10-Q 1 mrc10q9302017.htm FORM-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark one)
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2017
 
 
 
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _________ to __________
 
 
Commission file number 000-55006
 
 
MacKenzie Realty Capital, Inc.
(Exact name of registrant as specified in its charter)
 
 
Maryland
45-4355424
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1640 School Street, Moraga, California 94556
(Address of principal executive offices)
 
 
(925) 631-9100
(Registrant's telephone number, including area code)
 
 
 
________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes        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 or 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 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No    
 
The number of the shares of issuer's Common Stock outstanding as of November 14, 2017 was 7,169,588.52.
 




TABLE OF CONTENTS
 
   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (unaudited)
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
Item 2.
     
Item 3.
     
Item 4.
     
PART II.
OTHER INFORMATION
 
     
Item 1.
     
Item 1A.
     
Item 2.
     
Item 3.
     
Item 4.
   
Item 5.
     
Item 6.
     

  




 
Part I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

MacKenzie Realty Capital, Inc.
Consolidated Statements of Assets and Liabilities

  
 
 
September 30, 2017
   
June 30, 2017
 
 
 
(Unaudited)
       
Assets
           
Investments, at fair value
           
Non-controlled/non-affiliated investments (cost of $50,391,265 and $41,144,520, respectively)
 
$
54,490,055
   
$
44,594,061
 
Non-controlled/affiliated investment (cost of $6,287 and $6,287, respectively)
   
6,613
     
7,309
 
Controlled investments (cost of $2,612,019 and $2,612,019, respectively)
   
3,597,381
     
3,284,157
 
Cash and cash equivalents
   
8,684,478
     
11,849,712
 
Accounts receivable
   
390,918
     
2,240,815
 
Other assets
   
1,003,988
     
284,991
 
Deferred offering costs, net
   
148,649
     
243,807
 
Total assets
 
$
68,322,082
   
$
62,504,852
 
 
               
 
               
Liabilities
               
Accounts payable and accrued liabilities
 
$
535,187
   
$
78,865
 
Income tax payable
   
26,209
     
-
 
Capital pending acceptance
   
808,200
     
1,803,090
 
Due to related entities
   
389,982
     
588,009
 
Deferred tax liability, net
   
30,764
     
45,363
 
Total liabilities
   
1,790,342
     
2,515,327
 
 
               
Net assets
               
Common stock, $0.0001 par value, 80,000,000 shares authorized; 6,778,333.72 and 6,096,772.85 shares issued and outstanding, respectively
   
678
     
610
 
Capital in excess of par value
   
61,745,087
     
55,606,134
 
Accumulated distribution in excess of net investment income
   
(1,727,543
)
   
(1,354,197
)
Accumulated undistributed net realized gain
   
1,429,044
     
1,614,277
 
Accumulated undistributed net unrealized gain
   
5,084,474
     
4,122,701
 
Total net assets
   
66,531,740
     
59,989,525
 
 
               
Total liabilities and net assets
 
$
68,322,082
   
$
62,504,852
 
 
               
Net asset value per share
 
$
9.82
   
$
9.84
 
 
               
 

 
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

 

MacKenzie Realty Capital, Inc.
Consolidated Schedule of Investments
September 30, 2017
(Unaudited)
 
Name
 
Asset Type
 Shares/Units
 Cost Basis
 Total
Fair Value
 % of
Net Assets
Apartment Investment and Management Company
(3)
Publicly Traded Company
          34,000.00
$          1,477,221
$             1,491,240
            2.26
Ashford Hospitality Prime, Inc.
(3)
Publicly Traded Company
          76,915.00
              738,029
                   730,692
            1.10
Ashford Hospitality Trust, Inc.
(3)
Publicly Traded Company
        188,000.00
           1,188,646
                1,253,960
            1.88
Bluerock Residential Growth REIT, Inc.
(3)
Publicly Traded Company
          97,422.00
           1,060,379
                1,077,487
            1.62
CBL & Associates Properties, Inc.
(3)
Publicly Traded Company
        108,000.00
              903,943
                   906,120
            1.36
Chatham Lodging Trust
(3)
Publicly Traded Company
          33,000.00
              702,798
                   703,560
            1.06
City Office REIT, Inc.
(3)
Publicly Traded Company
          50,000.00
              688,636
                   688,500
            1.03
Equity Residential
(3)
Publicly Traded Company
          18,000.00
           1,183,520
                1,186,740
            1.78
Independence Realty Trust, Inc.
(3)
Publicly Traded Company
          98,323.00
              968,483
                   999,945
            1.50
New York REIT, Inc.
(3)(5)
Publicly Traded Company
        149,011.00
           1,165,395
                1,169,736
            1.76
Omega Healthcare Investors, Inc.
(3)
Publicly Traded Company
          52,000.00
           1,643,993
                1,659,320
            2.49
One Liberty Properties, Inc.
(3)
Publicly Traded Company
          25,273.00
              578,855
                   615,650
            0.93
Sabra Health Care REIT, Inc.
(3)
Publicly Traded Company
          75,000.00
           1,625,618
                1,645,500
            2.47
Store Capital Corp.
(3)
Publicly Traded Company
          47,000.00
           1,168,644
                1,168,890
            1.76
VEREIT Inc.
(3)
Publicly Traded Company
        131,000.00
           1,077,558
                1,085,990
            1.63
Washington Prime Group Inc.
(3)
Publicly Traded Company
          44,000.00
              367,060
                   366,520
            0.55
Total Publicly Traded Company
     
         16,538,778
              16,749,850
          25.18
             
American Finance Trust, Inc.
(4)
Non Traded Company
          86,769.05
           1,447,862
                1,357,068
            2.05
American Realty Capital Healthcare Trust III, Inc.
(4)
Non Traded Company
            3,365.50
                52,505
                     40,554
            0.06
American Realty Capital New York City REIT, Inc.
(4)
Non Traded Company
          35,032.38
              469,235
                   442,109
            0.66
Behringer Harvard Opportunity REIT I, Inc.
(4)(5)
Non Traded Company
        803,294.29
              883,916
                1,076,414
            1.62
Benefit Street Partners Realty Trust, Inc.
(4)
Non Traded Company
          12,016.08
              162,207
                   162,217
            0.24
Carter Validus Mission Critical REIT
(4)
Non Traded Company
            1,750.00
                14,886
                     16,030
            0.02
Cole Credit Property Trust IV, Inc.
(4)
Non Traded Company
        116,744.68
              677,921
                1,035,525
            1.56
First Capital Real Estate Trust, Inc.
(4)(5)
Non Traded Company
            3,792.51
                15,161
                     16,573
            0.02
FSP 1441 Main Street
(4)(5)
Non Traded Company
                 15.73
                  8,559
                     26,215
            0.04
FSP 303 East Wacker Drive Corp.
(4)
Non Traded Company
                   1.50
                43,977
                     40,838
            0.06
FSP Energy Tower
(4)(5)
Non Traded Company
                   7.00
              294,350
                   270,177
            0.41
FSP Grand Boulevard
(4)
Non Traded Company
                   7.50
              294,179
                   233,276
            0.35
FSP Satellite Place
(4)(5)
Non Traded Company
                   5.00
              195,035
                   196,465
            0.30
Healthcare Trust, Inc.
(4)
Non Traded Company
          83,599.42
              911,440
                1,396,946
            2.10
Highlands REIT Inc.
(4)(5)
Non Traded Company
     2,127,967.37
              516,578
                   446,873
            0.67
Hospitality Investors Trust, Inc.
(4)
Non Traded Company
               114.02
                  1,137
                       1,266
               -
InvenTrust Properties Corp.
(4)
Non Traded Company
     2,058,805.43
           4,302,231
                3,994,083
            6.00
KBS Legacy Partners Apartment REIT, Inc.
(4)
Non Traded Company
          69,639.35
              423,729
                   522,295
            0.79
KBS Real Estate Investment Trust, Inc.
(4)
Non Traded Company
     1,780,944.69
           3,328,471
                3,437,223
            5.17
Phillips Edison Grocery Center REIT I, Inc
(4)
Non Traded Company
        163,751.04
           1,073,425
                1,524,522
            2.29
Strategic Realty Trust, Inc.
(4)
Non Traded Company
          43,161.64
              171,109
                   202,860
            0.30
Summit Healthcare REIT, Inc.
(4)(5)
Non Traded Company
        589,738.37
              737,490
                   837,428
            1.26
Total Non Traded Company (1)
     
         16,025,403
              17,276,957
          25.97
             
5210 Fountaingate
(4)
LP Interest
                   9.89
              500,000
                   521,330
            0.79
Addison NC, LLC
(4)(5)
LP Interest
        200,000.00
           2,000,000
                2,550,000
            3.83
Arrowpoint Burlington LLC
(4)
LP Interest
                   7.50
              750,000
                   871,240
            1.31
BR Cabrillo LLC
(4)(5)
LP Interest
        346,723.32
              104,942
                     86,681
            0.13
BR Grand Dominion Investment Co, LLC
(4)
LP Interest
     2,240,436.24
           2,240,436
                2,240,436
            3.37
BR Sonoma Pointe Investment Co, LLC
(4)
LP Interest
     2,200,000.00
           2,200,000
                2,200,000
            3.31
Britannia Preferred Members, LLC
(4)(5)
LP Interest
        150,000.00
           1,500,000
                2,298,000
            3.45
Inland Land Appreciation Fund II, L.P.
(4)(5)
LP Interest
               210.97
                  2,700
                     16,266
            0.02
MC 15 Preferred Equity, LLC
(2)(4)(5)
LP Interest
        250,000.00
           2,500,000
                3,562,500
            5.35
MPF Pacific Gateway - Class B
(2)(4)(5)
LP Interest
                 23.20
                  6,287
                       6,613
            0.01
Redwood Mortgage Investors VIII
(4)
LP Interest
          56,300.04
                29,700
                     38,847
            0.06
Resource Real Estate Investors 6, L.P.
(4)(5)
LP Interest
          42,600.00
                  5,112
                       5,112
            0.01
Satellite Investment Holdings, LLC - Class A
(4)
LP Interest
                 22.00
           2,200,000
                2,200,000
            3.31
Secured Income, LP
(4)(5)
LP Interest
          64,177.00
              315,109
                   241,947
            0.36
Strategic Realty Operating Partnership, LP
(4)
LP Interest
          20,433.01
                78,951
                     96,035
            0.14
The Weatherly Building, LLC
(4)(5)
LP Interest
                 17.50
              392,000
                   602,258
            0.91
The Weatherly, LTD
(4)(5)
LP Interest
                 60.00
              672,000
                1,032,442
            1.55
Uniprop Manufactured Housing Income Fund II, LP
(4)
LP Interest
        145,393.00
              836,134
                1,462,654
            2.20
Total LP Interest
     
         16,333,371
              20,032,361
          30.11
             
Coastal Realty Business Trust, REEP, Inc. - A
(2)(4)(5)
Investment Trust
          72,320.00
                49,901
                     31,098
            0.04
Coastal Realty Business Trust, Series H2- A
(2)(4)(5)
Investment Trust
          47,284.16
                62,118
                       3,783
            0.01
Total Investment Trust
     
              112,019
                     34,881
            0.05
             
Mayfield Capitol Hill, LLC Promissory Note
(4)
Note
     
           4,000,000
                4,000,000
            6.01
Total Note
     
           4,000,000
                4,000,000
            6.01
             
Total Investments
     
 $      53,009,571
 $           58,094,049
          87.32
             

(1) Investments primarily in non-traded public REITs or their successors.
(2) Investment in affiliated companies. See additional disclosures in note 5.
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of September 30, 2017, the total percentage of non-qualifying assets is 24.52%, and, as a business development company, non-qualifying assets may not exceed 30% of our total assets.
(4) Investments in illiquid securities, or securities that are not traded on a national exchange. As of September 30, 2017, 60.51% of the Company's total assets are in illiquid securities.
(5) Investments in non-income producing securities. As of September 30, 2017, 21.19% of the Company's total assets are in non-income producing securities.
 
 
 
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
2


MacKenzie Realty Capital, Inc.
Consolidated Schedule of Investments
June 30, 2017
 
 
Name
 
Asset Type
 Shares/Units
 Cost Basis
 Total
Fair Value
 % of
Net Assets
Ambase Corporation
(5)
Publicly Traded Company
        201,200.00
 $           333,468
 $                195,164
            0.31
Apartment Investment and Management Company
(3)
Publicly Traded Company
          34,000.00
           1,477,221
                1,460,980
            2.44
Ashford Hospitality Prime, Inc.
(3)
Publicly Traded Company
        156,000.00
           1,594,743
                1,605,240
            2.68
Ashford Hospitality Trust, Inc.
(3)
Publicly Traded Company
        188,000.00
           1,188,646
                1,143,040
            1.91
Care Capital Properties Inc.
(3)
Publicly Traded Company
          65,200.00
           1,700,409
                1,740,840
            2.90
CBL & Associates Properties, Inc.
(3)
Publicly Traded Company
        108,000.00
              915,434
                   910,440
            1.52
Chatham Lodging Trust
(3)
Publicly Traded Company
          33,000.00
              666,902
                   662,970
            1.11
Equity Commonwealth
(3)(5)
Publicly Traded Company
          12,150.00
              311,114
                   383,940
            0.64
Equity Residential
(3)
Publicly Traded Company
          15,000.00
              995,497
                   987,450
            1.65
Independence Realty Trust, Inc.
(3)
Publicly Traded Company
        160,000.00
           1,479,050
                1,579,200
            2.63
New York REIT, Inc.
(3)
Publicly Traded Company
        152,000.00
           1,308,259
                1,313,280
            2.19
Omega Healthcare Investors, Inc.
(3)
Publicly Traded Company
          52,000.00
           1,699,573
                1,717,040
            2.86
One Liberty Properties, Inc.
(3)
Publicly Traded Company
          32,561.00
              745,499
                   762,904
            1.27
Store Capital Corp.
(3)
Publicly Traded Company
          43,000.00
              980,329
                   965,350
            1.61
VEREIT Inc.
(3)
Publicly Traded Company
        131,000.00
           1,072,538
                1,066,340
            1.78
Washington Prime Group Inc.
(3)
Publicly Traded Company
          44,000.00
              370,476
                   368,280
            0.61
Total Publicly Traded Company
     
         16,839,158
              16,862,458
          28.11
             
American Finance Trust, Inc.
(4)
Non Traded Company
          80,424.07
           1,369,194
                1,467,735
            2.44
American Realty Capital New York City REIT, Inc.
(4)
Non Traded Company
          29,037.15
              388,505
                   465,466
            0.78
Behringer Harvard Opportunity REIT I, Inc.
(4)(5)
Non Traded Company
        764,723.91
              843,192
                   963,552
            1.61
Benefit Street Partners Realty Trust, Inc.
(4)
Non Traded Company
          12,016.08
              162,207
                   144,794
            0.24
Carter Validus Mission Critical REIT
(4)
Non Traded Company
            1,750.00
                14,886
                     16,695
            0.03
Cole Credit Property Trust IV, Inc.
(4)
Non Traded Company
          68,963.94
              404,177
                   578,607
            0.96
First Capital Real Estate Trust, Inc.
(4)(5)
Non Traded Company
            3,792.51
                15,161
                     15,170
            0.03
FSP Energy Tower
(4)(5)
Non Traded Company
                   7.00
              294,350
                   270,177
            0.45
FSP Grand Boulevard
(4)
Non Traded Company
                   7.00
              279,104
                   228,207
            0.38
FSP 1441 Main Street
(4)
Non Traded Company
                 15.73
                  8,559
                       8,555
            0.01
FSP Satellite Place
(4)(5)
Non Traded Company
                   5.00
              195,035
                   193,117
            0.32
FSP South 10th Street Corp. Liquidating Trust
(4)(5)
Non Traded Company
                   0.25
                     151
                              1
               -
Healthcare Trust, Inc.
(4)
Non Traded Company
          61,158.56
              669,205
                1,072,110
            1.79
Highlands REIT Inc.
(4)(5)
Non Traded Company
     2,084,327.91
              508,857
                   458,552
            0.76
Hospitality Investors Trust, Inc.
(4)
Non Traded Company
               114.02
                  1,137
                       1,112
               -
InvenTrust Properties Corp.
(4)
Non Traded Company
     2,031,268.94
           4,262,262
                4,021,912
            6.70
KBS Legacy Partners Apartment REIT, Inc.
(4)
Non Traded Company
          20,158.17
              122,938
                   121,151
            0.20
KBS Real Estate Investment Trust, Inc.
(4)
Non Traded Company
     1,640,455.20
           3,132,551
                3,231,697
            5.39
Phillips Edison Grocery Center REIT I, Inc
(4)
Non Traded Company
            1,950.00
                17,439
                     15,912
            0.03
Sentio Healthcare Properties, Inc.
(4)
Non Traded Company
          71,693.46
              530,655
                   813,004
            1.36
Strategic Realty Trust, Inc.
(4)
Non Traded Company
          42,288.14
              167,662
                   161,118
            0.27
Summit Healthcare REIT, Inc.
(4)(5)
Non Traded Company
        587,596.80
              734,792
                   822,636
            1.37
Total Non Traded Company (1)
     
         14,122,019
              15,071,280
          25.12
             
5210 Fountaingate
(4)(5)
LP Interest
                   9.89
              500,000
                   511,730
            0.84
Addison NC, LLC
(4)(5)
LP Interest
        200,000.00
           2,000,000
                2,400,000
            4.00
Arrowpoint Burlington LLC
(4)
LP Interest
                   7.50
              750,000
                   736,394
            1.23
BR Cabrillo LLC
(4)(5)
LP Interest
        346,723.32
              104,942
                     86,681
            0.14
Britannia Preferred Members, LLC
(4)(5)
LP Interest
        150,000.00
           1,500,000
                2,017,500
            3.36
Inland Land Appreciation Fund II, L.P.
(4)(5)
LP Interest
               210.97
                  2,700
                     21,099
            0.04
MC 15 Preferred Equity, LLC
(2)(4)(5)
LP Interest
        250,000.00
           2,500,000
                3,250,000
            5.42
MPF Pacific Gateway - Class B
(2)(4)(5)
LP Interest
                 23.20
                  6,287
                       7,309
            0.01
Rancon Realty Fund IV Liquidating Trust
(4)(5)
LP Interest
            8,408.97
                  6,307
                     36,327
            0.06
Redwood Mortgage Investors VIII
(4)
LP Interest
          53,848.09
                29,070
                     35,540
            0.06
Resource Real Estate Investors 6, L.P.
(4)
LP Interest
          42,600.00
              101,814
                   101,814
            0.17
Satellite Investment Holdings, LLC - Class A
(4)
LP Interest
                 22.00
           2,200,000
                2,200,000
            3.67
Secured Income, LP
(4)(5)
LP Interest
          64,177.00
              315,109
                   235,530
            0.39
Strategic Realty Operating Partnership, LP
(4)
LP Interest
          20,433.01
                78,951
                     77,850
            0.13
The Weatherly, LTD
(4)(5)
LP Interest
                 60.00
              672,000
                1,065,862
            1.78
The Weatherly Building, LLC
(4)(5)
LP Interest
                 17.50
              392,000
                   621,753
            1.04
Uniprop Manufactured Housing Income Fund II, LP
(4)
LP Interest
        133,191.00
              705,450
                1,174,745
            1.96
VWC Savannah, LLC
(4)(5)
LP Interest
                   8.25
              825,000
                1,337,498
            2.23
Total LP Interest
     
         12,689,630
              15,917,632
          26.53
             
Coastal Realty Business Trust, REEP, Inc. - A
(2)(4)(5)
Investment Trust
          72,320.00
                49,901
                     30,374
            0.05
Coastal Realty Business Trust, Series H2- A
(2)(4)(5)
Investment Trust
          47,284.16
                62,118
                       3,783
            0.01
Total Investment Trust
     
              112,019
                     34,157
            0.06
             
Total Investments
     
 $      43,762,826
 $           47,885,527
          79.82
 
 
(1) Investments primarily in non-traded public REITs or their successors.
(2) Investment in affiliated companies. See additional disclosures in note 5.
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of June 30, 2017, the total percentage of non-qualifying assets is 26.67%, and, as a business development company, non-qualifying assets may not exceed 30% of our total assets.
(4) Investments in illiquid securities, or securities that are not traded on a national exchange. As of June 30, 2017, 49.63% of the Company's total assets are in illiquid securities.
(5) Investments in non-income producing securities. As of June 30, 2017, 23.88% of the Company's total assets are in non-income producing securities.
 
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
3



MacKenzie Realty Capital, Inc.
Consolidated Statements of Operations
(Unaudited)
 
 
     
 
 
Three Months Ended
September 30,
 
 
 
2017
   
2016
 
Investment income
           
Non-controlled/non-affiliated investments:
           
Dividend and operational/sales distributions
 
$
603,019
   
$
787,965
 
Interest and other income
   
28,853
     
-
 
Non-controlled/affiliated investments:
               
Dividend and operational/sales distributions
   
789
     
-
 
Controlled investments:
               
Dividend and operational/sales distributions
   
-
     
2,364
 
Total investment income
   
632,661
     
790,329
 
 
               
Operating expenses
               
Base management fee (note 5)
   
388,917
     
287,416
 
Portfolio structuring fee (note 5)
   
201,902
     
197,208
 
Administrative cost reimbursements (note 5)
   
108,000
     
55,000
 
Amortization of deferred offering costs
   
122,702
     
-
 
Professional fees
   
110,997
     
116,479
 
Directors' fees
   
18,500
     
10,500
 
Other general and administrative
   
41,779
     
39,258
 
Total operating expenses
   
992,797
     
705,861
 
 
               
Net investment income (loss) before taxes
   
(360,136
)
   
84,468
 
Income tax expense - (note 2)
   
13,210
     
-
 
Net investment income (loss)
   
(373,346
)
   
84,468
 
 
               
Realized and unrealized gain (loss) on investments
               
Net realized gain (loss)
               
Non-controlled/non-affiliated investments
   
848,583
     
1,016,846
 
Total net realized gain
   
848,583
     
1,016,846
 
Net unrealized gain (loss)
               
Non-controlled/non-affiliated investments
   
649,246
     
445,141
 
Non-controlled/affiliated investments
   
(696
)
   
-
 
Controlled investments
   
313,223
     
306,996
 
Total net unrealized gain
   
961,773
     
752,137
 
 
               
Total net realized and unrealized gain on investments
   
1,810,356
     
1,768,983
 
 
               
Net increase in net assets resulting from operations
 
$
1,437,010
   
$
1,853,451
 
 
               
Net increase in net assets resulting from operations per share
 
$
0.22
   
$
0.41
 
 
               
Weighted average common shares outstanding
   
6,577,208
     
4,533,971
 


 
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
4


MacKenzie Realty Capital, Inc.
Consolidated Statements of Changes in Net Assets

  
 
 
Three Months Ended
   
Year Ended June 30,
 
 
 
September 30, 2017
   
June 30, 2017
 
 
 
(Unaudited)
       
Operations
           
Net investment income (loss)
 
$
(373,346
)
 
$
1,733,806
 
Net realized gain
   
848,583
     
1,596,367
 
Net unrealized gain (loss)
   
961,773
     
2,023,069
 
Net increase in net assets resulting from operations
   
1,437,010
     
5,353,242
 
 
               
Dividends
               
Dividends to stockholders
   
(1,033,816
)
   
(4,046,021
)
 
               
Capital share transactions
               
Issuance of common stock
   
6,730,057
     
19,296,300
 
Issuance of common stock through reinvestment of dividends
   
434,005
     
1,903,677
 
Redemption of common stock
   
(357,002
)
   
(915,267
)
Selling commissions and fees
   
(668,039
)
   
(1,934,597
)
Net increase in net assets resulting from capital share transactions
   
6,139,021
     
18,350,113
 
 
               
Total increase in net assets
   
6,542,215
     
19,657,334
 
 
               
Net assets at beginning of the period
   
59,989,525
     
40,332,191
 
 
               
Net assets at end of the period
 
$
66,531,740
   
$
59,989,525
 
 
 

 
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
5


MacKenzie Realty Capital, Inc.
Consolidated Statements of Cash Flows
 (Unaudited)

 
 
     
 
 
Three Months Ended
September 30,
 
 
 
2017
   
2016
 
 
           
Cash flows from operating activities:
           
Net increase in net assets resulting from operations
 
$
1,437,010
   
$
1,853,451
 
Adjustments to reconcile net increase in net assets resulting from
               
operations to net cash from operating activities:
               
Proceeds from sale of investments, net
   
15,372,752
     
5,860,847
 
Return of capital
   
96,702
     
133,857
 
Purchase of investments
   
(23,867,620
)
   
(8,376,662
)
Net realized gain on investments
   
(848,583
)
   
(1,016,846
)
Net unrealized gain on investments
   
(961,773
)
   
(752,137
)
Amortization of deferred offering costs
   
122,702
     
-
 
Changes in assets and liabilities:
               
Accounts receivable
   
1,849,897
     
57,602
 
Other assets
   
(792,622
)
   
110,493
 
Payment of deferred offering costs
   
(27,544
)
   
(279,117
)
Accounts payable and accrued liabilities
   
454,561
     
167,789
 
Income tax payable
   
26,209
     
-
 
Due to related entities
   
(198,027
)
   
9,560
 
Deferred tax liability
   
(14,599
)
   
-
 
Net cash from operating activities
   
(7,350,935
)
   
(2,231,163
)
 
               
Cash flows from financing activities:
               
Proceeds from issuance of common stock
   
6,730,057
     
6,573,620
 
Redemption of common stock
   
(357,002
)
   
(161,197
)
Dividends to stockholders
   
(599,811
)
   
(478,709
)
Payment of selling commissions and fees
   
(592,653
)
   
(636,205
)
Change in capital pending acceptance
   
(994,890
)
   
(771,290
)
       Net cash from financing activities
   
4,185,701
     
4,526,219
 
 
               
Net increase (decrease)  in cash and cash equivalents
   
(3,165,234
)
   
2,295,056
 
 
               
Cash and cash equivalents at beginning of the period
   
11,849,712
     
2,350,435
 
 
               
Cash and cash equivalents at end of the period
 
$
8,684,478
   
$
4,645,491
 
 
               
Non-cash financing activities:
               
Issuance of common stock through reinvestment of dividends
 
$
434,005
   
$
463,950
 

 
 

 
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
6


 
MacKenzie Realty Capital, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)

NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION

MacKenzie Realty Capital, Inc. (together with its subsidiary as discussed below, the "Company") was incorporated under the general corporation laws of the State of Maryland on January 25, 2012. It is a non-diversified, closed-end investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). MacKenzie Realty Capital, Inc. has elected to be treated as a real estate investment trust ("REIT") as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company is authorized to issue 100,000,000 shares, of which (i) 80,000,000 are designated as Common Stock, with a $0.0001 par value per share; and (ii) 20,000,000 are designated as Preferred Stock, with a $0.0001 par value per share. The Company commenced its operations on February 28, 2013, and its fiscal year-end is June 30.



MacKenzie Realty Capital, Inc. filed its initial registration statement in June 2012 with the Securities and Exchange Commission ("SEC") to register the initial public offering ("IPO") of 5,000,000 shares of the its common stock. The IPO commenced in January 2014 and concluded in October 2016. MacKenzie Realty Capital, Inc. filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of its common stock that was declared effective by the SEC on December 20, 2016, and the offering commenced shortly thereafter.

MacKenzie Realty Capital, Inc.'s wholly owned subsidiary, MRC TRS, Inc., ("TRS") was incorporated under the general corporation laws of the State of California on February 22, 2016, and operates as a taxable REIT subsidiary. TRS started its operation on January 1, 2017, and the financial statements of TRS have been consolidated with MacKenzie Realty Capital, Inc. beginning with the quarter ended March 31, 2017.



The Company is externally managed by MacKenzie Capital Management, LP ("MacKenzie") under the administration agreement dated and effective as of February 28, 2013 (the "Administration Agreement"). MacKenzie manages all of the Company's affairs except for providing investment advice. The Company is advised by MCM Advisers, LP (the "Adviser") under the advisory agreement dated and effective as of February 28, 2013 (the "Investment Advisory Agreement"). The Investment Advisory Agreement was subsequently amended on August 6, 2014, and renewed on October 23, 2014, October 23, 2015, and September 27, 2016. The Board of Directors approved an amendment and restatement of the Investment Advisory Agreement on September 11, 2017, which was subsequently approved by the Company's stockholders on October 23, 2017.  The Amended and Restated Investment Advisory Agreement is effective as of October 1, 2017. The Company pursues a strategy focused on investing primarily in illiquid or non-traded debt and equity securities issued by U.S. companies generally owning commercial real estate.  These companies are likely to be non-traded REITs, small-capitalization publicly traded REITs, public and private real estate limited partnerships, limited liability companies, and tenancies-in-common.

As of September 30, 2017, the Company has raised approximately $63.21 million from the public offerings, including proceeds from the Company's dividend reinvestment plan ("DRIP") of approximately $3.35 million. Of the total capital raised as of September 30, 2017, approximately $2.80 million has been redeemed under the Company's share repurchase program.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation Policy

The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company's wholly-owned consolidated subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Under the 1940 Act rules, regulations pursuant to Article 6 of Regulation S-X and Topic 946 of the Accounting Standards Codification, as amended (the "ASC"), of the Financial Accounting Standards Board ("FASB"), Financial Services-Investment Companies, the Company is precluded from consolidating portfolio company investments, including those in which the Company has a controlling interest, unless the portfolio company is a wholly-owned investment company. An exception to this general principle occurs if the Company owns a controlled operating company whose purpose is to provide services to the Company such as an investment adviser or transfer agent. None of the Company's investments qualifies for this exception. Therefore, the Company's portfolio company investments, including those in which the Company has a controlling interest, are carried on the consolidated statements of assets and liabilities at fair value with changes to fair value recognized as "Net Unrealized gain (loss)" on the Consolidated Statements of Operations until the investment is realized, usually upon exit, resulting in any gain or loss on exit being recognized as a realized gain or loss. However, in the event that any controlled subsidiary exceeds the tests of significance set forth in Rules 3-09 or 4-08(g) of Regulation S-X, the Company will include required financial information for such subsidiary in the notes or as an attachment to its consolidated financial statements.

The unaudited consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company's results for the interim periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2017, included in the Company's annual report on Form 10-K filed with the SEC.

There have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2017, other than those expanded upon and described below.

 
 
 
Reclassifications
 
Certain amounts in the consolidated statements of assets and liabilities related to non-controlled/affiliated and controlled investments have been disaggregated from the non-controlled/non-affiliated investments, as of September 30, 2017. Similarly, investment income, net realized gains (losses) and net unrealized gains (losses) from non-controlled/affiliated and controlled investments have been disaggregated from the corresponding line items from non-controlled/non-affiliated investments in the consolidated statements of operations. The prior periods have been reclassified to conform to this presentation as of September 30, 2017.

Cash and Cash Equivalents

The Fund considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These balances are insured by the Federal Deposit Insurance Corporation ("FDIC") up to certain limits. At times the cash balances held in financial institutions by the Company may exceed these insured limits. Cash and cash equivalents are carried at cost which approximates fair value. There were no cash equivalents held as of September 30, 2017, and June 30, 2017.


Accounts Receivable

Accounts receivable represent dividends, distributions and sales proceeds recognized in accordance with our revenue recognition policy but not yet received as of the date of the financial statements. The amounts are generally fully collectible as they are recognized based on completed transactions. The Fund monitors and adjusts its receivables and those deemed to be uncollectible are written-off only after all reasonable collection efforts are exhausted. The Company has determined that all account receivable balances outstanding as of September 30, 2017, are collectible and do not require recording any uncollectible allowance.

Capital Pending Acceptance

The Company conducts closings for new stock purchases twice per month and admits new stockholders effective beginning the first of each month. Subscriptions are effective only upon the Company's acceptance. Any gross proceeds received from subscriptions which are not accepted as of the period-end are classified as capital pending acceptance in the consolidated statements of assets and liabilities. As of September 30, 2017, and June 30, 2017, capital pending acceptance was $808,200 and $1,803,090, respectively.
 

Organization and Deferred Offering Costs



Organization costs include, among other things, the cost of legal services pertaining to the organization and incorporation of the business, incorporation fees and audit fees relating to the initial registration statement and the initial statement of assets and liabilities. These costs are expensed as incurred. Offering costs include, among other things, legal fees and other costs pertaining to the preparation of the registration statements and pre- and post-effective amendments. Offering costs are capitalized as deferred offering costs as incurred by the Company and subsequently amortized to expense over a 12-month period. Any deferred offering costs that have not been amortized upon the expiration or earlier termination of an offering will be accelerated and expensed upon such expiration or termination.

In August 2016, the Company filed a new registration statement with the SEC to register a public offering of 15,000,000 shares of the Company's common stock. The offering costs incurred in connection with the current public offering through September 30, 2017, were $586,177. These offering costs are deferred and expensed over a twelve-month period beginning from the date the registration was declared effective by the SEC. Amortization of these deferred costs for the three months ended September 30, 2017, was $122,702. As the offering costs on the IPO were fully amortized as of July 2014, there was no amortization expense in three months ended September 30, 2016.

 
 

 
Income Taxes and Deferred Tax Liability

The Company has elected to be treated as a REIT for tax purposes under the Code and as a REIT, the Company is not subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it distributes at least 90% of its REIT taxable income to the stockholders and meets certain other conditions. To the extent that the Company satisfies the annual distribution requirement but distributes less than 100% of its taxable income, it is either subject to U.S. federal corporate income tax on its undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year. The Company is also subject to tax on built-in gains it realizes during the first ten years following REIT election.

The Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2016, and 2015. Therefore, the Company did not incur any tax expense or excise tax during the quarterly periods within the tax year ended December 31, 2016, and 2015. Similarly, the Company intends to pay the requisite amount of dividends to stockholders during the tax year ended December 31, 2017, such that the Company would not pay any income taxes on its income for tax year 2017. Therefore, the Company did not record any income tax provisions during the quarterly periods within the tax year 2017 through September 30, 2017.

The income tax expense of $13,210 reflected in the statements of operations for the three months ended September 30, 2017, was the adjustment for the difference between the actual and estimated tax liability on the built-in gains realized during the period of January 1, 2017 through September 30, 2017. Prior to the effective date of its REIT election, the Company had net unrealized built-in gains of $239,595, for which the Company recorded an estimated tax liability of $95,431 as of December 31, 2013. Accordingly, in each subsequent tax year, the Company only records the difference between the actual and estimated tax on the built-in gains it realizes during each tax year as income tax expense or benefit. The remaining net unrealized built-in gains, which are subject to tax, as of September 30, 2017 and June 30, 2017 were $70,174 and $113,893, respectively. The deferred tax liabilities relating to those net unrealized built-in gains as of September 30, 2017 and June 30, 2017, were $30,764 and $45,363, respectively.

The Company's wholly owned subsidiary, MRC TRS, Inc. is subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of September 30, 2017, the subsidiary did not have any taxable income for tax year ended December 31, 2017. Accordingly, no tax provision has been recorded by the Company as of September 30, 2017.
The Company follows ASC 740, Income Taxes, ("ASC 740") to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the net unrealized investment gain (losses) on existing investments. In estimating future tax consequences, the Company considers all future events, other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period of enactment. In addition, ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. As of September 30, 2017, and June 30, 2017, there were no uncertain tax positions. Management's determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
 

NOTE 3 –INVESTMENTS
The following table summarizes the composition of the Company's investments at cost and fair value as of September 30, 2017, and June 30, 2017:

 
 
September 30, 2017
   
June 30, 2017
 
Asset Type
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Publicly Traded Companies
 
$
16,538,778
   
$
16,749,850
   
$
16,839,158
   
$
16,862,458
 
Non Traded Companies
   
16,025,403
     
17,276,957
     
14,122,019
     
15,071,280
 
LP Interests
   
16,333,371
     
20,032,361
     
12,689,630
     
15,917,632
 
Investment Trusts
   
112,019
     
34,881
     
112,019
     
34,157
 
Note
   
4,000,000
     
4,000,000
     
-
     
-
 
Total
 
$
53,009,571
   
$
58,094,049
   
$
43,762,826
   
$
47,885,527
 

The following table presents fair value measurements of the Company's investments measured at fair value on a recurring basis as of September 30, 2017, according to the fair value hierarchy that is described in our annual report on Form 10-K:
 
Asset Type
 
Total
   
Level I
   
Level II
   
Level III
 
Publicly Traded Companies
 
$
16,749,850
   
$
16,749,850
   
$
-
   
$
-
 
Non Traded Companies
   
17,276,957
     
-
     
-
     
17,276,957
 
LP Interests
   
20,032,361
     
-
     
-
     
20,032,361
 
Investment Trusts
   
34,881
     
-
     
-
     
34,881
 
Note
   
4,000,000
     
-
     
-
     
4,000,000
 
Total
 
$
58,094,049
   
$
16,749,850
   
$
-
   
$
41,344,199
 
 
                               

 
The following table presents fair value measurements of the Company's investments measured at fair value on a recurring basis as of June 30, 2017, according to the fair value hierarchy that is described in our annual report on Form 10-K:

 
Asset Type
 
Total
   
Level I
   
Level II
   
Level III
 
Publicly Traded Companies
 
$
16,862,458
   
$
16,667,294
   
$
195,164
   
$
-
 
Non Traded Companies
   
15,071,280
     
-
     
-
     
15,071,280
 
LP Interests
   
15,917,632
     
-
     
-
     
15,917,632
 
Investment Trusts
   
34,157
     
-
     
-
     
34,157
 
Total
 
$
47,885,527
   
$
16,667,294
   
$
195,164
   
$
31,023,069
 
 
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the three months ended September 30, 2017:

Balance at July 1, 2017
 
$
31,023,069
 
Purchases of investments
   
11,664,924
 
Proceeds from sales, net
   
(3,294,495
)
Return of capital
   
(96,702
)
Net realized gains
   
1,273,402
 
Net unrealized gains
   
774,001
 
Ending balance at September 30, 2017
 
$
41,344,199
 
 
For the three months ended September 30, 2017, changes in unrealized gains included in earnings relating to Level III investments still held at September 30, 2017, was $1,598,718.
 
 

 
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the three months ended September 30, 2016:

Balance at July 1, 2016
 
$
24,881,461
 
Purchases of investments
   
2,148,321
 
Proceeds from sales, net
   
(281
)
Return of capital
   
(133,857
)
Net realized gains
   
132
 
Net unrealized gains
   
1,238,014
 
Ending balance at September 30, 2016
 
$
28,133,790
 


The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at September 30, 2017:
 
Asset Type
 
 Fair Value
 
Primary Valuation Techniques
 
Unobservable Inputs Used
 
Range
 
Wt. Average
                     
Non Traded Companies
 
 $    16,372,033
 
Market Activity
 
Acquisition Cost
       
           
Secondary market industry publication
       
Non Traded Companies
 
            904,924
 
Net Asset Value (1)
 
Capitalization rate
 
6.4% - 8.5%
 
7.5%
           
Liquidity discount
 
10.0% - 70.0%
 
24.6%
           
Sponsor provided value
       
                     
LP Interests
 
         5,999,126
 
Market Activity
 
Acquisition Cost
       
           
Secondary market industry publication
       
                     
LP Interests
 
       14,033,235
 
Net Asset Value (1)
 
Capitalization rate
 
5.4% - 8.8%
 
7.1%
           
Discount rate
 
28.0% - 30.0%
 
29.2%
           
Liquidity discount
 
10.0% - 50.0%
 
21.2%
           
Discount term (months)
 
10.0 - 12.0
 
10.9
           
Sponsor provided value
       
           
Contracted sale price of underlying property
     
                     
Investment Trust
 
              34,881
 
Net Asset Value (1)
 
Sponsor provided value
       
           
Capitalization rate
 
6.0%
   
           
Liquidity discount
 
20.0 % - 25.0%
 
24.5%
                     
Note
 
         4,000,000
 
Market Activity
 
Acquisition Cost
       
                     
   
 $    41,344,199
               
                     

(1)
The net asset value of the issuer's shares was calculated by the Company.
 
 

 

 
The following table shows quantitative information about significant unobservable inputs related to the Level II and Level III fair value measurements used at June 30, 2017:

Asset Type
 
 Fair Value
 
Primary Valuation Techniques
Unobservable Inputs Used
 
Range
 
Wt. Average
                     
Level II
                   
                     
Publicly Traded Company
 
 $         195,164
 
Market Activity
 
10 day average trading price
       
                     
   
 $         195,164
               
                     
Level III
                   
                     
Non Traded Company
 
 $    14,355,312
 
Market Activity
 
Secondary market industry publication
       
                     
Non Traded Company
 
            715,968
 
Net Asset Value (1)
 
Capitalization rate
 
6.2% - 8.5%
 
7.4%
           
Liquidity discount
 
20.0% - 30.0%
 
22.7%
           
Sponsor provided value
       
                     
LP Interest
 
         2,611,192
 
Market Activity
 
Contracted sale price of underlying asset
       
           
Liquidity discount
 
20.0%
   
           
Secondary market industry publication
       
                     
LP Interest
 
       13,306,440
 
Net Asset Value (1)
 
Capitalization rate
 
5.4% - 8.8%
 
7.1%
           
Discount rate
 
30.0% - 37.0%
 
34.0%
           
Liquidity discount
 
10.0% - 50.0%
 
20.5%
           
Discount term (months)
 
13.0 - 50.0
 
13.9
           
Sponsor provided value
       
           
Contracted sale price of underlying property
     
                     
Investment Trust
 
                3,783
 
Market Activity
 
Secondary market industry publication
       
Investment Trust
 
              30,374
 
Net Asset Value (1)
 
Capitalization rate
 
6.0%
   
           
Liquidity discount
 
25.0%
   
                     
   
 $    31,023,069
               
Valuation Technique Terms:

(1)
The net asset value of the issuer's shares was calculated by the Company.


NOTE 4—MARGIN LOANS

The Fund has a brokerage account through which it buys and sells publicly traded securities. The provisions of the account allow the Company to borrow on certain securities held in the account. Amounts borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities pledged to secure margin balances cannot be specifically identified as a portion of all securities held in a brokerage account are used as collateral. As of September 30, 2017, the Company had $11,274,458 of margin credit available for cash withdrawal or the ability to purchase up to $22,548,917 in additional shares. As of June 30, 2017, the Company had $11,686,296 of margin credit available for cash withdrawal or the ability to purchase up to $23,372,592 in additional shares. As of September 30, 2017, and June 30, 2017, the Company had not drawn any amount or purchased any shares under this short-term credit line.
 
 


NOTE 5 –RELATED PARTY TRANSACTIONS

Investment Advisory Agreement:

Under the Investment Advisory Agreement, the Company will pay the Adviser a fee for its services consisting of three components — a portfolio structuring fee, a base management fee, and a subordinated incentive fee.

The portfolio structuring fee is for the Adviser's initial work performed in identifying, evaluating and structuring the acquisition of portfolio of assets. The fee equals 3.0% of the gross proceeds from the sale of the Company's shares. The services are performed on an ongoing basis in anticipation of deploying new capital, generally within 15 days of the receipt of capital.  Therefore, this fee is expensed in the period the capital is accepted.

The base management fee is calculated based on the Company's "managed funds," which equal the price at which the Company's shares are issued plus any borrowing for investment purposes. The base management fees range from 1.5% to 3.0%, depending on the level of the "managed funds."

The subordinated incentive fee has two parts— the income and the capital gains. The income fee is based on preliminary net investment income excluding the distributions received from sales/capital transactions and the capital gains fee is based on realized gains including the distributions received from sales/capital transactions. The income component is (i) 100% of the Company's preliminary net investment income for any calendar quarter that exceeds 1.75% (7% annualized) but is less than 2.1875% (8.75% annualized) of the Company's "contributed capital" (defined as the number of shares outstanding, multiplied by the price at which the shares are sold), and (ii) 20% of the Company's preliminary net investment income for any calendar quarter that exceeds 2.1875% (8.75% annualized) of the Company's "contributed capital." The capital gains component is (i) 100% of the Company's realized capital gains annually generated by its investments above 7% and up to 8.75% of the Company's "contributed capital," and (ii) 20% of the Company's realized capital gains above 8.75% of the Company's "contributed capital," all 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. If the Company liquidates all its assets, the capital gains component is 20.0% of realized capital gains (without the hurdle), 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. The capital gains component may not, in any event, exceed 20% of the Company's realized capital gains, net of all realized capital losses and unrealized capital depreciation.

The portfolio structuring fees for the three ended September 30, 2017, and 2016, were $201,902 and $197,208, respectively.

The base management fee is calculated on a quarterly basis at the end of each quarter based on the quarter ended managed funds and is payable in arrears. The base management fees for the three months ended September 30, 2017, and 2016, were $388,917 and $287,416, respectively. These base management fees were based on the following quarter ended managed funds segregated in two columns based on the annual fee rate:

Base Management Fee Annual %
   
3.0
%
   
2.0
%
 
Total Managed Funds
 
 
                     
Quarter ended:
                     
September 30, 2017
 
$
20,000,000
   
$
47,783,337
   
$
67,783,337
 
 
                       
Quarter ended:
                       
September 30, 2016
 
$
20,000,000
   
$
27,483,207
   
$
47,483,207
 

There was no subordinated incentive capital gain or income fee for the three months ended September 30, 2017, and 2016.


 
Organization and Offering Costs Reimbursement:

As provided in the Investment Advisory Agreement, organization and offering costs incurred by the Company on the IPO in excess of $550,000 are reimbursed by the Adviser. As of October 28, 2016 (the termination date of the IPO) the Company had incurred organization and offering costs of $1,066,226, of which $516,226 was reimbursed by the Adviser as of June 30, 2017 in accordance with the Investment Advisory Agreement.

In August 2016, the Company filed a new registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of the Company's common stock. As provided in the Investment Advisory Agreement, offering costs incurred and paid by the Company in excess of $1,650,000 on the second public offering will be reimbursed by the Adviser. As of September 30, 2017, and June 30, 2017, the offering costs incurred and paid by the Company is below the threshold of $1,650,000. Accordingly, no amount was reimbursable from the Adviser.

Administration Agreement:

Under the Administration Agreement, the Company reimburses MacKenzie for its allocable portion of overhead and other expenses it incurs in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, performing compliance functions, providing the services of the Chief Financial Officer, Chief Compliance Officer, Director of Financial Reporting, and any administrative support staff, as well as providing the Company with other administrative services, subject to the Independent Directors' approval. The administrative cost reimbursements for the three months ended September 30, 2017, and 2016, were $108,000 and $55,000, respectively.

The table below outlines the related party expenses incurred for the three months ended September 30, 2017, and 2016 and unpaid as of September 30, 2017, and June 30, 2017.
 
 
 
For The Three Months Ended
   
Unpaid as of
 
Types and Recipient
 
September 30, 2017
   
September 30, 2016
   
September 30, 2017
   
June 30, 2017
 
 
                       
Portfolio Structuring fee- the Adviser
 
$
201,902
   
$
197,208
   
$
-
   
$
-
 
Base Management fees- the Adviser
   
388,917
     
287,416
     
388,917
     
354,839
 
Subordinated Incentive fee - the Adviser (2)
   
-
     
-
     
-
     
232,198
 
Administrative Cost Reimbursements- MacKenzie
   
108,000
     
55,000
     
-
     
-
 
Other expenses (1)- MacKenzie
                   
1,065
     
972
 
 
                               
Due to related entities
                 
$
389,982
   
$
588,009
 
 
                               
(1) Expenses paid by MacKenzie on behalf of the Company to be reimbursed to MacKenzie.
(2) Subordinated Incentive fee payable as of June 30, 2017 was the capital gains fee accrued for the year ended June 30, 2017. The fee was paid as of September 30, 2017.
 
 

Investments in Affiliated Companies:
 
September 30, 2017
 
Name of issuer and title of issue
 
Fair Value at
   
Net Change in Unrealized Gains/(Losses)
   
Fair Value at
   
Interest/Dividend/Other income
Three Months Ended
 
   
June 30, 2017
         
September 30, 2017
   
September 30, 2017
 
Non-Controlled/Affiliate Investment:
                       
MPF Pacific Gateway - Class B
 
$
7,309
   
$
(696
)
 
$
6,613
   
$
789
 
                                 
   
$
7,309
   
$
(696
)
 
$
6,613
   
$
789
 
Controlled Investments:
                               
Coastal Realty Business Trust, REEP, Inc. - A
 
$
30,374
   
$
724
   
$
31,098
   
$
-
 
Coastal Realty Business Trust, Series H2- A
   
3,783
     
-
     
3,783
     
-
 
MC 15 Preferred Equity, LLC
   
3,250,000
     
312,500
     
3,562,500
     
-
 
                                 
   
$
3,284,157
   
$
313,224
   
$
3,597,381
   
$
-
 
 
June 30, 2017
Name of issuer and title of issue
 
Fair Value at
   
Gross Reductions (1)
   
Net Change in Unrealized Gains/(Losses)
   
Fair Value at
   
Interest/Dividend/Other income
Year Ended
 
 
 
June 30, 2016
               
June 30, 2017
   
June 30, 2017
 
Non-Controlled/Affiliate Investment:
                             
MPF Pacific Gateway - Class B
 
$
7,309
   
$
-
   
$
-
   
$
7,309
   
$
-
 
 
                                       
 
 
$
7,309
   
$
-
   
$
-
   
$
7,309
   
$
-
 
Controlled Investments:
                                       
Coastal Realty Business Trust, REEP, Inc. - A
 
$
99,078
   
$
(23,654
)
 
$
(45,050
)
 
$
30,374
   
$
56,410
 
Coastal Realty Business Trust, Series H2- A
   
95,987
     
(122,763
)
   
30,559
     
3,783
     
26,006
 
MC 15 Preferred Equity, LLC
   
2,500,000
     
-
     
750,000
     
3,250,000
     
-
 
 
                                       
 
 
$
2,695,065
   
$
(146,417
)
 
$
735,509
   
$
3,284,157
   
$
82,416
 
 
                                       
(1) Gross reductions include decreases in the cost basis of investments resulting from return of capital distributions.
 


Beginning with the quarter ended September 30, 2017, the Company has decided to include all gross additions and deductions, realized gains (losses), and net change in unrealized gain (losses), if any, for all affiliated investments for the periods presented in the consolidated financial statements. Accordingly, we have disclosed gross reductions and net change in unrealized gains/(losses) for the year ended June 30, 2017, which were previously not presented in the notes of the consolidated financial statements included in the Form 10-K for the year ended June 30, 2017. This additional information presented for the prior year does not have any impact on the consolidated financial statements and the financial highlights disclosed previously.

Coastal Realty Business Trust ("CRBT"):

CRBT is a Nevada business trust whose trustee is MacKenzie. Each series of the trust has its own beneficiaries and own assets. The Fund owns two series of CRBT and is the only beneficiary of such series. Under the terms of the agreement, there are no redemption rights to any of the series participants. The Company and TRS are the sole beneficiaries of the following series as of September 30, 2017, and June 30, 2017:

·
CRBT, REEP, Inc.-A, which has an ownership interest in one of three general partners of a limited partnership which owns one multi-family property located in Frederick, Maryland.

·
CRBT, Series H2-A, which invests in shares of a REIT that owns a real estate portfolio totaling 105 properties within asset classes of ski and mountain lifestyle, senior housing, attractions, marinas and other lifestyle properties located in the United States and Canada.

MC 15 Preferred Equity, LLC:

MC 15 Preferred Equity, LLC is a holding company that owns preferred equity of a company that owns a commercial real estate property in Austin, Texas. The Company is a co-manager of MC 15 Preferred Equity, LLC and owns 55.8% ownership interest in the company.

MPF Pacific Gateway:

MPF Pacific Gateway, which is managed by MacKenzie, is a holding company that owns an investment in a REIT Liquidating Trust. As of September 30, 2017, and June 30, 2017, the Company had a 15.82% of ownership interest in MPF Pacific Gateway.



NOTE 6 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights of the Company for the three months ended September 30, 2017, and the year ended June 30, 2017.

   
 
 
For The Three Months Ended
   
For The Year Ended
 
 
 
September 30, 2017
   
June 30, 2017
 
Per Share Data:
 
(Unaudited)
       
 
           
Beginning net asset value ("NAV")
 
$
9.84
   
$
9.94
 
 
               
Net investment income (loss) (1)
   
(0.05
)
   
0.33
 
Net realized gain (1)
   
0.12
     
0.31
 
Net unrealized gain (loss) (1)
   
0.15
     
0.39
 
Net increase in net assets resulting from operations
   
0.22
     
1.03
 
 
               
Issuance of common stock above (below) NAV (1) (4)
   
(0.09
)
   
(0.37
)
Redemption of common stock below NAV (1) (6)
   
0.01
     
0.02
 
Dividends to stockholders (1) (5)
   
(0.16
)
   
(0.78
)
Ending NAV
 
$
9.82
   
$
9.84
 
 
               
Weighted average common Shares outstanding
   
6,577,208
     
5,183,166
 
Shares outstanding at the end of period
   
6,778,334
     
6,096,773
 
Net assets at the end of period
 
$
66,531,740
   
$
59,989,525
 
Average net assets (2)
 
$
63,260,633
   
$
50,160,858
 
 
               
Ratios to average net assets
               
Total expenses (7)
   
1.59
%
   
6.05
%
Net investment income (loss) (7)
   
(0.57
)%
   
3.46
%
Total rate of return (2) (3) (7)
   
2.27
%
   
10.67
%
 
(1)       Based on weighted average number of shares of common stock outstanding for the period.
 
(2)       Average net assets were derived from the beginning and ending period-end net assets.
 
 
(3)       Total rate of return is based on net increases (decreases) in net assets resulting from operations. An individual stockholder's return may vary from this return based on the time of capital transactions.
(4)       Net of sales commissions and dealer manager fees of $1.00 per share.
 
 
 
 
 
(5)       Dividends are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under GAAP.
(6)       Amounts based on differences between the actual redemption price and the NAVs preceding the redemptions.
(7)       Not annualized for interim reporting periods.
 
 
 
 
 

 
NOTE 7 – SHARE OFFERINGS AND FEES

During the three months ended September 30, 2017, the Company issued 673,005 shares with gross proceeds of $6,730,057 and 48,223 shares under the DRIP at $9 per share with gross proceeds of $434,005. For the three months ended September 30, 2017, the Company incurred selling commissions and fees of $668,039.

During the three months ended September 30, 2016, the Fund issued 657,362 shares with gross proceeds of $6,573,620 and 51,549.95 shares under the DRIP at $9 per share with gross proceeds of $463,950. For the three months ended September 30, 2016, the Fund incurred selling commissions and fees of $657,362.
 
NOTE 8 – SHARE REPURCHASE PLAN

Pursuant to the Company's share Repurchase Program, during the three months ended September 30, 2017, the Company submitted a tender offer to purchase its own shares at $9 per share. The Company repurchased a total of 39,666.90 shares for a total of $357,002. Similarly, during the three months ended September 30, 2016, the Company submitted a tender offer and repurchased a total of 17,910.76 of its shares for a total of $161,197.

 
NOTE 9 –STOCKHOLDER DIVIDENDS AND INCOME TAXES

The following table reflects the dividend the Company paid on its common stock during the three months ended September 30, 2017:
 
 
 
Dividends
 
During the Quarter Ended
 
Per Share
   
Amount
 
                 
Three months ended September 30, 2017
 
$
0.250
   
$
1,033,816
 
 
               
 
 
$
0.250
   
$
1,033,816
 


The following table reflects the dividend the Company paid on its common stock during the three months ended September 30, 2016:

 
 
 
Dividends
 
During the Quarter Ended
 
Per Share
   
Amount
 
                 
Three months ended September 30, 2016
 
$
0.250
   
$
942,659
 
 
               
 
 
$
0.250
   
$
942,659
 
Of the total dividend declared for the three months ended September 30, 2016, $463,950 was reinvested under the DRIP.

On October 19, 2017, the Company's Board of Directors have approved a quarterly dividend of $0.175 per share to the holders of record on September 30, 2017, which was paid on November 13, 2017.
 
 
 
 
Income Taxes


While our fiscal year end for financial reporting purposes is June 30 of each year, our tax year end is December 31 of each year. The information presented in this footnote is based on our tax year end for each period presented, unless otherwise specified.

For income tax purposes, dividends paid to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or a combination thereof. The tax character of dividends paid to stockholders for the tax years ended December 31, 2016, (the most recent tax year end completed and filed) were as follows:

   
December 31, 2016
 
Capital gain
 
$
2,275,740
 
Ordinary income- Post REIT qualification
   
985,410
 
Total dividends
 
$
3,261,150
 
 
The tax character of dividends paid to stockholders since December 31, 2016 (the most recent tax year ended completed and filed) through September 30, 2017, is expected to be ordinary income and capital gains. Because of the difference between our fiscal and tax year ends, the final determination of the tax character of dividends will not be made until we file our tax return for the tax year ending December 31, 2017.

The components of undistributed earnings on a tax basis as of December 31, 2016 (the most recent tax year end completed and filed) were as follows:
   
December 31, 2016
 
Undistributed long term capital gain
 
$
237,371
 
Unrealized fair value appreciation
   
4,198,019
 
   
$
4,435,390
 
The following table presents the aggregate gross unrealized appreciation, depreciation, and cost basis of investments for income tax purposes as of:
  
   
September 30, 2017
   
June 30, 2017
 
Aggregate gross unrealized appreciation
 
$
5,029,205
   
$
5,832,699
 
Aggregate gross unrealized depreciation
   
(1,216,927
)
   
(1,340,585
)
Net unrealized appreciation
 
$
3,812,278
   
$
4,492,114
 
                 
Aggregate cost (tax basis)
 
$
39,515,434
   
$
43,393,413
 
 

NOTE 10 –SUBSEQUENT EVENTS

The Investment Advisory Agreement was amended and restated effective October 1, 2017. The amendment was approved by the Board of Directors of the Company on September 11, 2017 and subsequently approved by the shareholders at the annual shareholder meeting held on October 23, 2017.

The Amended Agreement, among other definitional and clarification changes, provides for a new method of calculation for the capital gains incentive fee and the income incentive fee that ensures that stockholders receive dividends equal to at least 7% per year before either incentive fee is payable.  The Amended Agreement provides a formula for computation of each of the incentive fees to ensure this threshold is met, that neither fee would exceed 20% of its base source (income or capital gains) and that the total fees paid would never exceed 20% of the total capital gains and investment income.
 
 


 
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements by MacKenzie Realty Capital, Inc. and its wholly owned subsidiary MRC TRS, Inc. (the "Company," "we," or "us") contained herein, other than historical facts, may constitute "forward-looking statements."  These statements may relate to, among other things, future events or our future performance or financial condition.  In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative of such terms or comparable terminology.  These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements, including 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; a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities; and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy.  For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading "Risk Factors" in our Annual Report on Form 10-K.

We may experience fluctuations in our operating results due to a number of factors, including the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.




Overview


We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. Our objective is to generate both current income and capital appreciation through real estate-related investments. We have elected to be treated as a REIT under the Code and as a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of our taxable income, we will be subject to an excise tax on our undistributed taxable income. Our wholly owned subsidiary, MRC TRS, Inc., is subject to corporate federal and state income tax on its taxable income at regular statutory rates.

We are managed by the Adviser, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.

Investment Plan

Our investments are generally expected to range in size from $10,000 to $3 million. However, we may make smaller or larger investments from time to time on an opportunistic basis. We focus primarily on real estate-related securities. We purchase most of our securities (i) directly from existing security holders, (ii) through established securities markets, and (iii) in the case of unregistered, privately offered securities, directly from issuers. We invest primarily in debt and equity securities issued by U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange.

We generally seek to invest in interests of real estate-related limited partnerships and REITs. Under normal market conditions, we invest at least 80.0% of our total assets in common stocks and other equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities. A real estate company is one that (i) derives at least 50.0% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50.0% of its assets invested in such real estate. We do not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders. However, limited liability entities that we may invest in may in turn hold interests in general partnerships, joint ventures, or other non-limited liability entities. We generally consider purchasing securities issued by entities that have (i) completed the initial offering of their securities, (ii) operated for a period of at least two years, and typically more than five years, from the completion of their initial offering, and (iii) fully invested their capital in real properties or other real estate-related investments.

We may also acquire (i) individual mortgages secured by real property (i.e., we may originate such loans or we may purchase outstanding loans secured by real estate), (ii) securities of issuers that own mortgages secured by income producing real property, and (iii) using no more than 20.0% of our available capital, securities of issuers that own assets other than real estate.

 
Investment income

We generate revenues in the form of capital gains and dividends on dividend-paying equity securities or other equity interests that we acquire, in addition to interest on any debt investments that we hold. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees are generated in connection with our investments and recognized as earned.

Expenses

Our primary operating expenses include the payment of: (i) investment advisory fees to our Adviser; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie Capital Management in performing its obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Our investment advisory fees compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. Our expenses must be billed to and paid by us, except that MacKenzie may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We will bear all other expenses of our operations and transactions, including:

·
the cost of calculating our NAV, including the cost of any third-party valuation services;
·
the cost of effecting sales and repurchases of our shares and other securities;
·
interest payable on debt, if any, to finance our investments;
·
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees;
·
transfer agent and safekeeping fees;
·
fees and expenses associated with marketing efforts;
·
federal and state registration fees, any stock exchange listing fees in the future;
·
federal, state and local taxes;
·
Independent Directors' fees and expenses;
·
brokerage commissions;
·
fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums;
·
direct costs and expenses of administration and sub-administration, including printing, mailing, long distance telephone and staff;
·
fees and expenses associated with independent audits and outside legal costs;
·
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and
·
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and any administrative support staff.

In addition, we incurred $550,000 of organization and offering expenses in connection with our initial public offering. All additional amounts with respect to shares sold pursuant to the initial public offering were paid by our Adviser. Similarly, we will bear organization and offering expenses in connection with our current public offering up to $1,650,000. Any additional amounts with respect to shares being sold pursuant to the second public offering will be paid by our Adviser.


Portfolio Investment Composition

The following table summarizes the composition of our investments at cost and fair value as of September 30, 2017, and June 30, 2017:

 
 
 
September 30, 2017
   
June 30, 2017
 
Asset Type
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Publicly Traded Companies
 
$
16,538,778
   
$
16,749,850
   
$
16,839,158
   
$
16,862,458
 
Non Traded Companies
   
16,025,403
     
17,276,957
     
14,122,019
     
15,071,280
 
LP Interests
   
16,333,371
     
20,032,361
     
12,689,630
     
15,917,632
 
Investment Trusts
   
112,019
     
34,881
     
112,019
     
34,157
 
Note
   
4,000,000
     
4,000,000
     
-
     
-
 
Total
 
$
53,009,571
   
$
58,094,049
   
$
43,762,826
   
$
47,885,527
 
Net Asset Value

September 30, 2017 vs. June 30, 2017:

Our NAV as of September 30, 2017, was $9.82 per share compared to $9.84 per share as of June 30, 2017, a $0.02 per share decrease of approximately 0.20%. The net decrease during the three months was due to decreases resulting from (i) a dividend to stockholders of $0.16 per share, (ii) issuance of shares (net of selling commissions and dealer manager fees) below NAV per share resulting in a decrease of a $0.09 per share and (iii) net investment loss of $0.05 per share. The decreases were offset by increases resulting from (i) net unrealized gain of $0.15 per share, (ii) net realized gain on sale of investments of $0.12 per share and (iii) repurchases of outstanding shares below NAV resulting in an increase of $0.01 per share.

Results of Operations


Three Months Ended September 30, 2017, and 2016:


Investment Income:

Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest and other investment income. Total investment income for the three months ended September 30, 2017, and 2016, were $0.63 million and $0.79 million, respectively. The decrease of $0.16 million or 20.3%, was primarily due to liquidations of BR Riverside Investment Co., LLC, and BR Beach House Investment Co., LLC in December 2016, which provided approximately $0.27 million of distribution income during the three months ended September 30, 2016. The decrease of $0.27 million from liquidation of these two investments was partly offset by an increase of $0.11 million in dividend and distributions income during the three months ended September 20, 2017, because of the overall increase of the investment portfolio by $12.53 million in cost basis since September 30, 2016.

Operating Expenses:


Base management fee: The base management fee for the three months ended September 30, 2017 was $0.39 million as compared to $0.29 million for the three months ended September 30, 2016. This increase of $0.10 million, or 34.5% was due to an increase in the managed funds by $20.30 million from $47.48 million as of September 30, 2016, to $67.78 million as of September 30, 2017.


Portfolio structuring fee: The portfolio structuring fees for the three months ended September 30, 2017, and 2016 remained comparable at $0.20 million. This was due to new capital raised through issuance of new shares during these two quarterly periods also remaining comparable. During the three months ended September 30, 2017, the Company issued 673,005 shares with gross proceeds of $6.73 million and during the three months ended September 30, 2016, the Company issued 657,362 shares with gross capital of $6.57 million.

Administrative cost reimbursements: Costs reimbursed to Mackenzie for the three months ended September 30, 2017, was $0.11 million as compared to $0.06 for the three months ended September 30, 2016. The increase was primarily due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie since September 30, 2016, due to the increase in the Company's operating activities.
 
 

Subordinated incentive fee: The subordinated incentive fee has two components; capital gains fee and income fee. The capital gains fee is based on realized gains (including the distributions received from sales/capital transactions) and the income fee is based on net investment income. There were no capital gains fee or income fee for the three months ended September 30, 2017, and 2016 due to the total realized gains (net of all unrealized losses) and net investment income for periods being below the threshold of 7% contributed capital.

Other operating expenses: Other operating expenses include amortization of deferred offering costs, professional fees, directors' fees and other general and administrative expenses. Other operating expenses for the three months ended September 30, 2017, were $0.29 million as compared to $0.17 million for the three months ended September 30, 2016. The increase of $0.12 million or 70.6% was due to the deferred offering costs on the second public offering being amortized beginning December 2016. For the three months ended September 30, 2016, the Company did not have any amortization of deferred offering costs as the deferred offering costs on the IPO was fully amortized as of September 2015.

 

 
Net realized gain on investments:

Total net realized gains for three months ended September 30, 2017 and 2016, were $0.85 million and $1.02 million, respectively. Total realized gains for the three months ended September 30, 2017, were realized from liquidations of four non-traded REIT securities with total realized gains of $0.76 million and a liquidation of a limited partnership interest with realized gains of $0.51 million offset by net realized loss of $0.42 million from disposal of fourteen publicly-traded securities. Total realized gains for the three months ended September 30, 2016, were realized from the merger of a non-traded REIT with a publicly traded REIT resulting in realized gains of $0.61 million and sales of a publicly traded REIT with realized gains of $0.41 million.


Net unrealized gain/loss on investments:

During the three months ended September 30, 2017, we recorded net unrealized gains of $0.96 million, which was net of $0.86 million of unrealized gains reclassification adjustment. The reclassification adjustment was the accumulated unrealized gain as of June 30, 2017, that was realized during the quarter. Accordingly, the net unrealized gains excluding the reclassification adjustment for the three months ended September 30, 2017, was $1.82 million, which resulted from fair value appreciation of (i) limited partnership interests by $1.00 million, (ii) non-traded REIT shares by $0.58 million and (iii) publicly-traded REIT shares by $0.23 million.

During the three months ended September 30, 2016, we recorded unrealized gains of $0.75 million, which was net of $0.62 million of unrealized gains reclassification adjustment. The reclassification adjustment was the accumulated unrealized gains as of June 30, 2016, that was realized during the quarter ended September 30, 2016. Accordingly, the net unrealized gains for the three months ended September 30, 2016, excluding the reclassification adjustment was $1.37 million, which resulted from fair value appreciation of (i) non-traded REIT shares by $0.77 million (ii) limited partnership interests by $0.36 million, and (iii) publicly-traded REIT shares by $0.24 million.

Income tax provision (benefit):


We did not record any income tax provision for the three ended September 30, 2017 or 2016, as we have elected to be treated as a REIT for tax purposes beginning with the tax year ended December 31, 2014. The income tax expense of $13,210 reflected in the statements of operations for the three months ended September 30, 2017, was the adjustment for the difference between the actual and estimated tax liability on the built-in gains realized during the period of January 1, 2017 through September 30, 2017. Prior to the effective date of its REIT election, the Company had net unrealized built-in gains of $239,595, for which the Company recorded an estimated tax liability of $95,431 as of December 31, 2013. Accordingly, in each subsequent tax year, the Company only records the difference between the actual and estimated tax on the built-in gains it realizes during each tax year as income tax expense or benefit.

As a REIT, the Company is not subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it distributes at least 90% of its REIT taxable income to the stockholders and meets certain other conditions.  The Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2016. Therefore, the Company did not incur any tax expense or excise tax during the quarterly periods within the tax year ended December 30, 2016. Similarly, the Company intends to pay the requisite amount of dividends to stockholders during the tax year ended December 31, 2017, such that the Company would not pay any income taxes on its income for tax year 2017. Therefore, the Company did not record any income tax provisions during the quarterly periods within the tax year 2017 through September 30, 2017.


The Company's wholly owned subsidiary, MRC TRS, Inc. is subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of September 30, 2017, the subsidiary did not have any taxable income for tax year ended December 31, 2017. Accordingly, no tax provision has been recorded by the Company as of September 30, 2017.
 
 



Liquidity and Capital Resources


Capital Resources

We commenced our IPO of 5,000,000 shares in January 2014 and concluded the offering in October 2016. As of the date of conclusion, we sold 4,248,933.5 shares with gross proceeds of $42.46 million, issued 223,151.28 shares under our DRIP with gross proceeds of $2.01 million and redeemed 187,518.23 shares under our share Repurchase Program at an aggregate price of $1.69 million. Following the conclusion of the IPO, we filed a new registration statement with the SEC to register the public offering of 15,000,000 shares of the Company's common stock. This new registration statement was declared effective by the SEC on December 20, 2016. Under the current public offering, we plan to raise total gross proceeds of $150 million. As of September 30, 2017, we sold 1,739,563 shares with gross proceeds of $17.40 million, issued 149,439.80 shares under our DRIP with gross proceeds of $1.34 million and redeemed 123,452.43 shares under our share Repurchase Program at an aggregate price of $1.11 million. We do not have any plans to issue any preferred equity. We plan to fund future investments with the net proceeds raised from our second offering and any future offerings of securities and cash flows from operations, as well as interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities; however, we do not have any current plans to borrow money. As of September 30, 2017, we were selling our shares on a continuous basis at a price of $10 which may be below NAV per share from time to time, as approved by our stockholders.

Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly.  The maximum amount of such borrowing is limited by the 1940 Act.

Our primary uses of funds are investing in portfolio companies, paying cash dividends to holders of our common stock (primarily from investment income and realized capital gains), making payments to any lenders or senior security holders, and the payment of operating expenses.  If all the shares registered under our second registration statement in the second public offering are sold, we would receive investable cash totaling approximately $130.5 million.

Cash Flows:

Three Months Ended September 30, 2017:

For the three months ended September 30, 2017, we experienced a net decrease in cash of $3.17 million. During this period, we generated cash of $4.18 million from our financing activities and used $7.35 million in operating activities.


The net cash outflow of $7.35 million from operating activities resulted from $23.87 million used for purchases of investments and $0.12 million used for operating expenses, net of investment income. The cash outflows were offset by cash inflows of $16.54 million from sales of investments and $0.10 million from distributions received from our investments that are considered return of capital.


The net cash inflow of $4.19 million from financing activities resulted from the sale of shares under our IPO with gross proceeds of $5.74 million (adjusted for the $0.99 million of decrease in capital pending acceptance) offset by cash outflows of $0.36 million from share redemptions, $0.60 million from dividend payments and $0.59 million from selling commissions and fees payments.



Three Months Ended September 30, 2016:

For the three months ended September 30, 2016, we experienced a net increase in cash of $2.30 million. During this period, we generated cash of $4.52 million from our financing activities and used $2.22 million in operating activities.

The net cash outflow of $2.22 million from operating activities was primarily due to the cash outflow of $8.37 million from purchases of investments offset by cash inflows of $5.87 million from sales of investments, $0.13 million from distributions received from our investments that are considered return of capital and $0.15 million from investment income, net of the Company's operating expenses.
 
The net cash inflow of $4.52 million from financing activities resulted from the sale of Shares under our current offering with gross proceeds of $5.80 million (adjusted for the $0.77 million of decrease in capital pending acceptance) offset by cash outflows of $0.16 million from Share redemptions, $0.48 million from dividend payments and $0.64 million from selling commissions and fees payments.

Contractual Obligations

We have entered into two contracts under which we have material future commitments: (i) the Advisory Agreement, under which the Adviser serves as our investment adviser, and (ii) the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Advisory Agreement in future periods (after the up-front payment of the portfolio structuring fee during the IPO) will be (i) a percentage of the value of our Managed Funds; and (ii) incentive fees based on our income and our performance above specified hurdles (except in the year of liquidation).  Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it will be liable for any expenses we incur as a result of such withdrawal.


Off-Balance Sheet Arrangements


We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Borrowings




We do not have any current plans to borrow money or issue preferred securities. In the event that we do so borrow, we would expect to be subject to various customary covenants and restrictions on our operations, such as covenants which would (i) require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth, and/or (ii) restrict our ability to incur liens, additional debt, merge or sell assets, make certain investments and/or distributions or engage in transactions with affiliates.

Critical Accounting Policies


The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions.  Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex or subjective judgments. There have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2017, included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2017.

Dividends to Stockholders

We began paying quarterly dividends to our stockholders since May 9, 2014, and to the extent that we have income from operations available, we intend to pay quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined by our Board of Directors after a quarterly review and will be paid pro-rata to holders of our shares. Any dividends to our stockholders will be declared out of assets legally available for distribution.  In no event are we permitted to borrow money to pay dividends (or make distributions) if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs.

We qualified and elected to be taxed as a REIT beginning with the tax year ended December 31, 2014. As a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. Our current intention is to make any dividends in additional shares under our DRIP out of assets legally available therefore, unless a stockholder elects to receive dividends in cash, or their participation in our DRIP is restricted by a state securities regulator. If one holds shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive dividends in cash. We can offer no assurance that we will achieve results that will permit the payment of any cash dividends and, if we issue senior securities, we are prohibited from paying dividends if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if dividends are limited by the terms of any of our borrowings.
 
 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our current investment portfolio, as well as our future investments, primarily consists of equity and debt securities issued by smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our investments in these securities are considered speculative in nature. Our investments often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and a return of their capital.
 
At September 30, 2017, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented 81% of our total assets as of that date. As discussed in Note 3 to our financial statements ("Investments"), these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment strategy represents a high degree of business and financial risk due to the fact that portfolio company investments are generally illiquid and in small and middle market companies. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.

Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act) during the fiscal quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

There have been no material changes to our risk factors discussed in "Risk Factors" in our annual report on Form 10-K for the fiscal year ended June 30, 2017.
 
 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Issuer Purchases of Equity Securities

The following table presents information with respect to the Company's purchases of its common stock during the period covered by this report:
 
Period
 
Total Number of Shares Purchased
   
Average Price Paid Per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans
   
Maximum Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Plans
 
                         
August 30, 2017 through September 29, 2017
   
39,666.90
   
$
9.00
     
39,666.90
     
-
 

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

On September 11, 2017, the Company's Board of Directors approved the Amended and Restated Investment Advisory Agreement (the "Amended Agreement"), subject to shareholder approval.  On October 23, 2017, the stockholders approved the Agreement, which was made effective October 1, 2017.  The Amended Agreement, among other definitional and clarification changes, provides for a new method of calculation for the capital gains incentive fee and the income incentive fee that ensures that stockholders receive dividends equal to at least 7% per year before either incentive fee is payable.  The Amended Agreement provides a formula for computation of each of the incentive fees to ensure this threshold is met, that neither fee would exceed 20% of its base source (income or capital gains) and that the total fees paid would never exceed 20% of the total capital gains and investment income.

The foregoing summary of the Amended Agreement is qualified in its entirety by reference to the full text thereof attached hereto as Exhibit 10.1 and incorporated herein by reference.
 


Item 6.  EXHIBITS

Exhibit
Description
 
 
10.1
   
31.1