UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

Commission File Number: 000-55411

 

Parkview Capital Credit, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   47-2441958
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
1980 Post Oak Blvd, Two Post Oak Center, 15th Floor
Houston, Texas
  77056
(Address of Principal Executive Offices)   (Zip Code)

 

(Registrant’s telephone number, including area code): (713) 622-5000

 

Securities to be registered pursuant to Section 12(b) of the Act:

 

None

 

Securities to be registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.01 per share

 

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 past 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     ☐  No

 

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

 

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

 

Large accelerated filer  Accelerated filer
Non-accelerated filer Smaller reporting company

(Do not check if a smaller reporting company)

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 3,800,010 issued and outstanding shares of the issuer’s common stock, $.01 par value per share, on November 9, 2016.

 

 

 

 

 

 

PARKVIEW CAPITAL CREDIT, INC. FORM 10Q

QUARTER ENDED SEPTEMBER 30, 2016

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Unaudited Financial Statements  
     
  Condensed Statements of Financial Condition as of September 30, 2016 (Unaudited) and December 31, 2015 1
     
  Unaudited Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 2
     
  Unaudited Condensed Statements of Changes in Net Assets for the Nine Months Ended September 30, 2016 and 2015 3
     
  Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 4
     
  Condensed Schedules of Investments as of September 30, 2016 (Unaudited) and December 31, 2015 5
     
  Notes to Unaudited Condensed Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
     
Item 4. Controls and Procedures 26
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 27
     
Item 1A. Risk Factors 27
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. Mine Safety Disclosures 27
     
Item 5. Other Information 28
     
Item 6. Exhibits 28
     
Signatures 29

 

 

 

 

PARKVIEW CAPITAL CREDIT, INC.

CONDENSED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per share information)

 

   September 30,   December 31, 
   2016   2015 
   (Unaudited)     
Assets        
Investments at fair value (amortized cost $25,000 and $25,746, respectively)  $24,858   $25,500 
Cash and cash equivalents   16,674    12,358 
Accounts receivable   -    26 
Interest receivable   419    123 
Dividend receivable   144    20 
Receivable for investments sold and repaid   25    958 
Prepaid expenses and other assets   100    121 
Total assets  $42,220   $39,106 
Liabilities and stockholders' equity          
Liabilities          
Payable for investments purchased  $3,458   $1,472 
Accounts payable and accrued expenses   132    24 
Amount due to advisor   8    2 
Loan origination fees, net   163    130 
Management fees payable   86    64 
Total liabilities   3,847    1,692 
           
Commitments and contingencies          
           
Stockholders' equity          
Preferred stock, par value $0.01 per share, 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2016 and December 31, 2015   -    - 
Common stock, par value $0.01 per share, 50,000,000 shares authorized, 3,800,010 shares issued and outstanding at September 30, 2016 and December 31, 2015   38    38 
Additional paid-in capital   37,961    37,961 
Accumulated undistributed net realized loss on investments   (17)   (18)
Accumulated undistributed net investment income (loss)   532    (321)
Net unrealized depreciation on investments   (141)   (246)
Total stockholders' equity   38,373    37,414 
Total liabilities and stockholders' equity  $42,220   $39,106 
           
Net asset value per share  $10.10   $9.85 

 

See Notes to Unaudited Condensed Financial Statements

 

 1 

 

 

PARKVIEW CAPITAL CREDIT, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share information)

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2016   2015   2016   2015 
                 
Investment income                
Net interest income  $579   $304   $1,913   $341 
Paid-in-kind interest   364    -    542    - 
Dividend income   67    -    200    - 
Total investment income   1,010    304    2,655    341 
Operating expenses                    
Organizational expenses   -    -    -    63 
Management fees   228    126    695    147 
Professional fees   196    195    587    286 
General and administrative expenses   164    105    548    127 
Total expenses before expense waiver and provision for taxes   588    426    1,830    623 
Waiver of management fees   (25)   -    (112)   - 
Provision for taxes   -    -    84    - 
Total operating expenses   563    426    1,802    623 
Net investment income (loss)   447    (122)   853    (282)
                     
Realized and unrealized loss                    
Net realized gain on investments   13    -    1    - 
Net change in unrealized appreciation (depreciation) on investments   212    (6)   105    (159)
Total net realized and unrealized income (loss) on investments   225    (6)   106    (159)
Net increase (decrease) in net assets resulting from operations  $672   $(128)  $959   $(441)
                     
Per share information - basic and diluted (a)                    
Weighted average - net increase (decrease) in net assets resulting from operations  $0.18   $(0.06)  $0.25   $(0.21)
Weighted average shares outstanding   3,800,010    2,190,227    3,800,010    2,110,073 

 

(a) Per share information for the three and nine months ended September 30, 2015 is calculated using weighted average shares outstanding from commencement of operations on April 24, 2015 through September 30, 2015.

 

See Notes to Unaudited Condensed Financial Statements

 

 2 

 

 

PARKVIEW CAPITAL CREDIT, INC.

CONDENSED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

(in thousands, except share and per share information)

 

   For the Nine Months Ended September 30, 
   2016   2015 
         
Decrease from operations        
Net investment income (loss)  $853   $(282)
Net realized gain on investments   1    - 
Net change in unrealized appreciation (depreciation) on investments   105    (159)
Net increase (decrease) in net assets resulting from operations   959    (441)
Capital Share Transactions          
Issuance of common stock   -    23,500 
Net increase in net assets from capital share transactions   -    23,500 
           
Total increase in net assets resulting from operations   959    23,059 
Net assets at beginning of period   37,414    (67)
Net assets at end of period  $38,373   $22,992 
           
Net asset value per common share  $10.10   $9.78 
Common shares outstanding, end of period   3,800,010    2,350,010 

 

See Notes to Unaudited Condensed Financial Statements

 

 3 

 

 

PARKVIEW CAPITAL CREDIT, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

   For the Nine Months Ended September 30, 
   2016   2015 
         
Cash flows from operating activities        
Net increase (decrease) in net assets resulting from operations  $959   $(441)
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities          
Purchases of investments   (34,291)   (17,021)
Paid-in-kind interest   (542)   - 
Proceeds from sales and repayments of investments   35,610    41 
Loan origination fee amortization   (90)   - 
Net unrealized (appreciation) depreciation on investments   (105)   159 
Net amortization of premiums on investments   (30)   2 
Decrease (increase) in operating assets:          
Accounts receivable   26    - 
Interest receivable   (296)   (187)
Dividend receivable   (124)   - 
Receivable for investments sold and repaid   933    (5)
Prepaid expenses and other assets   21    (121)
Increase (decrease) in operating liabilities:          
Payable for investments purchased   1,986    966 
Accounts payable and accrued expenses   108    (41)
Amount due to advisor   6    - 
Loan origination fees   123    74 
Management fees payable   22    89 
Net cash provided by (used in) operating activities   4,316    (16,485)
           
Cash flows from financing activities          
Issuance of common stock   -    23,500 
Net cash provided by financing activities   -    23,500 
           
Total increase in cash   4,316    7,015 
Cash at beginning of period   12,358    - 
Cash at end of period  $16,674   $7,015 

 

See Notes to Unaudited Condensed Financial Statements

 

 4 

 

 

PARKVIEW CAPITAL CREDIT, INC.

CONDENSED SCHEDULE OF INVESTMENTS

(Unaudited)

(in thousands, except share and per share information) 

 

September 30, 2016 

 

Portfolio Company (a)  Industry  Spread Above Index (b)  Interest Rate   Maturity   Principal   Amortized Cost   Fair Value (c)   % of Net Assets 
Senior Secured Loans - First Lien                              
InfoGroup, Inc.  Market Analytics  L + 6.00%   7.50%   5/26/2018   $3,477   $3,448   $3,445    9.0%
North Atlantic Trading Company, Inc.  Tobacco  L + 6.50%   7.75%   1/13/2020    866    867    860    2.2%
Ebony Media (d)  Media  N/A   12%, 2% PIK    5/5/2020    3,781    3,674    3,667    9.6%
Medifare (d)  Healthcare  N/A   10%, 4% PIK    5/25/2018    3,651    3,604    3,593    9.4%
Total Senior Secured Loans - First Lien                        11,593    11,565    30.2%
                                     
Senior Secured Loans - Second Lien                                    
Kronos (e)  Software Services  L + 8.50%   9.75%   4/25/2020    1,500    1,537    1,533    4.0%
JD Power  Marketing Information Services  L + 8.50%   9.50%   9/7/2024    1,000    985    1,015    2.6%
American Bath (e)  Manufacturing  L + 9.75%   10.75%   9/30/2024    2,000    1,920    1,920    5.0%
North Atlantic Trading Company, Inc.  Tobacco  L + 10.25%   11.50%   7/31/2020    1,500    1,532    1,500    3.9%
Action Resources  (d)  Transportation  L + 15.00% PIK   16.00% PIK    4/30/2020    5,386    5,386    5,278    13.8%
Total Senior Secured Loans - Second Lien                        11,360    11,246    29.3%

 

Portfolio Company (a)  Industry  Dividend Rate   Number of Shares   Amortized Cost   Fair
Value (c)
   % of
Net Assets
 
Equity Investments                            
Langham Creek LLC; Preferred Units (d)  Real Estate   14.00%   1,868,600    1,869    1,869    4.9%
Langham Creek LLC; Common Units (d)  Real Estate   N/A    1,000    1    1    0.0%
Ebony Media; Warrants (d)  Media   N/A    50,000    119    119    0.3%
Medifare; Warrants (d)  Healthcare   N/A    5    58    58    0.1%
Total Equity Investments                2,047    2,047    5.3%
                             
                             
Total Investments               $25,000    24,858    64.8%
Other assets in excess of liabilities                     13,515    35.2%
Net assets                    $38,373    100.0%

 

(a) With the exception of the Company’s investment in Langham Creek LLC, all of the Company’s investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”). Under the 1940 Act, the Company would be deemed to “control” a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. The Company would be deemed an “affiliated person” of a portfolio company if the Company owned 5% or more of the portfolio company’s outstanding voting securities. As of September 30, 2016, the Company does not "control" any of its portfolio companies. The Company is an “affiliated person” of Langham Creek LLC by virtue of its ownership of voting securities of Langham Creek LLC.

 

(b) The majority of the investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”), which reset monthly, quarterly, or semiannually. For each, the Company has provided the spread over LIBOR and the current contractual interest rate in effect at September 30, 2016. Certain investments are subject to a LIBOR interest rate floor.

 

(c) The fair value of these investments is determined in good faith by or under the guidance of the Company’s board of directors pursuant to the Company's valuation policies.

 

(d) Direct origination.

 

(e) Position or portion thereof unsettled as of September 30, 2016.

 

See Notes to Unaudited Condensed Financial Statements

 

 5 

 

  

PARKVIEW CAPITAL CREDIT, INC.

CONDENSED SCHEDULE OF INVESTMENTS

(in thousands, except share and per share information)

 

December 31, 2015

 

Portfolio Company (a)  Industry  Spread Above Index (b)  Interest Rate   Maturity   Principal   Amortized Cost   Fair Value (c)   % of Net Assets 
Senior Secured Loans - First Lien                              
InfoGroup, Inc.  Market Analytics  L + 6.00%   7.50%   5/26/2018   $3,504   $3,463   $3,328    8.9%
North Atlantic Trading Company, Inc.  Tobacco  L + 6.50%   7.75%   1/13/2020    903    905    899    2.4%
Generation Brands  Home Furnishings  L + 6.50%   7.75%   12/13/2018    1,492    1,508    1,488    4.0%
Offisol (d)  Staffing  N/A   12%, 2% PIK    12/14/2017    3,502    3,502    3,502    9.4%
WBL SPE I, LLC (d)  Financial Services  N/A   13.00%   2/28/2017    3,000    3,000    3,000    8.0%
Total Senior Secured Loans - First Lien                        12,378    12,217    32.7%
                                     
Senior Secured Loans - Second Lien                                    
Maxim Crane Works, LP (e)  Heavy Construction  L + 9.25%   10.25%   11/26/2018    4,500    4,484    4,455    11.9%
North Atlantic Trading Company, Inc.  Tobacco  L + 10.25%   11.50%   7/31/2020    2,000    2,051    1,995    5.3%
Action Resources (d)  Transportation  L + 9.00%   10.00%   4/30/2020    4,963    4,963    4,963    13.3%
Total Senior Secured Loans - Second Lien                        11,498    11,413    30.5%

 

Portfolio Company (a)  Industry  Dividend Rate   Number of Shares   Principal   Amortized Cost   Fair
Value (c)
   % of
Net Assets
 
Equity Investments                           
Langham Creek LLC; Preferred Units (d)  Real Estate   14.00%   1,868,600    1,869    1,869    1,869    5.0%
Langham Creek LLC; Common Units (d)  Real Estate   N/A    1,000    1    1    1    0.0%
Offisol; Warrants (d)  Staffing   N/A    7    -    -    -    0.0%
Total Equity Investments                     1,870    1,870    5.0%
                                  
                                  
Total Investments                    $25,746    25,500    68.2%
Other assets in excess of liabilities                          11,914    31.8%
Net assets                         $37,414    100.0%

 

(a) With the exception of the Company’s investments in WBL SPE I, LLC and Langham Creek LLC, all of the Company’s investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”). Under the 1940 Act, the Company would be deemed to “control” a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. The Company would be deemed an “affiliated person” of a portfolio company if the Company owned 5% or more of the portfolio company’s outstanding voting securities. As of December 31, 2015, the Company does not "control" any of its portfolio companies. The Company is an “affiliated person” of Langham Creek LLC by virtue of its ownership of voting securities of Langham Creek LLC.

 

(b) The majority of the investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) which generally reset monthly, quarterly, or semiannually. For each, the Company has provided the spread over LIBOR and the current contractual interest rate in effect at December 31, 2015. Certain investments are subject to a LIBOR interest rate floor.

 

(c) The fair value of the Company’s investments was determined in good faith by or under the guidance of the Company’s board of directors pursuant to the Company's valuation policies.

 

(d) Direct origination.

 

(e) Position or portion thereof unsettled as of December 31, 2015.

 

See Notes to Unaudited Condensed Financial Statements

 

 6 

 

 

PARKVIEW CAPITAL CREDIT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(in thousands, except share and per share information)

 

NOTE A – ORGANIZATION AND BASIS OF PRESENTATION

 

Parkview Capital Credit, Inc. (the “Company”), was legally formed on November 25, 2014 (“Inception”) as a Maryland corporation and commenced its principal operations on April 24, 2015, commensurate with the raising of $20,000 through the sale of 2,000,000 shares of its common stock. The Company is an externally managed, non-diversified, closed-end management investment company that elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”) on February 12, 2016, and intends to elect to be treated for federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

The Company is an investment company that follows the specialized accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946 “Financial Services Investment Companies.”

 

The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”). Additionally, the accompanying unaudited financial statements of the Company and related financial information as of and for the three and nine months ended September 30, 2016 and 2015 have been prepared pursuant to the requirements for reporting in Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the period included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2016.

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents: The Company considers all highly liquid financial instruments with a maturity of three months or less at the date of purchase to be cash equivalents.

 

Organizational Expenses: Fees associated with the organization of the Company have been expensed as incurred. These fees consist primarily of legal fees.

 

Income Taxes: The Company has elected to be regulated as a BDC under the 1940 Act. As a BDC, the Company also intends to elect to be treated as a RIC under Subchapter M of the Code. As a RIC, the Company generally will not be required to pay corporate level federal income taxes on any ordinary income or capital gains that it distributes to its stockholders as dividends. To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must distribute to its stockholders, for each taxable year, at least 90% of its “investment company taxable income” for that year, which is generally its ordinary income plus the excess of its realized net short-term capital gains over its realized net long-term capital losses. As a result, any tax liability related to income earned and distributed by the Company represents obligations of the Company’s common stockholders and will not be reflected in the financial statements of the Company for the years in which it qualifies as a RIC.

 

 7 

 

 

Although the Company may not be subject to federal income taxes as a RIC, it may choose to retain a portion of its calendar year income. If so, the Company may be subject to a 4% excise tax on the amount retained. No excise taxes were accrued for the three and nine months ended September 30, 2016.

 

Prior to 2016, the Company did not qualify as a RIC and was taxed as a C corporation (“C-Corp”) for both 2014 and 2015. Because the Company did not elect to be regulated as a BDC until February 12, 2016, the Company will not qualify as a RIC for calendar year 2016. In order to be able to make such election, the Company changed its tax year to June 30. The Company will file as a C-Corp for the six month period ended June 30, 2016 and then elect RIC status for the tax year ended June 30, 2017 and thereafter.

 

The Company has recorded a tax provision for the nine months ended September 30, 2016. The total provision for income taxes is as follows:

 

   For the Nine Months Ended
September 30
 
   2016   2015 
Current Federal  $84    - 

 

The recording of the provision for income taxes reduced the Company’s net asset value (“NAV”) per share by $0.02.

 

There is no evidence to record a deferred tax asset on a more likely than not basis due to the limited operating history of the Company.

 

In order to qualify as a RIC, the Company must distribute before the end of its first qualifying tax year all earnings and profits accumulated in prior non-RIC tax years. There were no earnings and profits prior to 2016. The Company has approximately $200 of accumulated earnings and profits through the period ended June 30, 2016. Built-in gains by a C-Corp electing to be a RIC may be subject to tax if realized during the first five years of RIC status. The Company had net unrealized built-in gains on two investments in its portfolio at June 30, 2016 but did not have an aggregate net unrealized built-in gain as of that date.

 

The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are reversed and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. All tax years are open for examination.

 

Revenue Recognition: Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts or premiums are accreted or amortized, respectively, using the effective interest method as interest income. Dividend income is recognized on an accrual basis to the extent that the Company expects to collect such amount. Loan origination fees, original issue discount and market discount are capitalized and amortized as interest income over the respective term of the loan. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.

 

The Company has loans and preferred securities in its portfolio that contain payment-in-kind (“PIK”) provisions. PIK represents interest or dividends that are accrued and recorded as interest or dividend income at the contractual rates, increases the loan or preferred equity principal on the respective capitalization dates, and is generally due at maturity. For the three and nine months ended September 30, 2016, the Company recognized PIK income of $364 and $542, respectively. The Company did not recognize PIK income for the three and nine months ended September 30, 2015.

 

 8 

 

 

Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the statements of operations.

 

Earnings per Share: Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive shares of common stock, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

Investments: Investment transactions are accounted for on a trade-date basis. The Company considers trade date for investments not traded on a recognizable exchange, or traded in the over-the-counter markets, to be the date on which the Company receives legal or contractual title to the asset and bears the risk of loss.

 

Investments in senior loans generate a fixed spread over floating base rates such as LIBOR or the U.S. Prime Rate. These floating base rates generally reset either monthly, quarterly or semi-annually.

 

Valuation of Portfolio Securities: The Company determines the net asset value per share of its common stock quarterly. The net asset value per share equals the value of the Company’s total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding. The Company’s investments are valued at the end of each fiscal quarter.

 

Substantially all of the Company’s investments are expected to be in loans that do not have readily ascertainable market prices. Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. In order to assist the Company’s board of directors (the “Board”) in determining the fair value of assets that are not publicly traded or whose market prices are not readily available, Parkview Advisors, LLC (the “Advisor”) provides the Board with portfolio company valuations, which are based on relevant inputs, which may include but are not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third party valuation services. The Board has retained an independent valuation specialist to assist it by performing certain limited third-party valuation services. In connection with each valuation determination, investment professionals from the Advisor prepare portfolio company valuations using sources and/or proprietary models depending on the availability of information on the Company’s assets and the type of asset being valued, all in accordance with the Company’s valuation policy. The participation of the Advisor in the valuation process could result in a conflict of interest, since the base management fee is based on the Company’s gross assets.

 

Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Company may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that may be considered include the borrower’s ability to adequately service its debt, the fair market value of the borrower in relation to the face amount of its outstanding debt and the quality of collateral securing its debt investments.

 

The Company’s equity interests in portfolio companies for which there is no liquid public market are valued at fair value. The Board, in its determination of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or the actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

 

 9 

 

 

The Advisor’s management team, any approved independent third-party valuation specialist and the Board may also consider private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Advisor’s management team, any approved independent third-party valuation specialist and the Board may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the smaller size of portfolio companies relative to comparable firms, as well as such other factors as the Board, in consultation with the Advisor’s management team and any approved independent third-party valuation specialist may consider relevant in assessing fair value. Generally, the value of the equity interests in public companies for which market quotations are readily available will be based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

 

When the Company receives warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. The Board subsequently values these warrants or other equity securities received at their fair value.

 

The Company periodically benchmarks the bid and ask prices received from the third-party pricing services and/or dealers, as applicable, against the actual prices at which it purchases and sells investments. Based on the results of the benchmark analysis and the experience of management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company also uses an independent valuation firm to assist the Board in determining fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the Board otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which the Company purchases and sells investments. The audit committee and Board review and approve the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation policy.

 

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 the investment portfolio may differ from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

Fair Value of Financial Instruments: The carrying amounts of certain of the Company’s financial instruments, including cash, receivables, accounts payable and accrued expenses, approximate fair value due to their short-term nature.

 

Recent Accounting Pronouncements: In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently evaluating the impact this standard will have on its financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact this standard will have on its financial statements.

 

Reclassifications: Prior period financial statement amounts have been reclassified to conform to the current period presentation.

 

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NOTE C – RELATED PARTY TRANSACTIONS

 

Advisory Agreement

 

On March 11, 2015, the Company entered into an investment advisory agreement with the Advisor for management services (the “Investment Advisory Agreement”). The Investment Advisory Agreement was approved by the Board, including a majority of the directors who are not “interested persons” of the Company and the Advisor as defined in Section 2(a)(19) of the 1940 Act, at an in person meeting of the Board held in August 2015. The Advisor is owned by SKW Financial, LLC, an entity controlled by the Company’s Chief Executive Officer. Pursuant to the Investment Advisory Agreement, the Advisor provides credit analysis, structuring capability and transactional experience. The fees associated with the Investment Advisory Agreement consist of a base management fee and incentive fees.

 

The management fee is calculated at an annual rate of 2.00% of the end-of-period gross assets payable monthly in arrears. For purposes of calculating the management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. As a result, the Advisor will benefit when the Company incurs debt or uses leverage. For each of the first two months of operations, the management fee was calculated based on the value of the Company’s gross assets at the end of such month, and appropriately adjusted for any share issuances during these months. Following the Company’s first two months of operations, the Investment Advisory Agreement provides that the management fee is calculated based on the average value of gross assets at the end of the two most recently completed months. The Company has clarified its management fee calculation so that the management fee is calculated by averaging the value of the Company’s gross assets at the end of the two most recently completed quarters, and appropriately adjusting for any share issuances occurring during any month of the current quarter. Management fees for any partial month are appropriately prorated. In order to meet the diversification tests required to qualify as a RIC, the Company, on June 28, 2016 and March 31, 2016, acquired $10,000 and $12,500, respectively, in face value of short-term U.S. Treasury Bills. There were no U.S. Treasury Bills acquired during the three months ended September 30, 2016. These transactions had the effect of increasing management fees payable to the Advisor, all of which were waived by the Advisor. For the three and nine months ended September 30, 2016, the Company incurred management fees of $203 and $583, respectively, net of the fee waiver of $25 and $112, respectively. For the three and nine months ended September 30, 2015, the Company incurred management fees of $126 and $147, respectively.

 

The incentive fee is divided into two parts: (i) an incentive fee on income and (ii) an incentive fee on capital gains.

 

The incentive fee on income is calculated and payable quarterly in arrears based upon the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter. The incentive fee on income is subject to a hurdle rate, measured quarterly and expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 1.75% (7.0% annualized), subject to a “catch up” feature. For the three and nine months ended September 30, 2016 and 2015, the Company did not accrue any incentive fees on income.

 

The incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement). This fee will equal 20% of realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. For the three and nine months ended September 30, 2016 and 2015, the Company did not accrue any incentive fees on capital gains.

 

 11 

 

 

During the three months ended September 30, 2016 and 2015, the Company reimbursed the Advisor $33 and $32, respectively, for administrative services performed on its behalf. During the nine months ended September 30, 2016 and 2015, the Company reimbursed the Advisor $79 and $59, respectively, for administrative services performed on its behalf. The Company has accrued an additional $8 as of September 30, 2016 for amounts owed by the Company to third party providers of services paid by the Advisor on the Company’s behalf and reimbursements for company-related travel.

 

Administration Agreement

 

On March 11, 2015, the Company entered into an administration agreement with Parkview Administrator, LLC (the “Administrator”), under which the Administrator will provide administrative services to the Company (the “Administration Agreement”). These services include providing office space, providing equipment and office services, maintaining financial records, preparing reports to the Company’s stockholders and reports filed with the SEC and managing the payment of the Company’s expenses and the performance of administrative and professional services rendered by others. The Company will reimburse the Administrator for all reasonable costs and expenses incurred by the Administrator in providing these services, facilities and personnel, as provided by the Administration Agreement.

 

License Agreement

 

On March 11, 2015, the Company entered into a license agreement (the “License Agreement”) with the Advisor, pursuant to which the Company was granted a non-exclusive license to use the name “Parkview.” Under the License Agreement, the Company has a right to use the “Parkview” name and logo, as long as the Advisor or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Parkview” name or logo.

 

Other Related Party Matters

 

On May 21, 2015, the SEC filed an Order Instituting Proceedings alleging violations of federal securities laws against the Company’s former Chairman, Mr. Laurence O. Gray, and Gray Financial Group, Inc., an entity controlled by Mr. Gray that manages GrayCo Alternative Partners II, LP, the Company’s largest stockholder. As a result of such order, Mr. Gray resigned from the Board and as Chairman of the Board on May 28, 2015. Additionally, Mr. Gray’s ownership in the Advisor, held through Gray & Company, was transferred back to the Advisor on May 28, 2015, leaving SKW Financial, LLC as the sole owner of the Advisor. Mr. Gray’s resignation was not the result of any matter related to the Company's operations, policies and/or practices. There is uncertainty about what impact the order against Mr. Gray may have on the Company, if any; however, management of the Company does not believe Mr. Gray's resignation or the order will have a material effect on the Company’s liquidity, financial condition or operations.

 

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NOTE D – INVESTMENT PORTFOLIO

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such strategies:

 

   September 30, 2016   December 31, 2015 
   Fair Value   Percentage
of Portfolio
   Fair Value   Percentage
of Portfolio
 
Financial Services  $-    0%  $3,000    12%
Healthcare   3,651    15%   -    0%
Heavy Construction   -    0%   4,455    18%
Home Furnishings   -    0%   1,488    6%
Manufacturing   1,920    8%   -    0%
Market Analytics   3,445    14%   3,328    13%
Marketing Information Services   1,015    4%   -    0%
Media   3,786    15%   -    0%
Real Estate   1,870    8%   1,870    7%
Software Services   1,533    6%   -    0%
Staffing   -    0%   3,502    14%
Tobacco   2,360    9%   2,894    11%
Transportation   5,278    21%   4,963    19%
   $24,858    100%  $25,500    100%

  

The following table summarizes the amortized cost and fair value of the investment portfolio as of September 30, 2016:

 

   Amortized
Cost (1)
   Percentage
of Portfolio
   Fair Value   Percentage
of Portfolio
 
Senior Secured Loans - First Lien  $11,593    46%  $11,565    47%
Senior Secured Loans - Second Lien   11,360    46%   11,246    45%
Equity Investments   2,047    8%   2,047    8%
Total  $25,000    100%  $24,858    100%

 

The following table summarizes the amortized cost and fair value of the investment portfolio as of December 31, 2015:

 

   Amortized Cost (1)   Percentage of Portfolio   Fair Value   Percentage of Portfolio 
Senior Secured Loans - First Lien  $12,378    48%  $12,217    48%
Senior Secured Loans - Second Lien   11,498    45%   11,413    45%
Equity Investments   1,870    7%   1,870    7%
Total  $25,746    100%  $25,500    100%

  

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

 

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NOTE E – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. Accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:

 

Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 — Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.

 

Level 3 — Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date.

 

The inputs for the determination of fair value may require significant management judgment or estimation and are based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the market or income approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

 

Pricing inputs and weightings applied to determine value require subjective determination. Accordingly, valuations do not necessarily represent the amounts that may eventually be realized from sales or other dispositions of investments.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

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The following table presents the fair value measurements of the investment portfolio, by major class according to the fair value hierarchy, as of September 30, 2016:

 

   Level 1   Level 2   Level 3   Total 
Senior Secured Loans - First Lien  $-   $-   $11,565   $11,565 
Senior Secured Loans - Second Lien   -    -    11,246    11,246 
Equity Investments   -    -    2,047    2,047 
   $-   $-   $24,858   $24,858 

 

The following table presents the fair value measurements of the investment portfolio, by major class according to the fair value hierarchy, as of December 31, 2015:

 

   Level 1   Level 2   Level 3   Total 
Senior Secured Loans - First Lien  $-   $-   $12,217   $12,217 
Senior Secured Loans - Second Lien   -    -    11,413    11,413 
Equity Investments   -    -    1,870    1,870 
   $-   $-   $25,500   $25,500 

 

The following table provides a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the nine months ended September 30, 2016:

 

   Senior Secured Loans First Lien   Senior Secured Loans Second Lien   Equity Investments   Total 
Fair value beginning of period   $12,217   $11,413   $1,870   $25,500 
Purchases of investments    7,173    4,443    177    11,793 
Net realized gain      -    -    -    - 
Amortization of discount (premium)   33    (3)   -    30 
Paid-in-kind interest    100    442    -    542 
Proceeds from sales and repayments of investments   (8,093)   (5,019)   -    (13,112)
Net change in unrealized appreciation (depreciation)   135    (30)   -    105 
Fair value end of period   $11,565   $11,246   $2,047   $24,858 
                     
The amount of total losses for the period included in changes in net assets attributable to the change in unrealized losses relating to investments still held at the reporting date  $(28)  $(114)  $-   $(142)

 

During the nine months ended September 30, 2016, the Company did not have any transfers between levels.

 

The following table presents the quantitative information about Level 3 fair value measurements of the investment portfolio, as of September 30, 2016:

 

   Fair Value   Valuation Techniques   Unobservable input   Range   Weighted Average 
Senior Secured Loans - First Lien  $4,305    Market quotes    Indicative Dealer Quotes    98.7% - 100.5%    99.3%
Senior Secured Loans - First Lien  $7,260    Market comparables    Market yield (%)    96.0% - 100.3%    98.5%
              EBITDA Multiples (x)    2.25x - 5.5x    3.7x  
Senior Secured Loans - Second Lien  $5,968    Market quotes    Indicative Dealer Quotes    96.0% - 102.6%    99.4%
Senior Secured Loans - Second Lien  $5,278    Market comparables    Market yield (%)    96.5% - 100.0%    98.0%
              EBITDA Multiples (x)    4.0x - 4.5x    4.3x  
Equity Investments  $2,047    Market comparables    Market yield (%)    90.0% - 104.0%    100.0%
              EBITDA Multiples (x)    0.9x - 1.0x    1.0x  

 

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NOTE F – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights of the Company for the nine months ended September 30:

 

   2016   2015 
Per share data        
Net asset value begining of period (a)  $9.85   $(0.03)
Results of operations (a)          
Net investment income (loss)   0.22    (0.11)
Net realized gain on investments   -    - 
Net change in unrealized appreciation (depreciation) on investments   0.03    (0.07)
Net increase (decrease) in net assets resulting from operations   0.25    (0.18)
Capital share transactions          
Issuance of common stock   -    10.00 
Total increase in net assets   0.25    9.82 
Net asset value at end of period  $10.10   $9.78 
           
Shares outstanding at end of period   3,800,010    2,350,010 
Total return (b)   2.53%   -1.88%
           
Ratio/Supplemental data (c)          
Net assets at end of period   38,373    22,992 
Ratio of operating expenses to average net assets (d)   4.76%   5.44%
Ratio of net investment income (loss) to average net assets   2.25%   (2.46%)
Portfolio turnover rate   46.68%   0.44%

 

(a) Per share information for the nine months ended September 30, 2016 and 2015 calculated using common stock outstanding at September 30, 2016 and 2015, respectively.
(b) The total return for the nine months ended September 30, 2016 was calculated by taking the net income of the Company for the period divided by the average net assets during the period. The total return for the nine months ended September 30, 2015 was calculated by taking the net loss of the Company for the period divided by the common stock issued during the period.
(c) The financial information has not been annualized in computing ratios and may not be indicative of full year results.
(d) In order to meet the diversification tests required to qualify as a RIC, the Company, on June 28, 2016 and March 31, 2016, acquired $10,000 and $12,500, respectively, in face value of short-term U.S. Treasury Bills. These transactions had the effect of increasing management fees payable to the Advisor, all of which were waived by the Advisor. The effect of the management fee waiver is 0.3% for the nine months ended September 30, 2016. There was no fee waiver during the nine months ended September 30, 2015.

 

NOTE G – SUBSEQUENT EVENTS

 

Management performed an evaluation of the Company’s activity through the date the financial statements were issued and has determined that there have been no events that have occurred that would require adjustments to the Company’s disclosures in the financial statements.

 

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

 

Forward Looking Statements

 

This report contains forward looking statements that involve substantial risks and uncertainties. These forward looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and are difficult to predict, that could cause actual results to differ materially from those expressed or forecasted in the forward looking statements including, without limitation:

 

  An economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
     
  interest rate volatility could adversely affect our results, particularly if we elect to use leverage as part of our investment strategy;
     
  our future operating results;
     
  our business prospects and the prospects of our portfolio companies;
     
  our contractual arrangements and relationships with third parties;
     
  the ability of our portfolio companies to achieve their objectives;
     
  competition with other entities for investment opportunities;
     
  the speculative and illiquid nature of our investments;
     
  the adequacy of our financing sources and working capital;
     
  the costs associated with being a public entity;
     
  the loss of key personnel;
     
  the timing of cash flows, if any, from the operations of our portfolio companies;
     
  the ability of our Advisor to locate suitable investments for us and to monitor and administer our investments;
     
  our ability to attract and retain highly talented professionals that can provide services to our Advisor;
     
  our ability to qualify and maintain our qualification as a regulated investment company, or “RIC,” under Subchapter M of the U.S. Internal Revenue Code of 1986, as amended, or the “Code,” and as a business development company, or “BDC”, and
     
  the effect of legal, tax and regulatory changes.

 

Although we believe that the assumptions on which these forward looking statements are based are reasonable, some of those assumptions are based on the work of third parties and any of those assumptions could prove to be inaccurate; as a result, the forward looking statements based on those assumptions also could prove to be inaccurate. 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 and objectives will be achieved. You should not place undue reliance on these forward looking statements, which apply only as of the date of this report. We do not undertake any obligation to update or revise any forward looking statements or any other information contained herein, except as required by applicable law. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, which preclude civil liability for certain forward looking statements are not applicable to us since we are a BDC under the Investment Company Act of 1940, or the 1940 Act.

 

Overview

 

We were incorporated under the laws of the State of Maryland on November 25, 2014. We filed an election to be regulated as a BDC under the 1940 Act, and intend to elect to be treated as a RIC for federal income tax purposes. As such, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest.

 

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 All amounts presented are in thousands, except share and per share data.

 

Revenues

 

We generate revenues in the form of interest income from the debt securities we hold and dividends and capital appreciation on either direct equity investments or equity interests obtained in connection with originating loans, such as options, warrants or conversion rights. We expect most of the debt securities we will hold will be floating rate in nature. The debt we invest in will typically not be rated by any rating agency, but if it were, it is likely that such debt would be below investment grade. We intend to structure our debt investments with interest payable quarterly, semi-annually or annually, but we may structure certain investments with terms to provide for longer interest payment periods or to allow interest to be paid by adding amounts due to the principal balance of the loan, resulting in deferred cash receipts. In addition, we may also generate revenue in the form of commitment, loan origination, structuring or diligence fees, fees for providing managerial assistance to our portfolio companies, and possibly consulting fees. Certain of these fees may be capitalized and amortized as additional interest income over the life of the related loan.

 

Expenses

 

We anticipate that all investment professionals and staff of our Advisor, Parkview Advisors, LLC, or the Advisor, when and to the extent engaged in providing us investment advisory and management services, and the base compensation, bonus and benefits, and the routine overhead expenses, of such personnel allocable to such services, will be provided and paid for by our Advisor.

 

We bear all other costs and expenses of our operations, administration and transactions, including, but not limited to, those relating to:

 

  organization expenses;
     
  calculating our net asset value (including the cost and expenses of any independent valuation firms);
     
  expenses, including travel expense, incurred by our Advisor, its investment professionals, or payable to third parties, performing due diligence on prospective portfolio companies;
     
  the costs of the offerings of common shares and other securities, if any;
     
  the base management fee and any incentive fee;
     
  certain costs and expenses relating to distributions paid on our shares;
     
  administration reimbursements payable under the administration agreement, or the Administration Agreement, with Parkview Administrator, LLC, or the Administrator;
     
  debt service and other costs of borrowings or other financing arrangements;
     
  the allocated costs incurred by our Advisor or the Administrator in providing managerial assistance to those portfolio companies that request it;
     
  amounts payable to third parties relating to, or associated with, making or holding investments;
     
  transfer agent and custodial fees;
     
  costs of hedging;
     
  commissions and other compensation payable to brokers or dealers;
     
  federal, state and local taxes;
     
  independent director fees and expenses;
     
  costs of preparing financial statements and maintaining books and records and filing reports or other documents with the Securities and Exchange Commission, or the SEC, (or other regulatory bodies) and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation of the foregoing;
     
  the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders’ meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters;
     
  our fidelity bond;
     
  directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

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  indemnification payments;
     
  direct costs and expenses of administration, including audit and legal costs; and
     
  all other expenses reasonably incurred by us in connection with making investments and administering our business.

 

From time to time, our Advisor may pay amounts owed by us to third-party providers of goods or services. We will subsequently reimburse our Advisor for such amounts paid on our behalf. Other than with respect to our initial organization and operating costs, as described above, there is no contractual cap on the reasonable costs and expenses for which our Advisor will be reimbursed. In addition, we will reimburse the Advisor for the allocable portion of the compensation paid by the Advisor (or its affiliates) to our chief compliance officer and chief financial officer (based on the percentage of time such individuals devote, on an estimated basis, to our business and affairs). All of these expenses will ultimately be borne by our stockholders.

 

Portfolio and Investment Activity

 

We commenced operations on April 24, 2015 and made our first investment on April 30, 2015. The fair value of our investments was approximately $24,858 and $25,500 in 9 and 8 portfolio companies as of September 30, 2016 and December 31, 2015, respectively. Our investment activity for the nine months ended September 30, 2016 is as follows (information presented herein is at amortized cost unless otherwise indicated):

 

Amortized cost of investments, beginning  $25,746 
Cost of investments purchased   34,291 
Paid-in-kind interest   542 
Proceeds from sales and repayments of investments   (35,610)
Net amortization of premium on investments   30 
Realized gain on sold/repaid investments   1 
Amortized cost of investments, ending  $25,000 

 

Refer to “Part I. Financial Information, Item 1. Financial Statements – Note D” of this quarterly report on Form 10-Q for a summary of the composition of our portfolio at amortized cost and fair value as of September 30, 2016 and December 31, 2015.

 

As of September 30, 2016, the investments in our portfolio were purchased at a weighted average price of 99.7% of par value, and the weighted average yields, based on the amortized cost and fair value of our portfolio as of September 30, 2016, were 11.39% and 11.37%, respectively.

 

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Direct Origination

 

We intend to leverage our Advisor’s industry relationships to directly source investment opportunities. Such investments are originated or structured for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions. The following tables present certain selected information regarding the direct originations entered into during the nine months ended September 30, 2016:

 

   Commitment     
New Direct Origination by Asset Class  Amount   Percentage 
Senior Secured Loans - First Lien  $7,350    100%
Equity Investments   -    0%
   $7,350    100%

 

Average New Direct Origination Commitment Amount  $3,675 
Weighted Average Maturity for New Direct Originations    2.6 years 
Gross Portfolio Yield (based on amortized cost) of New Direct Originations Funded during Period   14.0%

   

   September 30,   December 31, 
Characteristics of All Direct Originations held in Portfolio  2016   2015 
Number of Portfolio Companies   4    4 
Average Annual EBITDA of Portfolio Companies  $6,490   $6,020 
Average Leverage Through Tranche of Portfolio Companies - Excluding Equity/Other and Collateralized Securities   7.58x   2.57x
Gross Portfolio Yield (based on amortized cost) of Funded Direct Originations   14.7%   12.3%

 

Portfolio Composition by Strategy and Industry

 

Although our primary focus is to invest in directly originated transactions, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies.

 

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies:

 

   September 30, 2016   December 31, 2015 
Portfolio Composition by Strategy  Fair Value   Percentage of Portfolio   Fair Value   Percentage of Portfolio 
Direct Origination  $14,585    59%  $13,335    52%
Broadly Syndicated   10,273    41%   12,165    48%
   $24,858    100%  $25,500    100%

 

Refer to “Part I. Financial Information, Item 1. Financial Statements – Note D” of this quarterly report on Form 10-Q for a description of investments by industry classification and the percentage, by fair value, of the total portfolio assets in such strategies.

  

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Portfolio Asset Quality

 

In addition to various risk management and monitoring tools, the Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. The Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

 

Investment

Rating

  Summary Description
1   Investment exceeding expectations and/or capital gain expected.
2   Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected. Each investment is initially rated 2.
3   Performing investment requiring closer monitoring.
4   Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment.
5   Underperforming investment with expected loss of interest and some principal.

 

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of September 30, 2016 and December 31, 2015:

 

   September 30, 2016   December 31, 2015 
Investment Rating  Fair Value   Percentage of Portfolio   Fair Value   Percentage of Portfolio 
1  $-    -   $-    - 
2   19,580    79%   25,500    100%
3   5,278    21%   -    - 
4   -    -    -    - 
5   -    -    -    - 
Total  $24,858    100%  $25,500    100%

 

The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

 

Recent Accounting Pronouncements

 

Refer to “Part I. Financial Information, Item 1. Financial Statements - Note B” of this quarterly report on Form 10-Q for a description of recent accounting pronouncements.

 

Results of Operations

 

We commenced our principal operations on April 24, 2015, commensurate with the raising of $20,000 through a sale of 2,000,000 shares of common stock. Prior to April 24, 2015, we solely incurred expenses associated with organizational activities.

 

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Three Months Ended September 30, 2016 and 2015

 

Investment Income

 

For the three months ended September 30, 2016 and 2015, total investment income totaled $1,010 and $304 respectively, of which $915 and 304, respectively, was attributable to portfolio interest earned on our first and second lien senior secured loans, $67 and $0, respectively, was attributable to dividend income earned and $28 and $0, respectively, was attributable to amortization of loan origination fees received. The increase in investment income was due to the increase in the size of our portfolio.

 

For the three months ended September 30, 2016 and 2015, $364 and $0 of our total investment income constituted PIK interest. As of September 30, 2016, three of our investments paid all or a portion of their interest payments in the form of PIK interest, including our position in Action Resources, which was restructured so that the entire position is payable in PIK interest. As of September 30, 2015, none of our investments paid PIK interest. 

 

Operating Expenses

 

Total operating expenses were $563 for the three months ended September 30, 2016, and consisted of base management fees of $228 (less a fee waiver of $25) professional fees of $196 and other general and administrative fees of $164. Total operating expenses were $426 for the three months ended September 30, 2015, and consisted of base management fees of $126, professional fees of $195 and other general and administrative fees of $105. We did not incur any incentive fees for the three months ended September 30, 2016 and 2015. The increase in operating expenses was driven by an increase in our portfolio as we executed our business model. Our operating expenses were 1.48% and 2.00% of our average net assets for the three months ended September 30, 2016 and 2015, respectively. As we continue to execute our strategy, we expect our operating expenses as a percentage of our average net assets to decrease.

 

In order to meet the diversification tests required to qualify as a RIC, we acquired $10,000 in face value of short-term U.S. Treasury Bills on June 28, 2016. This transactions had the effect of increasing management fees payable to the Advisor in an amount of $25 for the three months ended September 30, 2016, all of which was waived by the Advisor. Professional fees include legal, audit, compliance, valuation, technology and other professional fees incurred related to our management. Other general and administrative expenses include custody, printer fees, research, subscriptions and other costs.

 

Net Investment Income (Loss)

 

Our net investment income totaled $447, which is equal to $0.12 per share calculated using weighted average shares outstanding for the three months ended September 30, 2016. Our net investment loss totaled $122 for the three months ended September 30, 2015, which is equal to ($0.06) per share calculated using weighted average shares outstanding for the period from April 24, 2015 through September 30, 2015.

 

Net Realized Gain on Investments

 

For the three months ended September 30, 2016, we had net realized gain of $13 resulting from the sale of investments in our portfolio. There was no realized gain or loss for the three months ended September 30, 2015.

 

Net Unrealized Appreciation (Depreciation) on Investments

 

Net change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investment portfolio. For the three months ended September 30, 2016, we had net unrealized appreciation on our portfolio of $212 and for the three months ended September 30, 2015, we had net unrealized depreciation of $6.

 

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Changes in Net Assets from Operations

 

For the three months ended September 30, 2016, we recorded a net increase in net assets resulting from operations of $672, which is equal to $0.18 per share calculated using weighted average shares outstanding for the three months ended September 30, 2016. For the three months ended September 30, 2015, we recorded a net decrease in net assets resulting from operations of $128, which is equal to ($0.06) per share using the weighted average shares outstanding for the period from April 24, 2015 through September 30, 2015.

 

Nine Months Ended September 30, 2016 and 2015

 

Investment Income

 

For the nine months ended September 30, 2016 and 2015, total investment income totaled $2,655 and $341, respectively, of which $2,365 and 341, respectively, was attributable to portfolio interest earned on our first and second lien senior secured loans, $200 and $0, respectively, was attributable to dividend income earned and $90 and $0, respectively, was attributable to amortization of loan origination fees. The increase in investment income was due to the increase in the size of our portfolio.

 

For the nine months ended September 30, 2016 and 2015, $542 and $0 of our total investment income constituted PIK interest. As of September 30, 2016, three of our investments paid all or a portion of their interest payments in the form of PIK interest, including our position in Action Resources, which was restructured so that the entire position is payable in PIK interest. As of September 30, 2015, none of our investments paid PIK interest.

Operating Expenses

 

Total operating expenses were $1,802 for the nine months ended September 30, 2016, and consisted of base management fees of $695 (less a fee waiver of $112) professional fees of $587, other general and administrative fees of $548 and provision for taxes of $84. Total operating expenses were $623 for the nine months ended September 30, 2015, and consisted of organizational expenses of $63, base management fees of $147, professional fees of $286 and other general and administrative fees of $127. We did not incur any incentive fees for the nine months ended September 30, 2016 and 2015. The increase in operating expenses was driven by an increase in our portfolio as we executed our business model. Our operating expenses were 4.76% of our average net assets for the nine months ended September 30, 2016. As we continue to execute our strategy, we expect our operating expenses as a percentage of our average net assets to decrease.

 

In order to meet the diversification tests required to qualify as a RIC, we acquired $10,000 and $12,500 in face value of short-term U.S. Treasury Bills on June 28, 2016 and March 31, 2016, respectively. There were no U.S. Treasury Bills acquired during the three months ended September 30, 2016. These transactions had the effect of increasing management fees payable to the Advisor in an amount of $112, all of which was waived by the Advisor. Professional fees include legal, audit, compliance, valuation, technology and other professional fees incurred related to our management. Other general and administrative expenses include custody, printer fees, research, subscriptions and other costs.

 

Net Investment Income (Loss)

 

Our net investment income totaled $853, which is equal to $0.22 per share calculated using weighted average shares outstanding for the nine months ended September 30, 2016. Our net investment loss totaled $282 for the nine months ended September 30, 2015, which is equal to ($0.13) per share calculated using weighted average shares outstanding for the period from April 24, 2015 through September 30, 2015.

  

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Net Realized Gain on Investments

 

For the nine months ended September 30, 2016, we had net realized gain of $1 resulting from the sale of investments in our portfolio. There was no realized gain or loss for the nine months ended September 30, 2015.

 

Net Unrealized Appreciation (Depreciation) on Investments

 

Net change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investment portfolio. For the nine months ended September 30, 2016, we had net unrealized appreciation on our portfolio of $105 and for the nine months ended September 30, 2015, we had net unrealized depreciation of ($159).

 

Changes in Net Assets from Operations

 

For the nine months ended September 30, 2016, we recorded a net increase in net assets resulting from operations of $959, which is equal to $0.25 per share using weighted average shares outstanding for the nine months ended September 30, 2016. For the nine months ended September 30, 2015, we recorded a net decrease in net assets resulting from operations of $441, which is equal to ($0.21) per share using the weighted average shares outstanding for the period from April 24, 2015 through September 30, 2015.

 

Hedging

 

We may, but are not required to, enter into interest rate, foreign exchange or other derivative agreements to hedge interest rate, currency, credit or other risks, but we do not generally intend to enter into any such derivative agreements for speculative purposes. Such hedging activities, which will be in compliance with applicable legal and regulatory requirements, may include the use of futures, options and forward contracts. If we enter into hedging transactions, we will bear the costs incurred in connection with entering into, administering and settling any such derivative contracts. There can be no assurance any hedging strategy we employ will be successful. As of September 30, 2016, we had not entered into any hedging transactions.

 

Financial Condition, Liquidity and Capital Resources

 

As of September 30, 2016, we had cash of approximately $16,674. We raise capital through a private offering of our shares in order to acquire a portfolio of debt and equity investments consistent with our investment objective and strategy. We generate cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. The increase in cash of $4,316 during the nine months ended September 30, 2016 was primarily driven by a pay down by North Atlantic Trading Company and the repayments of WBL SPE I, LLC, Maxim Crane Works, LP, Generation Brands and Offisol offset by our investments in Ebony Media and Medifare in May 2016 and JD Power in September 2016.

 

Prior to deploying the capital we raise in our private offering of shares, we intend to invest in cash equivalents, U.S. government securities, repurchase agreements and high quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our intent to be taxed as a RIC.

 

We may borrow funds to make investments, to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities. We currently do not have access to a credit facility or other forms of borrowing.

 

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Critical Accounting Policies

 

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (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 has made 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 has utilized 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 may 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. Refer to “Part I. Financial Information, Item 1. Financial Statements Note B” of this quarterly report on Form 10-Q for a description of the summary of significant accounting policies.

 

Contractual Obligations

 

We have entered into an agreement with our Advisor to provide us with investment advisory services and with the Administrator to provide us with administrative services.

 

Off-Balance Sheet Arrangements

 

We currently have no off balance sheet arrangements, including risk management of commodity pricing or other hedging practices.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are subject to financial market risks, including changes in interest rates. As of September 30, 2016, our portfolio consisted of investments paying variable rates and fixed rates of interest. In addition, in the future we may seek to borrow funds in order to make additional investments. If we borrow funds to make additional investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we would be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we have debt outstanding, our cost of funds would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a materially adverse effect on our business, financial condition and results of operations.

 

A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, especially to the extent that we hold variable rate investments. Currently 63% of our portfolio pays variable rates of interest. Accordingly, an increase in interest rates would make it easier for us to meet or exceed our incentive fee return, as defined in our Advisory Agreement, and may result in a substantial increase in our net investment income, and also to the amount of incentive fees payable to our Advisor with respect to our increasing pre-incentive fee net investment income.

 

Item 4. Controls and Procedures.

 

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) was carried out by us under the supervision and with the participation of our chief executive officer, who serves as our principal executive officer, and our chief financial officer, who serves as our principal financial officer. Based upon that evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2016, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, in order to allow timely decisions regarding required disclosure.

 

Our management, including our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) that occurred during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, neither we nor the Advisor is currently a party to any pending material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or against the Advisor.

 

Item 1A. Risk Factors.

 

Other than the risk factors noted below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K that we filed with the SEC on March 28, 2016.

 

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

 

For U.S. federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, for the three and nine months ended September 30, 2016, 36% and 20% of our total investment income consisted of PIK interest. Because PIK interest received by us is included in our investment company taxable income for the tax year of the accrual, we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under Subchapter M of the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for or maintain RIC tax treatment and thus become subject to corporate-level income tax.

 

PIK interest payments we receive increases our assets under management and, as a result, increases the amount of base management fees and incentive fees payable by us to our Advisor.

 

For the three and nine months ended September 30, 2016, 36% and 20% of our total investment income consisted of PIK interest. Because PIK interest results in an increase in the size of the loan balance of the underlying loan, the receipt by us of PIK interest has the effect of increasing our assets under management. As a result, because the base management fee that we pay to our Advisor is based on the value of our gross assets, the receipt by us of PIK interest results in an increase in the amount of the base management fee payable by us. In addition, any such increase in a loan balance due to the receipt of PIK interest causes such loan to accrue interest on the higher loan balance, which will result in an increase in our pre-incentive fee net investment income and, as a result, an increase in incentive fees that are payable by us to our Advisor.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

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Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

(a) Exhibits

 

31.1*   Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2*   Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1*   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

*   Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PARKVIEW CAPITAL CREDIT, INC.
   
Date: November 9, 2016 /s/ KEITH W. SMITH
  Keith W. Smith
  Chief Executive Officer
(Principal Executive Officer)
   
  /s/ CHARLES M. JACOBSON
  Charles M. Jacobson
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

 

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