest in Mix 1 Life, Inc.
and served as that company’s Chief Financial Officer at the time of our investment. We invested in Mix 1 Life in February
2014 and we exercised, on a cashless basis, a warrant for the purchase of Mix 1 Life common stock in September 2014. Subsequent
to our initial investment, Mr. Larson became a director of Mix 1 Life.



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.



Realized Gains and Losses, Interest and Dividend Income
Recognition



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



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. We 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 on March 31, 2015. There have been no material changes to our critical accounting policies and estimates
from those disclosed in our Annual Report on Form 10-K.



Off-Balance Sheet Arrangements



During the nine months ended September 30, 2015, we did not engage
in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.



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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 September 30, 2015, 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 September 30, 2015.



Changes in Internal Controls



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.



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          |  | 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: November 6, 2015     
| |                             
| | /s/ Joseph A. Geraci, II    
| | JOSEPH A. GERACI, II        
| | Chief Financial Officer     
| |                             
| | Dated: November 6, 2015     



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