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





  · Overview
  · Portfolio and Investment Activity
  · Results of Operations
  · Financial Condition
  · Critical Accounting Estimates
  · Off-Balance Sheet Arrangements
  · Forward Looking Statements




OVERVIEW

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

We are engaged in the business of providing short-term non-bank lending and specialty finance solutions to companies and individuals, generally on a secured basis. The loans we provide typically have maturities that are nine months or shorter, highly illiquid, and ordinarily involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale, or other projects relating to real estate, title loans, inventory needs, inventory financing, solve for short-term liquidity needs, or for other similar purposes. We intend to remain opportunistic, however, and may occasionally engage in transactions that involve our acquisition of other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make.

Our principal sources of income are interest and fees associated with our loans such as origination fees, closing fees or exit fees. In connection with the short-term non-bank specialty finance loans we provide, we may receive reimbursement of legal costs associated with loan documentation. We occasionally derive income from dividends paid on equity securities we hold from time to time, or from the sale of our equity securities. Our statement of operations also reflect increases and decreases in the carrying value of our assets and investments (i.e., unrealized appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview.

PORTFOLIO AND INVESTMENT ACTIVITY

During the nine months ended September 30, 2022, we made $13,924,333 of investments and loans and had $10,076,483 of redemptions and repayments, resulting in net investments at amortized cost of $17,913,927 at the end of the period.

During the nine months ended September 30, 2021, we made $18,133,352 of investments and loans and had $16,363,964 of redemptions and repayments, resulting in net investments at amortized cost of $10,562,451 at the end of that period.






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Our investment composition by major class, based on fair value at September 30,
2022, was as follows:



                                Investments at       Percentage of
                                  Fair Value          Fair Value
Short-term Non-banking Loans   $     16,040,748                88.8 %
Preferred Stock                       1,200,000                 6.6
Other Equity                            822,500                 4.6
Total                          $     18,063,248               100.0 %




RESULTS OF OPERATIONS

Our operating results for the three and nine months ended September 30, 2022 and September 30, 2021 were as follows:





                                For the Three Months              For the Nine Months
                                 Ended September 30,              Ended September 30,
                                 2022            2021            2022             2021
Investment Income:           $  1,115,224     $  755,601     $  3,351,935     $  1,977,992
Operating Expenses:            (1,179,792 )     (239,582 )     (2,227,865 )     (1,023,596 )
Net Investment Gain (Loss)   $    (64,568 )   $  516,019     $  1,124,070     $    954,396




     Investment Income

We generate revenue primarily in the form of interest income derived from the short-term non-banking loans we provide, together with fees we charge in connection with those loans, such as commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned. In some cases, the interest payable to us on the short-erm loans we provide may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. On occasion, we may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire.

For the three and nine months ended September 30, 2022, interest earned on our loan portfolio was $1,053,714 and $2,840,425, respectively, and our fees charged in connection with the loans was $61,510 and $511,510, respectively. For the three and nine months ended September 30, 2021, interest earned on our loan portfolio was $663,101 and $1,756,492, respectively, and our fees charged in connection with the loans was $92,500 and $221,500, respectively. The increase in the most recent period is primarily due to a combination of strong demand for our short-term loans and our enhanced ability to satisfy that demand with the additional cash resources we have derived from prior loans that have been repaid to us. Our loan portfolio generates interest income, with a weighted-average interest rate on the loans of 26%.





     Professional Fees

For the three and nine months ended September 30, 2022, we had $916,359 and $1,309,348 professional fees expense, respectively. For the three and nine months ended September 30, 2021, we had $79,950 and $300,297 professional fees expense, respectively. The increase for the nine months in 2022 is due to legal costs incurred to close on several new short-term banking loans, to obtain our listing on the Nasdaq exchange,and our efforts to seek additional financing through a public offering of our common stock to grow our business.





     Net Realized Gain from Investments

For the three and nine months ended September 30, 2022, we had $2,098,585 and $10,076,483, respectively, of sales of investments, resulting in $0 and $133,020 of realized gains, respectively. For the three and nine months ended September 30, 2021, we had $6,474,137 and $16,363,964, respectively, of sales of investments, resulting in $289,138 and $3,818,737, respectively, of realized gains.





     Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three and nine months ended September 30, 2022, our investments had $0 of unrealized appreciation and $16,297 of unrealized depreciation, respectively. For the three and nine months ended September 30, 2021, our investments had $774,169 and $1,204,319 of unrealized depreciation, respectively.






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     Changes in Net Assets from Operations

For the three and nine months ended September 30, 2022, we recorded a net decrease in net assets from operations of $36,126 and a net increase in net assets from operations of $893,993, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2022, our per-share net decrease in net assets from operations was $0.01 and our per share net increase from operations was $0.18, respectively. For the three and nine months ended September 30, 2021, we recorded a net increase in net assets from operations of $31,288 and $2,557,836, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2021, our per-share net increase in net assets from operations was $0.01 and $0.53, respectively.





     Cash Flows for the Nine months Ended September 30, 2022 and 2021

The level of cash flows used in or provided by operating activities is affected primarily by our provision of short-term loans, purchases of other investments, redemptions and repayments of our loans or investments, and other related factors. For the nine months ended September 30, 2022, net cash used in operating activities was $6,429,293. Cash flows used in operating activities for the nine months ended September 30, 2022 were primarily related to the funding of our short-term loans and purchases of investments aggregating $13,924,333, offset mostly by redemptions and repayments of short-term loans and investments totaling $10,076,483. For the nine months ended September 30, 2021, net cash used in operating activities was $1,306,775. Cash flows used in operating activities for the nine months ended September 30, 2021 were primarily related to the funding of our short-term loans and purchases of investments aggregating $18,133,352, offset mostly by redemptions and repayments of short-term loans and investments totaling $16,363,964.

For the nine months ended September 30, 2022, net cash provided in financing activities was $6,354,795. Cash flows provided in financing activities for the nine months ended September 30, 2022 were primarily related to our public offering and our draw on the available line of credit, offset by payments against the line of credit. For the nine months ended September 30, 2021, net cash used in financing activities was $539,296. Cash flows used in financing activities for the nine months ended September 30, 2021 were related to the payment of our stock dividend to investors.





FINANCIAL CONDITION

As of September 30, 2022, we had cash of $1,861,650, a decrease of $74,498 from December 31, 2021. We expect that our existing funds, together with any funds raised in the future, will be used primarily to fund our provision of short-term non-bank loans and specialty finance solutions or for other general corporate purposes, including paying our operating expenses and servicing our existing debt. Pending use of our cash as described, we may invest some portion of our cash in U.S. government securities or other high quality debt securities maturing in one year or less from the time of investment.

On August 9, 2022, we effected a stock combination (reverse stock split) of our common shares on a 1-for-2.25 basis such that every 2.25 shares of common stock issued and outstanding on that date were combined into one share of common stock. Any fractional share resulting from the reverse stock split was rounded up to the nearest whole share. The reverse stock split was approved by our Board of Directors in accordance with Minnesota law, and resulted in a proportionate reduction in the number of authorized shares of capital stock available for issuance under our articles of incorporation. On a post-reverse-split basis, we are authorized to issue up to 111,111,111 shares of capital stock.

On August 11, 2022, we completed a public offer and sale of 1,250,000 common shares pursuant to a registration statement filed with the SEC and declared effective on August 9, 2022. We sold these shares at $4.00 per share, resulting in gross proceeds of $5,000,000. As part of the registered public offering, we granted the underwriters a 45-day option to purchase up to 187,500 additional common shares at the offering price, less underwriting discounts, which option was not exercised. In connection with the offering, we issued the underwriter a five-year warrant to purchase up to 75,000 common shares at the per-share price of $5.00. Our net proceeds after the payment of underwriting discounts, underwriting expenses, and offering-related expenses we incurred were otherwise obligated to pay, were approximately $4,041,000.





CRITICAL ACCOUNTING ESTIMATES

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

In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition. For more information, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.






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OFF-BALANCE-SHEET ARRANGEMENTS

During the nine months ended September 30, 2022, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.





FORWARD-LOOKING STATEMENTS

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





    ·   our future operating results;
    ·   the success of our investments;
    ·   our relationships with third parties;
    ·   the dependence of our success on the general economy and its impact on the
        industries in which we invest;
    ·   the ability of our portfolio companies to achieve their objectives;
    ·   our expected financings and investments;
    ·   our regulatory structure and tax treatment;
    ·   the adequacy of our cash resources and working capital; and
    ·   the timing of cash flows, if any, we receive from our investments.

The foregoing list is not exhaustive. For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on March 10, 2021 (related to our year ended December 31, 2021) and in particular the section thereof entitled "Risk Factors." Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.

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