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 June 30, 2016 OR



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

For the transition period from________to _______



Commission File Number 814-00991



MILL CITY VENTURES III, LTD.



(Exact name of registrant as specified in
its charter)



|Minnesota                                                      | 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 xNo  ̈



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 company x



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 August 15, 2016, 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 | 18  
|                                                                                              |     
|Item 4. Controls and Procedures                                                               | 26  
|                                                                                              |     
|PART II. OTHER INFORMATION                                                                    |     
|                                                                                              |     
|Item 6. Exhibits                                                                              | 26  
|                                                                                              |     
|SIGNATURES                                                                                    | 27  













PART I – FINANCIAL INFORMATION



Item 1. Financial Statements



Mill City Ventures III, Ltd.

Balance Sheets



|                                                                                                                                  |  | June 30, 2016 |            |   | December 31, 2015 |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------- | -
|                                                                                                                                  |  | (unaudited)   |            |   | (audited)         |  
|ASSETS                                                                                                                            |  |               |            |   |                   |  
|Investments, at fair value                                                                                                        |  |               |            |   |                   |  
|Non-control / Non-affiliate investments (cost of $6,875,137 and $7,218,131, respectively)                                         |  | $             | 5,685,735  |   |                   | $
|Cash                                                                                                                              |  |               | 2,579,366  |   |                   |  
|Prepaid expenses                                                                                                                  |  |               | 77,331     |   |                   |  
|Interest and dividends receivable                                                                                                 |  |               | 13,389     |   |                   |  
|Leasehold improvements, net                                                                                                       |  |               | 19,719     |   |                   |  
|Property and equipment, net                                                                                                       |  |               | 11,851     |   |                   |  
|Total Assets                                                                                                                      |  | $             | 8,387,391  |   |                   | $
|                                                                                                                                  |  |               |            |   |                   |  
|LIABILITIES                                                                                                                       |  |               |            |   |                   |  
|                                                                                                                                  |  |               |            |   |                   |  
|Current Liabilities                                                                                                               |  |               |            |   |                   |  
|Accounts payable                                                                                                                  |  | $             | 10,938     |   |                   | $
|Payable for purchases of investments                                                                                              |  |               | -          |   |                   |  
|Deferred interest income                                                                                                          |  |               | -          |   |                   |  
|Deferred rent                                                                                                                     |  |               | 11,288     |   |                   |  
|Total Current Liabilities                                                                                                         |  |               | 22,226     |   |                   |  
|                                                                                                                                  |  |               |            |   |                   |  
|Total Liabilities                                                                                                                 |  | $             | 22,226     |   |                   | $
|Commitments and Contingencies (Note 3)                                                                                            |  |               |            |   |                   |  
|                                                                                                                                  |  |               |            |   |                   |  
|SHAREHOLDERS’ EQUITY (NET ASSETS)                                                                                                 |  |               |            |   |                   |  
|Common Stock, par value $0.001 per share (250,000,000 common shares authorized; 12,151,493 and 12,151,493 issued and outstanding) |  | $             | 12,151     |   |                   | $
|Additional paid-in capital                                                                                                        |  |               | 11,857,660 |   |                   |  
|Accumulated deficit                                                                                                               |  |               | (1,159,665 | ) |                   |  
|Accumulated undistributed investment loss                                                                                         |  |               | (1,223,690 | ) |                   |  
|Accumulated undistributed net realized gains on investment transactions                                                           |  |               | 68,111     |   |                   |  
|Net unrealized appreciation in value of investments                                                                               |  |               | (1,189,402 | ) |                   |  
|Total Shareholders’ Equity (Net Assets)                                                                                           |  | $             | 8,365,165  |   |                   | $
|                                                                                                                                  |  |               |            |   |                   |  
|Total Liabilities and Shareholders’ Equity                                                                                        |  | $             | 8,387,391  |   |                   | $
|                                                                                                                                  |  |               |            |   |                   |  
|Net Asset Value Per Common Share                                                                                                  |  | $             | 0.69       |   |                   | $



See accompanying notes to financial statements.



1







Mill City Ventures III, Ltd.

Statements of Operations

(unaudited)





|                                                                    |  | Three Months  |            |   | Three Months  |  |            | Six Months    |  |   | Six Months    |  
|------------------------------------------------------------------- |  | ------------- | ---------- | - | ------------- |  | ---------- | ------------- |  | - | ------------- | -
|                                                                    |  | Ended         |            |   | Ended         |  |            | Ended         |  |   | Ended         |  
|                                                                    |  | June 30, 2016 |            |   | June 30, 2015 |  |            | June 30, 2016 |  |   | June 30, 2015 |  
|Investment Income                                                   |  |               |            |   |               |  |            |               |  |   |               |  
|Interest income                                                     |  | $             | 56,119     |   |               |  | 117,796    |               |  | $ | 126,160       |  
|Dividend income                                                     |  |               | 23,609     |   |               |  | 29,285     |               |  |   | 39,891        |  
|Total Investment Income                                             |  |               | 79,728     |   |               |  | 147,081    |               |  |   | 166,051       |  
|                                                                    |  |               |            |   |               |  |            |               |  |   |               |  
|Operating Expenses                                                  |  |               |            |   |               |  |            |               |  |   |               |  
|Professional fees                                                   |  |               | 45,477     |   |               |  | 36,071     |               |  |   | 85,484        |  
|Payroll expense                                                     |  |               | 40,549     |   |               |  | 40,481     |               |  |   | 81,958        |  
|Insurance expense                                                   |  |               | 18,730     |   |               |  | 21,610     |               |  |   | 40,087        |  
|Occupancy                                                           |  |               | 14,428     |   |               |  | 22,819     |               |  |   | 38,604        |  
|Directors’ fees expense                                             |  |               | 15,000     |   |               |  | 15,000     |               |  |   | 28,956        |  
|Depreciation and amortization expense                               |  |               | 3,212      |   |               |  | 3,212      |               |  |   | 6,424         |  
|Other general and administrative expenses                           |  |               | 5,700      |   |               |  | 4,368      |               |  |   | 8,301         |  
|Total Operating Expenses                                            |  |               | 143,096    |   |               |  | 143,561    |               |  |   | 289,814       |  
|Net Investment Income (Loss)                                        |  |               | (63,368    | ) |               |  | 3,520      |               |  |   | (123,763      | )
|                                                                    |  |               |            |   |               |  |            |               |  |   |               |  
|Realized and Unrealized Gain (Loss) on Investments                  |  |               |            |   |               |  |            |               |  |   |               |  
|Net realized gain (loss) on investments                             |  |               | 8,814      |   |               |  | 139,290    |               |  |   | (533,281      | )
|Net change in unrealized appreciation (depreciation) on investments |  |               | (300,729   | ) |               |  | (683,368   | )             |  |   | 280,921       |  
|Net Realized and Unrealized Gain (Loss) on Investments              |  |               | (291,915   | ) |               |  | (544,078   | )             |  |   | (252,360      | )
|Net Decrease in Net Assets Resulting
    from Operations            |  | $             | (355,283   | ) |               |  | (540,558   | )             |  | $ | (376,123      | )
|                                                                    |  |               |            |   |               |  |            |               |  |   |               |  
|Net Decrease in Net Assets Resulting from Operations per share:     |  |               |            |   |               |  |            |               |  |   |               |  
|                                                                    |  |               |            |   |               |  |            |               |  |   |               |  
|Basic and diluted                                                   |  | $             | (0.03      | ) |               |  | (0.04      | )             |  | $ | (0.03         | )
|                                                                    |  |               |            |   |               |  |            |               |  |   |               |  
|Weighted-average number of common shares outstanding                |  |               | 12,151,493 |   |               |  | 12,151,493 |               |  |   | 12,151,493    |  



See accompanying notes to financial statements.



2







Mill City Ventures
III, Ltd.

Statements of Changes in Net Assets

(unaudited)



|                                                                    |  | Six Months Ended |            |   | Six Months Ended |  
|------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | -
|                                                                    |  | June 30, 2016    |            |   | June 30, 2015    |  
|                                                                    |  |                  |            |   |                  |  
|Net Assets at Beginning of Period                                   |  |                  |            |   |                  |  
|                                                                    |  | $                | 8,741,288  |   |                  | $
|Net investment income (loss)                                        |  |                  | (123,763   | ) |                  |  
|Net realized gain (loss) on investments                             |  |                  | (533,281   | ) |                  |  
|Net increase (decrease) in unrealized appreciation on investments   |  |                  | 280,921    |   |                  |  
|Net increase (decrease) in net assets resulting from
    operations |  |                  | (376,123   | ) |                  |  
|Total net decrease in net assets resulting from
    operations      |  |                  | (376,123   | ) |                  |  
|Net Assets at End of Period                                         |  | $                | 8,365,165  |   |                  | $
|                                                                    |  |                  |            |   |                  |  
|Accumulated undistributed net investment loss                       |  | $                | (1,223,690 | ) |                  | $



3







Mill City Ventures III, Ltd.

Statements of Cash Flows

(unaudited)



|                                                                                                                        |  | Six Months Ended |            |   | Six Months Ended |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | -
|                                                                                                                        |  | June 30, 2016    |            |   | June 30, 2015    |  
|Cash flows from operating activities:                                                                                   |  |                  |            |   |                  |  
|Net decrease in net asset value resulting from operations                                                               |  | $                | (376,123   | ) |                  | $
|                                                                                                                        |  |                  |            |   |                  |  
|Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities: |  |                  |            |   |                  |  
|Net change in unrealized appreciation (depreciation) on investments                                                     |  |                  | (280,921   | ) |                  |  
|Net realized (gain) loss on investments                                                                                 |  |                  | 533,281    |   |                  |  
|Payments for purchases of investments                                                                                   |  |                  | (1,221,666 | ) |                  |  
|Proceeds from sales of investments                                                                                      |  |                  | 1,031,379  |   |                  |  
|Depreciation and amortization expense                                                                                   |  |                  | 6,425      |   |                  |  
|                                                                                                                        |  |                  |            |   |                  |  
|Changes in operating assets and liabilities:                                                                            |  |                  |            |   |                  |  
|Prepaid expenses                                                                                                        |  |                  | (33,523    | ) |                  |  
|Receivable from sale of investments                                                                                     |  |                  | -          |   |                  |  
|Interest and dividends receivable                                                                                       |  |                  | 10,451     |   |                  |  
|Accounts payable                                                                                                        |  |                  | 507        |   |                  |  
|Deferred interest income                                                                                                |  |                  | (5,645     | ) |                  |  
|Deferred rent                                                                                                           |  |                  | 164        |   |                  |  
|Payable for investment purchase                                                                                         |  |                  | (65,622    | ) |                  |  
|Net cash used in operating activities                                                                                   |  |                  | (401,293   | ) |                  |  
|Cash flows from investing activities:                                                                                   |  |                  |            |   |                  |  
|Purchases of property and equipment                                                                                     |  |                  | -          |   |                  |  
|Purchases of leasehold improvements                                                                                     |  |                  | -          |   |                  |  
|                                                                                                                        |  |                  |            |   |                  |  
|Net cash used by investing activities                                                                                   |  |                  | -          |   |                  |  
|                                                                                                                        |  |                  |            |   |                  |  
|Net decrease in cash                                                                                                    |  |                  | (401,293   | ) |                  |  
|                                                                                                                        |  |                  |            |   |                  |  
|Cash, beginning of the period                                                                                           |  |                  | 2,980,659  |   |                  |  
|Cash, end of the period                                                                                                 |  | $                | 2,579,366  |   |                  | $



See accompanying notes to financial statements.



4







Mill City Ventures III, Ltd.

Financial Highlights

(unaudited)





|                                                         |  | Six Months 
Ended |            |    | Six Months Ended |  
|-------------------------------------------------------- |  | ----------------- | ---------- | -- | ---------------- | -
|                                                         |  | June 30, 2016     |            |    | June 30, 2015    |  
|Per Share Data                                           |  |                   |            |    |                  |  
|Net asset value at beginning of the period               |  | $                 | 0.72       |    |                  | $
|Net investment loss                                      |  |                   | (0.01      | )  |                  |  
|Net realized and unrealized losses                       |  |                   | (0.02      | )  |                  |  
|                                                         |  |                   |            |    |                  |  
|Net asset value at end of period                         |  | $                 | 0.69       |    |                  | $
|                                                         |  |                   |            |    |                  |  
|Ratio / Supplemental Data                                |  |                   |            |    |                  |  
|Per share market value of investments at end of period   |  | $                 | 0.47       |    |                  | $
|Shares outstanding at end of period                      |  |                   | 12,151,493 |    |                  |  
|Average weighted shares outstanding for period           |  |                   | 12,151,493 |    |                  |  
|Net assets at end of period                              |  | $                 | 8,365,165  |    |                  | $
|Average net assets (1)                                   |  | $                 | 8,670,320  |    |                  | $
|Portfolio turnover rate (2)                              |  |                   | 11.90      | %  |                  |  
|Ratio of operating expenses to average net assets (2)    |  |                   | (6.63      | )% |                  |  
|Ratio of net investment income to average net assets (2) |  |                   | (2.86      | )% |                  |  
|Ratio of realized gains to average net assets (2)        |  |                   | (12.02     | )% |                  |  







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

(2)Ratios are annualized.



See accompanying notes to financial statements.



5









Mill City Ventures III, Ltd

Schedule of Investments

As of June 30, 2016









|Investments
    (1)          |  | Investment
    Type |  | Interest
    Rate(2)  |  | Maturity
    Date |  | Principal
    Amount |         |  | Cost |   |           | Fair
    Value |  |   | Percentage
    of Net Assets |  |  | Gross
    Unrealized Appreciation |       |   | Gross
    Unrealized Depreciation |  |   | Net
    Unrealized Appreciation (Depreciation) | 
|---------------------------- |  | ------------------- |  | --------------------- |  | ----------------- |  | -------------------- | ------- |  | ---- | - | --------- | -------------- |  | - | ---------------------------- |  |  | --------------------------------- | ----- | - | --------------------------------- |  | - | ---------------------------------------------- | 
|Debt Investments             |  |                     |  |                       |  |                   |  |                      |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Advertising                  |  |                     |  |                       |  |                   |  |                      |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Creative
    Realities, Inc. |  | Secured
    Loan(3) |  | 12%
    cash + 2% pik |  | 4/15/2017         |  | $                    | 606,000 |  |      | $ | 606,000   |                |  | $ | 606,000                      |  |  |                                   | 7.24  | % |                                   |  | — |                                                | 
|Consumer                     |  |                     |  |                       |  |                   |  |                      |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Mix 1 Life, Inc.             |  | Secured
    Loan(4) |  | 12%                   |  | 2/6/2016          |  | $                    | 500,000 |  |      |   | 500,000   |                |  |   | 500,000                      |  |  |                                   |       |   |                                   |  | — |                                                | 
|Mix
    1 Life, Inc.         |  | Secured
    Loan    |  | 12%                   |  | 3/13/2016         |  | $                    | 250,000 |  |      |   | 250,000   |                |  |   | 250,000                      |  |  |                                   |       |   |                                   |  | — |                                                | 
|                             |  |                     |  |                       |  |                   |  |                      |         |  |      |   | 750,000   |                |  |   | 750,000                      |  |  |                                   | 8.97  | % |                                   |  | — |                                                | 
|Financial                    |  |                     |  |                       |  |                   |  |                      |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Bravo
    Financial LLC      |  | Secured
    Loan    |  | 12%                   |  | 12/31/2015        |  | $                    | 500,000 |  |      |   | 500,000   |                |  |   | 500,000                      |  |  |                                   | 5.98  | % |                                   |  | — |                                                | 
|Oil & Gas                    |  |                     |  |                       |  |                   |  |                      |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Dala Petroleum, Inc.         |  | Secured Loan        |  | 12%                   |  | 12/31/2015        |  | $                    | 25,000  |  |      |   | 25,000    |                |  |   | 0                            |  |  |                                   |       |   |                                   |  | — |                                                | 
|                             |  | Secured
    Loan    |  | 12%                   |  | 12/22/2016        |  | $                    | 35,195  |  |      |   | 35,195    |                |  |   | 0                            |  |  |                                   |       |   |                                   |  | — |                                                | 
|                             |  |                     |  |                       |  |                   |  |                      |         |  |      |   | 60,195    |                |  |   | 0                            |  |  |                                   | 0.00  | % |                                   |  | — |                                                | 
|                             |  |                     |  |                       |  |                   |  |                      |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Total
    Debt Investments   |  |                     |  |                       |  |                   |  |                      |         |  |      | $ | 1,916,195 |                |  | $ | 1,856,000                    |  |  |                                   | 22.19 | % |                                   |  | — |                                                | 





|Investments
    (1)                                               |  | Investment
    Type(5)         |  | Interest
    Rate(6) |  | Expiration
    Date(7) |  | Shares/Units |           |  | Cost |   |           | Fair
    Value |  |   | Percentage
    of Net Assets |  |  | Gross
    Unrealized Appreciation |       |   | Gross
    Unrealized Depreciation |   |         | Net
    Unrealized Appreciation (Depreciation) | 
|----------------------------------------------------------------- |  | ------------------------------ |  | -------------------- |  | ---------------------- |  | ------------ | --------- |  | ---- | - | --------- | -------------- |  | - | ---------------------------- |  |  | --------------------------------- | ----- | - | --------------------------------- | - | ------- | ---------------------------------------------- | 
|Equity Investments                                                |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Advertising                                                       |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Creative Realities,
    Inc.                                      |  | Warrants
    (8)               |  | n/a                  |  | 12/28/2020             |  |              | 1,071,429 |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Creative
    Realities, Inc.                                      |  | Common
    Stock(8)            |  | n/a                  |  | n/a                    |  |              | 975,000   |  |      |   | —         |                |  |   | 170,527                      |  |  |                                   |       |   |                                   |   | 170,527 |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | —         |                |  |   | 170,527                      |  |  |                                   | 2.04  | % |                                   |   | 170,527 |                                                | 
|Bio-technology                                                    |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Bio Life Solutions, Inc.                                          |  | Warrants
    (8)               |  | n/a                  |  | 3/20/2021              |  |              | 100,000   |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Combimatrix Corporation                                           |  | Warrants
    (8)               |  | n/a                  |  | 5/6/2019               |  |              | 5,464     |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Combimatrix Corporation                                           |  | Warrants
    (8)               |  | n/a                  |  | 6/28/2019              |  |              | 5,464     |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Combimatrix
    Corporation                                       |  | Warrants
    (8)               |  | n/a                  |  | 12/19/2018             |  |              | 16,666    |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | —         |                |  |   | —                            |  |  |                                   | 0.00  | % |                                   |   | —       |                                                | 
|Consumer                                                          |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Escalade Inc.                                                     |  | Common Stock                   |  | n/a                  |  | n/a                    |  |              | 7,929     |  |      |   | 93,975    |                |  |   | 81,193                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Mix 1 Life, Inc.                                                  |  | Common
    Stock(8)            |  | n/a                  |  | n/a                    |  |              | 202,070   |  |      |   | —         |                |  |   | 56,580                       |  |  |                                   |       |   |                                   |   | 56,580  |                                                | 
|Tzfat
    Spirits of Israel, LLC                                  |  | LLC
    Membership Units(8)    |  | n/a                  |  | n/a                    |  |              | 55,000    |  |      |   | 101,019   |                |  |   | 25,000                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | 194,994   |                |  |   | 162,773                      |  |  |                                   | 1.95  | % |                                   |   | 56,580  |                                                | 
|Education                                                         |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Nat'l
    Amer. Univ. Holdings, Inc.                              |  | Common
    Stock               |  | n/a                  |  | n/a                    |  |              | 38,005    |  |      |   | 77,053    |                |  |   | 77,530                       |  |  |                                   | 0.93  | % |                                   |   | 521     |                                                | 
|Financial                                                         |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Comm. Sales & Leasing                                             |  | Common
    Stock(9)            |  | n/a                  |  | n/a                    |  |              | 2,000     |  |      |   | 65,620    |                |  |   | 57,800                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|OTC Markets Group Cl A                                            |  | Common Stock                   |  | n/a                  |  | n/a                    |  |              | 19,074    |  |      |   | 297,381   |                |  |   | 314,721                      |  |  |                                   |       |   |                                   |   | 17,422  |                                                | 
|QC
    Holdings, Inc.                                             |  | Common
    Stock(8)            |  | n/a                  |  | n/a                    |  |              | 15,000    |  |      |   | 10,655    |                |  |   | 14,130                       |  |  |                                   |       |   |                                   |   | 3,475   |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | 373,656   |                |  |   | 386,651                      |  |  |                                   | 4.62  | % |                                   |   | 20,897  |                                                | 
|Healthcare                                                        |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Sequenom Inc.                                                     |  | Common
    Stock(8)            |  | n/a                  |  | n/a                    |  |              | 20,000    |  |      |   | 29,222    |                |  |   | 18,274                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|WaferGen Bio-Systems,
    Inc.                                    |  | Common
    Stock(8)            |  | n/a                  |  | n/a                    |  |              | 149,900   |  |      |   | 149,900   |                |  |   | 123,083                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|WaferGen
    Bio-Systems, Inc.                                    |  | Warrants
    (8)               |  | n/a                  |  | 10/21/2020             |  |              | 200,000   |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | 179,122   |                |  |   | 141,357                      |  |  |                                   | 1.69  | % |                                   |   | —       |                                                | 
|Information Technology                                            |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Insite Software Solutions,
    Inc                                |  | Warrants
    (8)               |  | n/a                  |  | 12/30/2023             |  |              | 108,960   |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|MAX 4G                                                            |  | Preferred
    Stock(8)         |  | n/a                  |  | n/a                    |  |              | 300,000   |  |      |   | 150,000   |                |  |   | 300,000                      |  |  |                                   |       |   |                                   |   | 150,000 |                                                | 
|Mitek Systems Inc.                                                |  | Common
    Stock(8)            |  | n/a                  |  | n/a                    |  |              | 7,772     |  |      |   | 50,540    |                |  |   | 55,259                       |  |  |                                   |       |   |                                   |   | 4,719   |                                                | 
|Simulations
    Plus, Inc.                                        |  | Common
    Stock               |  | n/a                  |  | n/a                    |  |              | 18,639    |  |      |   | 173,310   |                |  |   | 140,907                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | 373,850   |                |  |   | 496,166                      |  |  |                                   | 5.93  | % |                                   |   | 154,719 |                                                | 
|Investment Fund                                                   |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Calamos Conv. & High
    Inc. Fund                                |  | Common
    Stock(9)            |  | n/a                  |  | n/a                    |  |              | 10,000    |  |      |   | 128,357   |                |  |   | 106,100                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Solar
    Senior Capital Ltd.                                     |  | Common
    Stock(9)            |  | n/a                  |  | n/a                    |  |              | 6,047     |  |      |   | 91,983    |                |  |   | 97,417                       |  |  |                                   |       |   |                                   |   | 5,434   |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | 220,340   |                |  |   | 203,517                      |  |  |                                   | 2.43  | % |                                   |   | 5,434   |                                                | 
|Leisure & Hospitality                                             |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Bitesquad.com
    LLC                                             |  | Preferred
    LLC Units(4) (8) |  | n/a                  |  | n/a                    |  |              | 60,000    |  |      |   | 780,000   |                |  |   | 780,000                      |  |  |                                   | 9.32  | % |                                   |   | —       |                                                | 
|Media                                                             |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Discovery
    Communications Inc.                                 |  | Common
    Stock(9)            |  | n/a                  |  | n/a                    |  |              | 5,000     |  |      |   | 149,609   |                |  |   | 126,150                      |  |  |                                   | 1.51  | % |                                   |   | —       |                                                | 
|Oil & Gas                                                         |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Dala Petroleum, Inc.                                              |  | Preferred
    Stock(8)         |  | n/a                  |  | n/a                    |  |              | 500       |  |      |   | 500,000   |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  | Warrants
    (8)               |  | n/a                  |  | 6/3/2017               |  |              | 714,286   |  |      |   | —         |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Northern Capital Partners
    I, LP                               |  | Ltd
    Partnership Units (8)  |  | n/a                  |  | n/a                    |  |              | 500,000   |  |      |   | 500,000   |                |  |   | 374,410                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Southern
    Plains Resources, Inc.                               |  | Common
    Stock(8)            |  | n/a                  |  | n/a                    |  |              | 600,000   |  |      |   | 730,000   |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | 1,730,000 |                |  |   | 374,410                      |  |  |                                   | 4.48  | % |                                   |   | —       |                                                | 
|Publishing                                                        |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Educational
    Development Corp.                                 |  | Common
    Stock               |  | n/a                  |  | n/a                    |  |              | 36,905    |  |      |   | 409,380   |                |  |   | 428,467                      |  |  |                                   | 5.12  | % |                                   |   | 36,765  |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Telecommunications                                                |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|AT&T                                                              |  | Common
    Stock(9)            |  | n/a                  |  | n/a                    |  |              | 5,000     |  |      |   | 175,260   |                |  |   | 216,050                      |  |  |                                   |       |   |                                   |   | 40,790  |                                                | 
|CenturyLink, Inc.                                                 |  | Common
    Stock(9)            |  | n/a                  |  | n/a                    |  |              | 5,000     |  |      |   | 157,360   |                |  |   | 145,050                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|MagicJack VocalTek Ltd.                                           |  | Common
    Stock(8) (9)        |  | n/a                  |  | n/a                    |  |              | 5,754     |  |      |   | 34,141    |                |  |   | 36,193                       |  |  |                                   |       |   |                                   |   | 2,052   |                                                | 
|Tessco Technologies Inc.                                          |  | Common Stock                   |  | n/a                  |  | n/a                    |  |              | 5,000     |  |      |   | 83,090    |                |  |   | 69,450                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Windstream
    Holdings Inc.                                      |  | Common
    Stock(9)            |  | n/a                  |  | n/a                    |  |              | 1,666     |  |      |   | 21,087    |                |  |   | 15,444                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   | 470,938   |                |  |   | 482,187                      |  |  |                                   | 5.76  | % |                                   |   | 42,842  |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Total
    Equity Investments                                      |  |                                |  |                      |  |                        |  |              |           |  |      | $ | 4,958,942 |                |  | $ | 3,829,735                    |  |  |                                   | 45.78 | % |                                   | $ | 488,285 |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Total
    Cash, Restricted Cash and Cash Equivalents              |  |                                |  |                      |  |                        |  |              |           |  |      | $ | 2,579,366 |                |  | $ | 2,579,366                    |  |  |                                   | 30.83 | % |                                   |   | —       |                                                | 
|                                                                  |  |                                |  |                      |  |                        |  |              |           |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Total
    Investments, Cash, Restricted Cash and Cash Equivalents |  |                                |  |                      |  |                        |  |              |           |  |      | $ | 9,454,503 |                |  | $ | 8,265,101                    |  |  |                                   | 98.80 | % |                                   | $ | 488,285 |                                                | 










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

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

| | (3) | Investment is secured but payment and collateral are
subordinated to the debt of another creditor by contract.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (4) | Investment is convertible into common equity of the issuer.
| | --- | -----------------------------------------------------------

| | (5) | In the case of warrants, warrants provide for the right
to purchase common equity of the issuer.
| | --- | ------------------------------------------------------------------------------------------------

| | (6) | In the case of preferred stock, this represents the right
to annual cumulative dividends calculated on a per annum basis.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (7) | In the case of warrants, purchase rights under the warrants
will expire at the close of business on this date.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (8) | Investment is not an income-producing investment.
| | --- | -------------------------------------------------

| | (9) | Investment is not a “qualifying asset” under
Section 55(a) of the Investment Company Act of 1940,.
| | --- | --------------------------------------------------------------------------------------------------



6









|Mill City Ventures III, Ltd
|---------------------------
|Schedule of Investments    
|As of December 31, 2015    





|Investments
    (1)          |  | Investment
    
Type |  | Interest
    
Rate(2) |  | Maturity
    
Date |  | Principal
    
Amount |         |  | Cost |   |           | Fair
    Value |  |   | Percentage
    of Net Assets |  |  | Gross
    Unrealized Appreciation |       |   | Gross
    Unrealized Depreciation |  |   | Net
    Unrealized Appreciation (Depreciation) | 
|---------------------------- |  | -------------------- |  | --------------------- |  | ------------------ |  | --------------------- | ------- |  | ---- | - | --------- | -------------- |  | - | ---------------------------- |  |  | --------------------------------- | ----- | - | --------------------------------- |  | - | ---------------------------------------------- | 
|Debt Investments             |  |                      |  |                       |  |                    |  |                       |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Advertising                  |  |                      |  |                       |  |                    |  |                       |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Creative
    Realities, Inc. |  | Secured
    Loan(3)  |  | 12%
    cash + 2% pik |  | 4/15/2017          |  | $                     | 600,000 |  |      | $ | 600,000   |                |  | $ | 600,000                      |  |  |                                   | 6.86  | % |                                   |  | — |                                                | 
|Consumer                     |  |                      |  |                       |  |                    |  |                       |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Mix 1 Life, Inc.             |  | Secured
    Loan(4)  |  | 12%                   |  | 2/6/2016           |  | $                     | 500,000 |  |      |   | 500,000   |                |  |   | 500,000                      |  |  |                                   |       |   |                                   |  | — |                                                | 
|Mix
    1 Life, Inc.         |  | Secured
    Loan     |  | 12%                   |  | 3/13/2016          |  | $                     | 250,000 |  |      |   | 250,000   |                |  |   | 250,000                      |  |  |                                   |       |   |                                   |  | — |                                                | 
|                             |  |                      |  |                       |  |                    |  |                       |         |  |      |   | 750,000   |                |  |   | 750,000                      |  |  |                                   | 8.58  | % |                                   |  | — |                                                | 
|Financial                    |  |                      |  |                       |  |                    |  |                       |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Bravo
    Financial LLC      |  | Secured
    Loan     |  | 12%                   |  | 12/31/2015         |  | $                     | 500,000 |  |      |   | 500,000   |                |  |   | 500,000                      |  |  |                                   | 5.72  | % |                                   |  | — |                                                | 
|Leisure & Hospitality        |  |                      |  |                       |  |                    |  |                       |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|The
    Igloo LLC            |  | Secured
    Loan     |  | 20%                   |  | 12/31/2016         |  |                       | 500,000 |  |      |   | 500,000   |                |  |   | —                            |  |  |                                   | 0.00  | % |                                   |  | — |                                                | 
|Oil & Gas                    |  |                      |  |                       |  |                    |  |                       |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Dala Petroleum, Inc.         |  | Secured Loan         |  | 12%                   |  | 12/22/2016         |  | $                     | 5,195   |  |      |   | 5,195     |                |  |   | —                            |  |  |                                   |       |   |                                   |  | — |                                                | 
|Pacific
    Oil & Gas LLC    |  | Secured
    Loan     |  | 12%                   |  | 12/31/2015         |  | $                     | 25,000  |  |      |   | 25,000    |                |  |   | —                            |  |  |                                   |       |   |                                   |  | — |                                                | 
|                             |  |                      |  |                       |  |                    |  |                       |         |  |      |   | 30,195    |                |  |   | —                            |  |  |                                   | 0.00  | % |                                   |  | — |                                                | 
|                             |  |                      |  |                       |  |                    |  |                       |         |  |      |   |           |                |  |   |                              |  |  |                                   |       |   |                                   |  |   |                                                | 
|Total
    Debt Investments   |  |                      |  |                       |  |                    |  |                       |         |  |      | $ | 2,380,195 |                |  | $ | 1,850,000                    |  |  |                                   | 21.16 | % |                                   |  | — |                                                | 









|Investments
    (1)                                               |  | Investment
    
Type(5)           |  | Interest
    
Rate(6) |  | Expiration
    
Date(7) |  | Shares/Units |           |  | Cost |   |            | Fair
    Value |  |   | Percentage
    of Net Assets |  |  | Gross
    Unrealized Appreciation |       |   | Gross
    Unrealized Depreciation |   |         | Net
    Unrealized Appreciation (Depreciation) | 
|----------------------------------------------------------------- |  | --------------------------------- |  | --------------------- |  | ----------------------- |  | ------------ | --------- |  | ---- | - | ---------- | -------------- |  | - | ---------------------------- |  |  | --------------------------------- | ----- | - | --------------------------------- | - | ------- | ---------------------------------------------- | 
|Equity Investments                                                |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Advertising                                                       |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Creative Realities, Inc.                                          |  | Warrants
    (8)                  |  | n/a                   |  | 12/28/2020              |  |              | 1,071,429 |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Creative
    Realities, Inc.                                      |  | Common
    Stock(8)               |  | n/a                   |  | n/a                     |  |              | 975,000   |  |      |   | —          |                |  |   | 243,750                      |  |  |                                   |       |   |                                   |   | 243,750 |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | —          |                |  |   | 243,750                      |  |  |                                   | 2.79  | % |                                   |   | 243,750 |                                                | 
|Bio-technology                                                    |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Bio Life Solutions, Inc.                                          |  | Warrants
    (8)                  |  | n/a                   |  | 3/20/2021               |  |              | 100,000   |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Combimatrix Corporation                                           |  | Warrants
    (8)                  |  | n/a                   |  | 5/6/2019                |  |              | 81,967    |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Combimatrix Corporation                                           |  | Warrants
    (8)                  |  | n/a                   |  | 6/28/2019               |  |              | 81,967    |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Combimatrix
    Corporation                                       |  | Warrants
    (8)                  |  | n/a                   |  | 12/19/2018              |  |              | 250,000   |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | —          |                |  |   | —                            |  |  |                                   | 0.00  | % |                                   |   | —       |                                                | 
|Consumer                                                          |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Mix 1 Life, Inc.                                                  |  | Common
    Stock(8)               |  | n/a                   |  | n/a                     |  |              | 237,470   |  |      |   | —          |                |  |   | 237,470                      |  |  |                                   |       |   |                                   |   | 237,470 |                                                | 
|Tzfat
    Spirits of Israel, LLC                                  |  | LLC
    Membership Units(8)       |  | n/a                   |  | n/a                     |  |              | 55,000    |  |      |   | 101,019    |                |  |   | 25,000                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | 101,019    |                |  |   | 262,470                      |  |  |                                   | 3.00  | % |                                   |   | 237,470 |                                                | 
|Financial                                                         |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Comm.
    Sales & Leasing                                         |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 2,000     |  |      |   | 65,620     |                |  |   | 37,380                       |  |  |                                   | 0.43  | % |                                   |   | —       |                                                | 
|Healthcare                                                        |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|WaferGen Bio-Systems,
    Inc.                                    |  | Common
    Stock(8)               |  | n/a                   |  | n/a                     |  |              | 200,000   |  |      |   | 200,000    |                |  |   | 146,760                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|WaferGen
    Bio-Systems, Inc.                                    |  | Warrants
    (8)                  |  | n/a                   |  | 10/21/2020              |  |              | 200,000   |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | 200,000    |                |  |   | 146,760                      |  |  |                                   | 1.68  | % |                                   |   | —       |                                                | 
|Information Technology                                            |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Insite Software Solutions,
    Inc                                |  | Warrants
    (8)                  |  | n/a                   |  | 12/30/2023              |  |              | 108,960   |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|MAX 4G                                                            |  | Preferred
    Stock(8)            |  | n/a                   |  | n/a                     |  |              | 300,000   |  |      |   | 150,000    |                |  |   | 300,000                      |  |  |                                   |       |   |                                   |   | 150,000 |                                                | 
|Simulations
    Plus, Inc.                                        |  | Common
    Stock                  |  | n/a                   |  | n/a                     |  |              | 5,000     |  |      |   | 47,869     |                |  |   | 49,550                       |  |  |                                   |       |   |                                   |   | 1,681   |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | 197,869    |                |  |   | 349,550                      |  |  |                                   | 4.00  | % |                                   |   | 151,681 |                                                | 
|Investment Fund                                                   |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Calamos Conv. & High
    Inc. Fund                                |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 10,000    |  |      |   | 128,357    |                |  |   | 105,100                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Powershares High Dividend
    Yield                               |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 10,000    |  |      |   | 253,510    |                |  |   | 210,000                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Solar
    Senior Capital Ltd                                      |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 6,047     |  |      |   | 91,983     |                |  |   | 90,100                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | 473,850    |                |  |   | 405,200                      |  |  |                                   | 4.64  | % |                                   |   | —       |                                                | 
|Leisure & Hospitality                                             |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Bitesquad.com LLC                                                 |  | Preferred
    LLC Units(4) (8)    |  | n/a                   |  | n/a                     |  |              | 60,000    |  |      |   | 780,000    |                |  |   | 780,000                      |  |  |                                   | 8.92  | % |                                   |   | —       |                                                | 
|DBR
    Phase III US Investors, LLC                               |  | Limited
    Partnership Units(8)  |  | n/a                   |  | n/a                     |  |              | 761,050   |  |      |   | 761,050    |                |  |   | 761,050                      |  |  |                                   | 8.71  | % |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | 1,541,050  |                |  |   | 1,541,050                    |  |  |                                   | 17.63 | % |                                   |   | —       |                                                | 
|Media                                                             |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Discovery
    Communications Inc.                                 |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 5,000     |  |      |   | 149,609    |                |  |   | 133,400                      |  |  |                                   | 1.53  | % |                                   |   | —       |                                                | 
|Oil & Gas                                                         |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Dala Petroleum, Inc.                                              |  | Preferred
    Stock(8)            |  | n/a                   |  | n/a                     |  |              | 500       |  |      |   | 500,000    |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  | Warrants
    (8)                  |  | n/a                   |  | 6/3/2017                |  |              | 714,286   |  |      |   | —          |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Northern Capital Partners
    I, LP                               |  | Limited
    Partnership Units (8) |  | n/a                   |  | n/a                     |  |              | 500,000   |  |      |   | 500,000    |                |  |   | 444,208                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Southern
    Plains Resources, Inc.                               |  | Common
    Stock(8)               |  | n/a                   |  | n/a                     |  |              | 600,000   |  |      |   | 730,000    |                |  |   | —                            |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | 1,730,000  |                |  |   | 444,208                      |  |  |                                   | 5.08  | % |                                   |   | —       |                                                | 
|Publishing                                                        |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Educational
    Development Corp.                                 |  | Common
    Stock                  |  | n/a                   |  | n/a                     |  |              | 2,300     |  |      |   | 25,212     |                |  |   | 25,461                       |  |  |                                   | 0.29  | % |                                   |   | 249     |                                                | 
|Telecommunications                                                |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|AT&T                                                              |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 5,000     |  |      |   | 175,260    |                |  |   | 172,050                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|CenturyLink, Inc.                                                 |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 5,000     |  |      |   | 157,360    |                |  |   | 125,800                      |  |  |                                   |       |   |                                   |   | —       |                                                | 
|Windstream
    Holdings Inc.                                      |  | Common
    Stock(9)               |  | n/a                   |  | n/a                     |  |              | 1,666     |  |      |   | 21,087     |                |  |   | 10,729                       |  |  |                                   |       |   |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   | 353,707    |                |  |   | 308,579                      |  |  |                                   | 3.53  | % |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Total
    Equity Investments                                      |  |                                   |  |                       |  |                         |  |              |           |  |      | $ | 4,837,936  |                |  | $ | 3,897,808                    |  |  |                                   | 44.59 | % |                                   | $ | 633,150 |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Total
    Cash, Restricted Cash and Cash Equivalents              |  |                                   |  |                       |  |                         |  |              |           |  |      | $ | 2,980,659  |                |  | $ | 2,980,659                    |  |  |                                   | 34.10 | % |                                   |   | —       |                                                | 
|                                                                  |  |                                   |  |                       |  |                         |  |              |           |  |      |   |            |                |  |   |                              |  |  |                                   |       |   |                                   |   |         |                                                | 
|Total
    Investments, Cash, Restricted Cash and Cash Equivalents |  |                                   |  |                       |  |                         |  |              |           |  |      | $ | 10,198,790 |                |  | $ | 8,728,467                    |  |  |                                   | 99.85 | % |                                   | $ | 633,150 |                                                | 














|(1) | All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Interest is presented on a per annum basis.                                                                                                                                                                       
|(3) | Investment is secured but payment and collateral are subordinated to the debt of another creditor by contract.                                                                                                    
|(4) | Investment is convertible into common equity of the issuer.                                                                                                                                                       
|(5) | In the case of warrants, warrants provide for the right to purchase common equity of the issuer.                                                                                                                  
|(6) | In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis.                                                                                         
|(7) | In the case of warrants, purchase rights under the warrants will expire at the close of business on this date.                                                                                                    
|(8) | Investment is not an income-producing investment.                                                                                                                                                                 
|(9) | Investment is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940.                                                                                                                 







7







Mill City Ventures III, Ltd.

Notes to Financial Statements

June 30, 2016



NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of Operations and Basis of Presentation



Mill City Ventures III, Ltd. (the “Company”)
is an investment company that was incorporated in the State of Minnesota on January 10, 2006.



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. Our 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.



Interim Financial Information



The balance sheet as of December 31, 2015, which has been derived
from audited financial statements, and the unaudited interim condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
have been omitted pursuant to such rules and regulations. Operating results for the six months ended June 30, 2016 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2016 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, 2015. 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.



8







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.



9







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 investment portfolio investments at June 30, 2016 and December
31, 2015 were $5,685,735 and $5,747,808, respectively.



Management and Service Fees



We do 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 LOSS PER COMMON SHARE



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



|                                                                     |  | For the Three Months Ended June 30, |           
|-------------------------------------------------------------------- |  | ----------------------------------- | ----------
|                                                                     |  | 2016                                |           
|Numerator: Net Decrease in Net Asset Value Resulting from Operations |  | $                                   | (355,283  
|Denominator: Weighted-average number of common shares outstanding    |  |                                     | 12,151,493
|Basic and diluted net loss per common share                          |  | $                                   | (0.03     



|                                                                     |  | For the Six Months Ended June 30, |           
|-------------------------------------------------------------------- |  | --------------------------------- | ----------
|                                                                     |  | 2016                              |           
|Numerator: Net Decrease in Net Asset Value Resulting from Operations |  | $                                 | (376,123  
|Denominator: Weighted-average number of common shares outstanding    |  |                                   | 12,151,493
|Basic and diluted net loss per common share                          |  | $                                 | (0.03     



10









At June 30, 2016 and 2015, the Company did not have any options
or warrants outstanding or any other dilutive common equivalent shares.



NOTE 3—COMMITMENTS AND CONTINGENCIES



We have an agreement to lease approximately 1,917 square feet
of commercial space and two parking spots, for a period of 62 months. The 62-month lease term began October 1, 2013 and runs through
November 30, 2018. The total rent expense for the three and six month periods ended June 30, 2016 was $14,428 and $38,604.

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



|Year  |  | Amount |        
|----- |  | ------ | -------
|2016  |  | $      | 23,655 
|2017  |  |        | 50,311 
|2018  |  |        | 46,988 
|TOTAL |  | $      | 120,954



NOTE 4—SHAREHOLDERS’ EQUITY



Common stock



At June 30, 2016, a total of 12,151,493 shares of common stock
were issued and outstanding.



NOTE 5—FAIR VALUE OF INVESTMENTS



Investment Risks



Our 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.





11







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 tables below presents the balances of assets measured at
fair value:



|                                            |  | As of June 30, 2016 |          
|------------------------------------------- |  | ------------------- | ---------
|                                            |  | Level 1             |          
|AT&T                                        |  | $                   | 216,050  
|Calamos Convertible & High Income Fund      |  |                     | 106,100  
|CenturyLink, Inc.                           |  |                     | 145,050  
|Communication Sales & Leasing, Inc.         |  |                     | 57,800   
|Discovery Communications Corporation        |  |                     | 126,150  
|Educational Development Corp.               |  |                     | 428,467  
|Escalade Inc.                               |  |                     | 81,193   
|Mix 1 Life, Inc.                            |  |                     | 56,580   
|MagicJack VocalTek Ltd.                     |  |                     | 36,193   
|Mitek Systems Inc.                          |  |                     | 55,259   
|National American University Holdings, Inc. |  |                     | 77,530   
|OTC Markets Group, Inc. Cl A                |  |                     | 314,721  
|QC Holdings, Inc.                           |  |                     | 14,130   
|Sequenom Inc.                               |  |                     | 18,274   
|Simulations Plus Inc.                       |  |                     | 140,907  
|Solar Senior Capital Ltd                    |  |                     | 97,417   
|Tessco Technologies Inc.                    |  |                     | 69,450   
|WaferGen Bio-Systems                        |  |                     | 123,083  
|Windstream Holdings Inc.                    |  |                     | 15,444   
|Bitesquad.com, LLC                          |  |                     | -        
|Bravo Financial, LLC                        |  |                     | -        
|Southern Plains Resources, Inc.             |  |                     | -        
|MAX 4G, Inc.                                |  |                     | -        
|Tzfat Spirits of Israel, LLC                |  |                     | -        
|Mix 1 Life, Inc.                            |  |                     | -        
|Mix 1 Life, Inc.                            |  |                     | -        
|Dala Petroleum Inc.                         |  |                     | -        
|Northern Capital Partners I, LP             |  |                     | -        
|Creative Realities, Inc.                    |  |                     | 170,527  
|Creative Realities, Inc.                    |  |                     | -        
|Total                                       |  | $                   | 2,350,325



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, 2015                                                                                                      |  | $          | 4,160,258
|Total realized loss, net                                                                                                           |  |            | (485,000 
|Change in unrealized appreciation                                                                                                  |  |            | 400,202  
|Net realized and unrealized gain                                                                                                   |  |            | (84,798  
|Purchases of portfolio investments                                                                                                 |  |            | 30,000   
|Sale of portfolio investments                                                                                                      |  |            | (776,050 
|Payment in kind interest                                                                                                           |  |            | 6,000    
|Fair value, June 30, 2016                                                                                                          |  | $          | 3,335,410
|Net unrealized gains included in the net increase in net assets resulting from operations relating to assets held at June 30, 2016 |  | $          | (84,798  





12









|                                       |  | As of June 30, 2015 |          
|-------------------------------------- |  | ------------------- | ---------
|                                       |  | Level 1             |          
|AT&T                                   |  | $                   | 177,600  
|Calamos Convertible & High Income Fund |  |                     | 132,900  
|CenturyLink, Inc.                      |  |                     | 146,900  
|Communication Sales & Leasing,Inc.     |  |                     | 49,440   
|Discovery Communications Corp.         |  |                     | 166,300  
|Hi Crush Partners, LP                  |  |                     | 153,450  
|Windstream Holdings, Inc.              |  |                     | 10,629   
|Solar Senior Capital Ltd               |  |                     | 95,361   
|Powershares High Yield Dividend Fund   |  |                     | 241,500  
|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          |  |                     | 1,460,523
|Dala Petroleum Inc.                    |  |                     | -        
|The Igloo, LLC                         |  |                     | -        
|Creative Realities, Inc.               |  |                     | -        
|Northern Capital Partners I, LP        |  |                     | -        
|Total                                  |  | $                   | 2,634,603



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                                                                             |  |            | (205,792 
|Net realized and unrealized loss                                                                              |  |            | (205,792 
|Purchases of portfolio investments                                                                            |  |            | 1,275,000
|Sales of portfolio investments                                                                                |  |            | (750,000 
|Fair value, June 30, 2015                                                                                     |  | $          | 4,544,208
|Net unrealized losses included in the net increase in net assets resulting from operations relating to assets |  | $          | (205,792 









Level 3 Valuation Information



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



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





13









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



For non-traded (Level 3) debt securities with a residual maturity
less than or equal to 60 days, the value will generally be the straight-line amortized face value of the debt unless justification
for impairment exists.



No changes have been made to our Valuation Policy and Procedures
during the reporting period.





Portfolio Investments



At June 30, 2016, we held investments in 22 eligible portfolio
investments, which had an amortized cost of $6,051,720 and a fair value of $4,885,531. At December 31, 2015, we held investments
in 18 eligible portfolio investments, which had an amortized cost of $6,175,345 and a fair value of $4,863,249.



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, we 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 June 30, 2016 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 Series C preferred
stock into 34,994 shares of CombiMatrix common stock at $2.86 per share and an additional 207 shares of common stock were issued
in lieu of accrued dividend on the converted principal amount. On November 21, 2013, we converted 300 shares of the series C preferred
stock into 104,983 shares of CombiMatrix common stock at $2.86 per share and 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 shares of Series D convertible
preferred stock of CombiMatrix for $1,000 per share for a total purchase price of $515,000 together 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 preferred share is convertible into
common stock at $2.06 per share. The warrant has an expiration date of December 18, 2018. On December 19, 2013, we converted all
of our Series D preferred shares into 250,000 shares of common stock. During the 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 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 decreased the exercise price of all the 81,967 warrants issued in connection with the Series C preferred to $1.97 per
share. The decrease was made in accordance with anti-dilution price-protection provisions in the warrants. On February 1, 2016
CombiMatrix affected a 1-for-15 share reverse split. On a post-split basis, our two warrants for 81,976 shares (issued in connection
with the Series C preferred stock) each became warrants to purchase 5,464 shares at an exercise price of $29.55 and the warrant
for 250,000 shares (issued in connection with the Series D preferred stock) became a warrant to purchase16,666 shares at an exercise
price of $46.80. At June 30, 2016, 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, at $0.50
per share, for a total of $150,000. At June 30, 2016, the cost of the MAX4G investment was $150,000 and the fair value was $300,000.







14







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 June 30, 2016, the cost and fair value of the Tzfat investment was $101,019 and $25,000, respectively.



On December 30, 2013, we purchased a $750,000 promissory note
from Insite Software Solutions, Inc. (“Insite Software”) and received a warrant to purchase 108,960 shares of Insite
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 payment of amounts owing under the promissory note. At
June 30, 2016, the cost and fair value of the warrant was $0.



On February 6, 2014, we purchased a $500,000 senior secured
convertible promissory note from Mix 1 Life, Inc. (“Mix 1 Life”) and received a five-year warrant to purchase up to
1,600,000 shares of Mix 1 common stock at $0.50 per share. The note currently is convertible into shares of common stock at $1.08
per share after giving effect to the 1-for-3 share reverse split effected September 11, 2014. On August 7, 2014, we elected to
exercise, on a cashless basis, our warrants and convert them into 1,121,912 shares of common stock. On September 11, 2014, Mix
1 affected a 1-for-3 share reverse split on its common stock, reducing our holdings to 373,971 common shares. At June 30, 2016,
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 $56,580,
respectively. Our former director, Christopher Larson, is currently the Chief Financial Officer and a director of Mix 1 as well
as a 5% shareholder of that company. Mr. Larson was appointed the Chief Financial Officer and a director of Mix 1 on June 24, 2014,
after our initial investment in Mix 1. On March 13, 2015, we purchased a 12% senior secured promissory note from Mix 1 in the principal
amount of $250,000, with 12 months of interest prepaid by Mix 1. The note was due on March 13, 2016. At June 30, 2016, the cost
and fair value of the note was $250,000. We have agreed in principle to extend both notes ($500,000 and $250,000) owed by Mix 1.
Thus far, Mix 1 is current on agreed-upon interest payments through June 30, 2016.



On February 7, 2014, we purchased a $1,000,000 promissory note
from DBR Phase III US Investors, LLC (“DBR Phase III”) 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.
On December 3, 2015, we received a $238,950 principal payment plus $90,389 of accrued interest. On January 22, 2016, we received
$434,195 from DBR Phase III, representing a $418,750 principal payment plus $15,445 of accrued interest. On March 22, 2016, we
received a final and full payment on the note from DBR Phase III for $342,300 in principal and $6,316 of accrued interest. The
note and accrued interest have now been paid in full.



On June 3, 2014, we entered purchased 500 shares of Series A
6% convertible preferred stock from Dala Petroleum Corporation (“Dala”) at $1,000 per share, for a total of $500,000,
and received a three-year warrant to purchase up to 714,286 shares of Dala common stock at an exercise price of $1.35 per share.
The preferred stock converts into common stock at $0.70. 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. Dala did not, however, make the prescribed payment
and has subsequently notified us of its inability to make the payment. As a result, the deferred dividend of $7,500 for each of
the quarters ended June 30, September 30, and December 31, 2015 was deemed uncollectible and removed from Dividend Income on the
Statement of Operations as of December 31, 2015. At June 30, 2016, 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 March 18, 2016, we entered into an agreement with Dala
Petroleum Corporation (“Dala”) whereby the original conversion price of the Series A convertible preferred stock was
modified from $0.70 to $0.05.





15







On December 22, 2015 we purchased a $5,195 promissory note with
Dala Petroleum Corporation (“Dala”). The note bears interest at 12% and is due on December 22, 2016. On February 17,
2016, an additional $30,000 promissory note was purchased, bearing 12% interest and due on February 17, 2017. At June 30, 2016
the cost and fair value of the note was $35,195 and $0.



On May 16, 2014, we entered into an agreement to purchase $500,000
of limited partnership interests in Northern Capital Partners I, LP and in connection therewith funded a first capital call of
$50,000 on June 16, 2014, 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 June 30, 2016, the cost and fair value of the
interests was $500,000 and $374,410 respectively.



On December 31, 2014, we purchased a $500,000 promissory note
from The Igloo, LLC (“The Igloo”). The Igloo no longer operates. On March 17, 2016, we entered into a Settlement and
Forbearance Agreement involving Christopher M. Gnetz, Jr., the guarantor of the $500,000 promissory note. The terms of the agreement
provide that we forbear from commencing or continuing legal action to recover the debt until August 1, 2016, unless a forbearance
event of defaults occurs under the agreement, and contemplates the assignment of our rights claims and interests against Mr. Gnetz
and The Igloo to a third party in consideration for payments as follows: (i) $15,000 by March 31, 2016; (ii) $50,000 by May
1, 2016; and (iii) $70,000 by August 1, 2016. On March 31, 2016, we received the $15,000 first payment. The Company has recognized
a $485,000 realized loss on the settlement of this note. The settlement payments will be recorded upon receipt of cash, due to
the uncertainty of receipt.



On February 19, 2015, we purchased a $1,000,000 convertible
note from Creative Realities, Inc. (“Creative Realities”). 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 connection
with the financing, we received a five-year warrant to purchase up to 1,515,152 common shares at a conversion price of $0.38 per
share. On October 14, 2015, we received the principal amount of $1,000,000 plus $46,684.93 in accrued interest in full payment
of amounts owing under the promissory note. On December 28, 2015, the warrants were exchanged for zero cost into 975,000 shares
of common stock. At June 30, 2016, the cost and fair value of the common stock was $0 and $170,527, respectively.



On June 1, 2015, we purchased a 12% promissory note from Pacific
Oil & Gas, LLC (“POG”) in principal amount of $25,000. The note plus accrued interest was due on December 31, 2015.
POG is a related entity to Dala Petroleum, another portfolio company. On May 6, 2016, the POG note was restated and became an obligation
of Dala Petroleum, including all interest accrued to date. The restated note bears interest at 12% and is due on December 31, 2016.
At June 30, 2016, the cost and fair value of the note was $25,000 and $0, respectively.



On August 31, 2015, we entered into an agreement with Bravo
Financial, LLC (“Bravo”) to loan Bravo up to $1,100,000 in principal amount. We funded a first advance in the amount
of $500,000 on September 1, 2015. The associated promissory note bears 12% annual interest that is paid monthly in arrears and
is due August 31, 2018. At June 30, 2016, the cost and fair value of the note was $500,000.



On September 21, 2015, we purchased 60,000 shares of Series
A convertible preferred stock from BiteSquad.com, LLC at $13 per share, for a total of $780,000. The preferred stock converts to
common at $13 per share. At June 30, 2016, the cost and fair value of the preferred stock was $780,000.



On October 21, 2015, we purchased 200,000 shares of common stock
of WaferGen Bio-Systems Inc. at $1.00 per share, for a total of $200,000. We also received a five-year warrant to purchase 200,000
common shares at $1.44 per share. On March 8, 2016, we sold 100 shares of the common stock at a realized loss of $40. On May 13,
2016 we sold 50,000 shares of the common stock at a realized loss of $2,923. At June 30, 2016, the cost of the common stock was
$149,900 and fair value was $123,083, and the cost and fair value of the warrant was $0.



On December 24, 2015, we purchased 804 shares of common stock
of Simulations Plus Inc. at $9.25 per share, for a total of $7,759 On December 29, 2015, we added 1,996 shares to our holdings
at $9.60 per share for a total of $19,224. On December 30, 2015, we added 2,200 shares to our holdings at $9.60 per share for a
total of $21,186. On January 22, 2016 we added 3,600 shares to our holdings at $10.77 per share for a total of $38,789. On February
5, 2016 we added 38.533 shares to our holdings through a dividend reinvestment option for a total of $430 and on February 8, 2016
we added 10,000 shares to our holdings at $8.62 per share for a total of $86,222, bringing our total holdings to 18,639 shares
as of June 30, 2016. At June 30, 2016, the cost and fair value of the common stock was $173,310 and $140,907, respectively.



On December 31, 2015, we owned 2,300 shares of common stock
of Educational Development Corporation at a cost of $10.93 per share, for a total of $25,212. From January 1 through March 31,
2016, we purchased a total of 26,847 common shares through open-market purchases at an aggregate cost of $282,669. From April 1
through June 30, 2016, we purchased a total of 7,758 common shares through open-market purchases at an aggregate cost of $101,500.
At June 30, 2016 our total holdings were 36,905 shares and the cost and fair value was $409,380 and $428,467, respectively.



16







On December 28, 2015, we purchased a $600,000 promissory note
from Creative Realities, Inc. The note bears 12% annual interest paid monthly in arrears plus 2% annual increase of principal at
the maturity of the note. The note is due April 15, 2017. The outstanding principal amount is convertible into common stock at
$0.28 per share. In conjunction with the financing, we received a five-year warrant to purchase up to 1,071,429 common shares at
an exercise price of $0.28 per share. At June 30, 2016, the cost and fair value of the convertible note was $606,000.



From January 1 through March 31, 2016, we purchased a total
of 19,074 common shares of OTC Markets Group Cl A through open-market purchases at an aggregate cost of $297,381. At June 30, 2016
the cost and fair value of these shares was $297,381 and $314,721, respectively.



On January 27, 2016, we purchased 5,000 shares of common stock
of QC Holdings Inc. at $0.72 per share, for a total of $3,586. On January 28, 2016 we added 10,000 shares to our holdings for $0.71
per share for a total of $7,070, bringing our total holdings to 15,000 shares. At June 30, 2016 the cost and fair value or our
total holdings was $10,656 and $14,130, respectively.



From April 1 through June 30, 2016, we purchased a total of
7,929 common shares of Escalade, Inc. through open-market purchases at an aggregate cost of $93,975. At June 30, 2016 the cost
and fair value of these shares was $93,975 and $81,193, respectively.



On April 7, 2016 we purchased 5,754 common shares of Magicjack
Vocaltek Ltd at a cost of $34,141. At June 30, 2016 the cost and fair value of these shares was $34,141 and $36,193, respectively.



On April 7, 2016 we purchased 7,772 common shares of Mitek Systems,
Inc. at a cost of $50,540. At June 30, 2016 the cost and fair value of these shares was $50,540 and $55,259, respectively.



From April 1 through June 30, 2016, we purchased a total of
38,005 common shares of National American University Holdings through open-market purchases at an aggregate cost of $77,053. At
June 30, 2016 the cost and fair value of these shares was $77,053 and $77,530, respectively.



On April 7, 2016, we purchased 20,000 common shares of Sequenom,
Inc. at a cost of $29,222. At June 30, 2016 the cost and fair value of these shares was $29,222 and $18,274, respectively.



From April 1 through June 30, 2016, we purchased a total of
5,000 common shares of Tessco Technologies Inc. through open-market purchases at an aggregate cost of $83,090. At June 30, 2016
the cost and fair value of these shares was $83,090 and $69,450, respectively.



NOTE 6—MINIMUM ASSET COVERAGE



As a BDC, we are required to meet various regulatory tests.
Among other things, these tests will require us to invest at least 70% of our total assets in private or small-cap public U.S.-based
companies, and to maintain a coverage ratio of total assets (less all liabilities and indebtedness not represented by senior securities)
to total indebtedness represented by senior securities of at least 200%. As of June 30, 2016, approximately 87% 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 taxed 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. Upon our election to be taxed as a RIC, we will be required to distribute at least
90% of our investment company taxable income and we intend at that time to distribute (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.



NOTE 8—SUBSEQUENT EVENTS



On August 1, 2016, we purchased an additional $50,000 of limited
partnership interests in Northern Capital Partners I, LP.



On August 9, 2016, we purchased 40,000 Series A-2 Preferred
Shares from Bitesquad.com, LLC for an aggregate purchase price of $600,000.



On August 1, 2016 we were notified that Igloo, LLC and it guarantor,
Christopher M. Gnetz, would not meet their obligation under the terms of the Forbearance and Settlement Agreement dated March 17,
2016. On May 1, 2016 we received $15,000 under the Agreement. We intend to pursue the legal remedies available to us under the
law.





17







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



Our Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth below should be read in conjunction with our audited financial statements, and notes
thereto, contained in our Form 10-K filed with the SEC on March 31, 2016 related to our year ended December 31, 2015.



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



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, 2016 (related to our year
ended December 31, 2015) 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 filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking
statement to reflect events or circumstances occurring after the date of this report. The forward-looking statements made in this
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.



18









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 focused on promoting and placing
a poker-based game online and into casinos and entertainment facilities nationwide. We are regulated as a business development
company (a “BDC”) under the Investment Company Act of 1940 (the “1940 Act”), 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.



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 Six Months Ended June 30, 2016



Investment Transactions



On January 22, 2016, we received $434,195 from DBR Phase III
US Investors, LLC. The payment represented a $418,750 principal payment on a promissory note we purchased on February 7, 2014,
plus $15,445 of accrued interest. On March 22, 2016, we received a final principal payment from the portfolio company for $342,300
in principal and $6,316 of accrued interest. The note and accrued interest have now been paid.



From January 1 through June 30, 2016, we purchased a total of
34,605 shares of common stock of Educational Development Corporation through open-market purchases at an aggregate cost of $384,168,
bringing our total holdings to 36,905 common shares. At June 30, 2016 the cost and fair value of these shares was $409,380 and
$428,467, respectively.



From January 1 through June 30, 2016, we purchased a total of
19,074 common shares of OTC Markets Group Cl A through open-market purchases at an aggregate cost of $297,381. At June 30, 2016
the cost and fair value of these shares was $297,381 and $314,721, respectively.

.

On January 27, 2016, we purchased 5,000 shares of common stock
of QC Holdings Inc. at $0.72 per share, for a total of $3,586. On January 28, 2016 we added 10,000 shares to our holdings at $0.71
per share for a total of $7,070, bringing our total holdings to 15,000 shares. At June 30, 2016 the cost and fair value was $10,655
and $14,130, respectively.



From April 1 through June 30, 2016, we purchased a total of
7,929 common shares of Escalade, Inc. through open-market purchases at an aggregate cost of $93,975. At June 30, 2016 the cost
and fair value of these shares was $93,975 and $81,193, respectively.



On April 7, 2016 we purchased 5,754 common shares of Magicjack
Vocaltek Ltd at a cost of $34,141. At June 30, 2016 the cost and fair value of these shares was $34,141 and $36,193, respectively.



On April 7, 2016 we purchased 7,772 common shares of Mitek Systems,
Inc. at a cost of $50,540. At June 30, 2016 the cost and fair value of these shares was $50,540 and $55,259, respectively.



From April 1 through June 30, 2016, we purchased a total of
38,005 common shares of National American University Holdings through open-market purchases at an aggregate cost of $77,053. At
June 30, 2016 the cost and fair value of these shares was $77,053 and $77,530, respectively.



On April 7, 2016 we purchased 20,000 common shares of Sequenom,
Inc. at a cost of $29,222. At June 30, 2016 the cost and fair value of these shares was $29,222 and $18,274, respectively.



From January 1 through June 30, 2016, we purchased a total of
13,639 shares of common stock of Simulations Plus Inc. through open-market purchases at an aggregate cost of $125,441, bringing
our total holdings to 18,639 common shares. At June 30, 2016 the cost and fair value of these shares was $173,310 and $140,907,
respectively.



From April 1 through June 30, 2016, we purchased a total of
5,000 common shares of Tessco Technologies Inc. through open-market purchases at an aggregate cost of $83,090. At June 30, 2016
the cost and fair value of these shares was $83,090 and $69,450, respectively.



19







Material Changes in Assets and Liabilities



Our prepaid expenses as of June 30, 2016 were $77,331 compared
to $43,808 for the year ended December 31, 2015. The increase relates to our annual insurance and fidelity bond premiums. These
premiums will be amortized ratably over the covered period.



Our interest and dividends receivable at June 30, 2016 were
$13,389 compared to $23,840 for the year ended December 31, 2015. The decrease relates to our investments in Insite Software Solutions,
Inc, DBR Phase III US Investors, LLC, The Igloo LLC, Mix 1 Life Inc., and Creative Realities Inc.



Results of Operations for the Six Months Ended June 30, 2016
compared to the Six Months Ended June 30, 2015



Operating Expenses



|                                 |  | For the Six-Month Period Ended |          |   | For the Six-Month Period Ended | 
|-------------------------------- |  | ------------------------------ | -------- | - | ------------------------------ | 
|Item                             |  | June 30, 2016                  |          |   | June, 2015                     | 
|Investment Income                |  | $                              | 166,051  |   |                                | 
|Operating Expenses:              |  |                                |          |   |                                | 
|Professional fees                |  |                                | 85,484   |   |                                | 
|Payroll expense                  |  |                                | 81,958   |   |                                | 
|Occupancy expense                |  |                                | 38,604   |   |                                | 
|Insurance expense                |  |                                | 40,087   |   |                                | 
|Directors’ fees expense          |  |                                | 28,956   |   |                                | 
|Depreciation and amortization    |  |                                | 6,424    |   |                                | 
|Other general and administrative |  |                                | 8,301    |   |                                | 
|Net Investment Gain (Loss)       |  | $                              | (123,763 | ) |                                | 



As the table above demonstrates, we incurred operating expenses
of $289,814 and $306,802 for the six-month periods ended June 30, 2016 and 2015, respectively. A discussion and analysis of the
material components of our operating expenses appears below.



Professional fees.Our professional fees were
$85,484 for the six-month period ended June 30, 2016, compared to $87,468 for the six-month period ended June 30, 2015. The decrease
in professional fees is due to decreased legal fees associated with the preparation of the Company’s filing requirements.



Insurance expense.During the six -month period
ended June 30, 2016, we incurred $40,087 in insurance expense compared to $46,174 for the six -month period ended June 30, 2015.
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 six -month periods ended June 30, 2016 were $28,956 compared to $30,000 for the six -month period ended June
30, 2015. The decrease relates to the temporary vacancy in our third director position due to the resignation of Mr. Christopher
Larson in December 2015.







20







Results of Operations for the Three Months Ended
June 30, 2016 Compared to the Three Months Ended June 30, 2015



Operating Expenses





|Item                             |  | For the 
Three-Month 
Period Ended 
June 30, 2016 |         |   | For the 
Three-Month 
Period Ended 
June 30, 2015 | 
|-------------------------------- |  | ------------------------------------------------- | ------- | - | ------------------------------------------------- | 
|Investment Income                |  | $                                                 | 79,728  |   |                                                   | 
|Operating Expenses:              |  |                                                   |         |   |                                                   | 
|Professional fees                |  |                                                   | 45,477  |   |                                                   | 
|Payroll expense                  |  |                                                   | 40,549  |   |                                                   | 
|Occupancy expense                |  |                                                   | 14,428  |   |                                                   | 
|Insurance expense                |  |                                                   | 18,730  |   |                                                   | 
|Directors’ fees expense          |  |                                                   | 15,000  |   |                                                   | 
|Depreciation and amortization    |  |                                                   | 3,212   |   |                                                   | 
|Other general and administrative |  |                                                   | 5,700   |   |                                                   | 
|Net Investment Income (Loss)     |  | $                                                 | (63,368 | ) |                                                   | 









As the table above demonstrates, we incurred operating expenses of $143,096 and $143,561 for the three-month
periods ended June 30, 2016 and 2015, respectively. A discussion and analysis of the material components of our operating expenses
appears below.



Professional fees.Our professional
fees were $45,477 for the three-month period ended June 30, 2016, compared to $36,071 for the three-month period ended June 30,
2015. The increase in professional fees is due to increased legal fees associated with the preparation of the Company’s filing
requirements.



Occupancy expense.During the three-month
period ended June 30, 2016, we incurred $14,428 in occupancy expense compared to $22,819 incurred during the three-month period
ended June 30, 2015. The decrease relates to a refund received on the Common Area Maintenance charges.



Insurance expense.During the three-month
period ended June 30, 2016, we incurred $18,730 in insurance expense compared to $21,610 for the three-month period ended June
30, 2015. Insurance expense relates to our annual director and officer insurance, fidelity bond premiums and business insurance
amortized ratably over the covered period.



Net Investment Income (Loss)



Net investment income (loss) represents the difference between
investment income and operating expenses. Our net investment income (loss) for the six- month period ended June 30, 2016 and 2015
was ($123,763) and $4,123 respectively. The decrease was due to a reduction in our investment income due to our investments in
Igloo, LLC, Insite Software Solutions, Inc. and DBR Phase III US Investors, LLC.



21









Net Realized Gains (Losses), Increase in Net
Assets from Net Changes in Unrealized Appreciation



Net realized losses on investments for the six-month period
ended June 30, 2016 was ($533,281). This was primarily due to a net realized loss of $485,000 due to our settlement of the note
with Igloo, LLC.



The net increase in net assets from changes in unrealized appreciation
was $280,921. This was primarily due to the realization of our $500,000 investment in Igloo, LLC which had a realized loss of $485,000.



Summary cash flow data is as follows:



|                                |  | Six Months Ended June 30, |          
|------------------------------- |  | ------------------------- | ---------
|                                |  | 2016                      |          
|Cash flows provided (used) by : |  |                           |          
|Operating activities            |  | $                         | (401,293 
|Investing activities            |  |                           | -        
|Financing activities            |  |                           | -        
|Net decrease in cash            |  |                           | (401,293 
|Cash, beginning of period       |  |                           | 2,980,659
|Cash, end of period             |  | $                         | 2,579,366



The cash provided in operating activities for the six-month
period June 30, 2016 was primarily from our investment transactions, specifically our receipt of payment on the promissory note
we purchased from DBR Phase III US Investors, LLC.



During the six months ending June 30, 2016, we used cash in
operating activities for open-market purchases of common shares of Educational Development Corporation (aggregating to $384,168
of total acquisition costs), common shares of OTC Markets Group Cl A (aggregating to $297,381 of total acquisition costs), common
shares of QC Holdings, Inc. (aggregating to $10,656 if total acquisition costs), common shares of Escalade (aggregating to $93,975
of total acquisition costs), common shares of Magicjack Vocaltek Ltd. (aggregating to $34,141 of total acquisition costs), common
shares of Mitek Systems Inc. (aggregating to $50,540 of total acquisition costs), common shares of National American University
Holdings. (aggregating to $77,053 of total acquisition costs), common shares of Sequenom Inc. (aggregating to $29,222 of total
acquisition costs), common shares of Simulations Plus Inc. (aggregating to $125,441 of total acquisition costs), and common shares
of Tessco Technologies Inc. (aggregating to $83,090 of total acquisition costs).



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.



22







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



23









| | (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.



24







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 former director Christopher Larson had 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. Mr. Larson is no longer a director of the Company.



In addition, Lantern Advisors, LLC, a limited liability company
equally owned by Messrs. Geraci and Polinsky, owns a cashless warrant to purchase 153,846 shares of Creative Realities, Inc. which
expires July 14, 2019 at a price of $0.70 a share.



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 30, 2016. 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 six months ended June 30, 2016, we did not engage
in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.



25









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 June 30, 2016, 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 June 30, 2016.



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).



26







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: August 15, 2016      
| |                             
| | /s/ Joseph A. Geraci, II    
| | Joseph A. Geraci, II        
| | Chief Financial Officer     
| |                             
| | Dated: August 15, 2016      



27