SUIG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2013, for Mill City Ventures III, Ltd. (formerly Poker Magic, Inc.). The Company transitioned from a development-stage gaming company to a Business Development Company (BDC) regulated under the Investment Company Act of 1940. As of the reporting date, the Company had elected BDC status and filed to deregister as a registered investment company. The primary business focus shifted to investing in or lending to private companies and providing managerial assistance.

Key Financial Metrics

Liquidity: The Company ended the period with significant liquidity, holding over $10 million in cash, primarily derived from financing activities. There were no long-term liabilities as of March 31, 2013.

Material Changes vs. Prior Period

• Capital Raise: The Company raised approximately $10.165 million in cash through private placements of common stock in March 2013. This included converting a $500,000 subscription payable and issuing 10,165,000 new shares at $1.00 per share.
• Asset Composition: Total assets increased from $603,621 to $10.8 million. The Company initiated its investment portfolio with $525,000 in private investments (Great Plains Sands, LLC and Southern Plains Resources, Inc.), whereas it held no investments in the prior period.
• Expense Structure: Operating expenses increased significantly to $191,185 from $42,859. This increase is attributed to professional fees related to the BDC conversion and private offering ($82,259), new payroll expenses for executive management ($80,737), and registration statement expenses ($23,305). In the prior period, executive compensation was paid in stock.
• Debt Reduction: Related-party notes payable were largely converted to equity or paid off. Total liabilities decreased from $540,546 to $297,554, with long-term liabilities dropping to zero.

Outlook, Risks, and Management Commentary

Management Commentary: Management anticipates that compensation, professional fees, and insurance expenses will increase in 2013 as the Company fully operates as a BDC. The Company intends to invest capital in portfolio companies for acquisitions, recapitalizations, and organic growth. Future revenues will be derived from earnings on portfolio investments.

Subsequent Events: On May 3, 2013, the Company entered into an agreement to purchase $400,000 of Series C Preferred Stock and warrants in CombiMatrix Corporation. The first closing of $200,000 occurred on May 3, 2013.

Risks and Contingencies:

• Valuation Risk: Investments are valued at fair value, often using Level 3 inputs (unobservable data), which involves significant management judgment and may differ from realized values.
• Regulatory Compliance: As a BDC, the Company must maintain an asset coverage ratio of at least 200% and invest at least 70% of assets in qualifying assets. As of March 31, 2013, the coverage ratio was well in excess of the minimum.
• Market Risk: The Company is subject to interest rate risk, though it currently holds no variable-rate investments and does not engage in hedging activities.

Investor Verification Checklist

• Verify the valuation methodology for the $525,000 Level 3 private investments (Great Plains Sands and Southern Plains Resources) given the lack of active market quotations.
• Confirm the status of the second closing of the CombiMatrix Corporation investment ($200,000) and the specific milestones required for completion.
• Review the sustainability of the current cash burn rate ($187,623 net loss for the quarter) against the $10.1 million cash balance to assess runway for future investments.
• Monitor the Company's ability to meet the 70% qualifying asset requirement under the 1940 Act as it deploys capital.
• Check for any changes in the related-party transaction policies, specifically regarding the conversion of debt to equity and executive compensation structures.