NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
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1.
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Organization and Purpose
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Alcentra Capital Corporation (the “Company” or
“Alcentra”) was formed as a Maryland corporation on June 6, 2013, is an externally managed, non-diversified closed-end
management investment company that has elected to be regulated as a business development company under the Investment Company
Act of 1940, as amended (the “1940 Act”) and is applying the guidance of Accounting Standards Codification (“ASC”)
Topic 946,
Financial Services Investment Companies
. Alcentra is managed by Alcentra NY, LLC (the “Adviser”
or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers
Act”). In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company
(“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with
its tax year ending December 31, 2014.
The Company was formed for the purpose of acquiring certain
assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership,
which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P.
(the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra
Mezzanine Partners (the “Manager”), a division of Alcentra NY and an affiliate of the General Partner, manages the
investment activities of the Partnership. Alcentra NY, together with certain of its affiliated companies (the "Alcentra Group"),
is an indirect, majority owned subsidiary of The Bank of New York Mellon Corporation.
On May 8, 2014 (commencement of operations), the Company acquired
all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock
of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s
common stock. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also
purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse
Portfolio debt investments were originated by the investment professionals of the Adviser and purchased by Alcentra Group using
funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public
offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital provided by Alcentra NY in exchange for
100 shares of Alcentra's common stock, the Company had no assets or operations prior to the acquisition of the investment portfolios
of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.
On May 14, 2014, Alcentra completed its initial public offering
(the “IPO”), at a price of $15.00 per share. Through the IPO the Company sold 6,666,666 shares for gross proceeds of
approximately $100 million. Alcentra used $94.2 million of the proceeds from the IPO to fund the purchase of the warehouse portfolio,
and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’
exercise of the overallotment option for gross proceeds of $11,250,000.
On April 8, 2014, the Company formed Alcentra BDC Equity Holdings,
LLC, a wholly-owned subsidiary for tax purposes (the “Taxable Subsidiary”). The Taxable Subsidiary allows us to hold
equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC
under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany
balances and transactions have been eliminated.
On May 22, 2017 Alcentra Capital Corporation completed an underwritten
primary offering of 808,161 shares of its common stock at a public offering price of $13.68 per share for proceeds of
approximately $10,853,602, after paying the sales load and offering expenses.
The Company’s investment objective is to generate both
current income and, to a lesser extent, capital appreciation primarily by making direct investments in lower middle and middle
market companies, which we define as companies having annual earnings, before interest , taxes, depreciation and amortization,
or EBITDA of between $5 million and $75 million, and/or revenues of between $10 million and $250 million, although we may make
investments in larger or smaller companies and other types of investments. These investments are in the form of first lien, second
lien, unitranche and, to a lesser extent given the current credit environment, mezzanine debt and equity investments.We expect
to source investments primarily through the network of relationships that the principals of its investment adviser have developed
with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
Upon commencement of operations, the Company also entered into
an administration and custodian agreement (the “Administration Agreement”) with State Street Bank and Trust Company
(the “Administrator”).
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2.
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Summary of Significant Accounting Policies
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Basis of Presentation
– The accompanying financial
statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting
principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain financial information that is normally included in annual financial statements, including certain financial statement notes,
prepared in accordance with GAAP, is not required for interim reporting purposes and have been omitted. In the opinion of management,
the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial
statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative
of results that ultimately may be achieved for the fiscal year ending December 31, 2018.
The accounting records of the Company are maintained in United
States dollars.
Use of Estimates
–
The preparation of financial statements in accordance with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates and such differences could be material. The most significant estimates relate to the
valuation of the Company’s portfolio investments.
Consolidation
–
In accordance with Regulation S-X Article 6.03 and ASC Topic 810 - Consolidation, the Company generally
will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries,
and controlled operating companies substantially all of whose business consists of providing services to the Company.
Portfolio Investment Classification
–
The Company classifies its investments in accordance with the requirements of
the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which the Company owns more than
25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate
Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not
have rights to maintain greater than 50% of the board representation. “Non-controlled, non-affiliate investments” are
defined as investments that are neither Control Investments or Affiliate Investments.
Cash
–
At
March 31, 2018, cash balances totaling $13.4 million exceeded FDIC insurance protection levels, subjecting the Company to risk
related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes
that the risk of loss associated with any uninsured balance is remote.
Deferred Financing Costs
–
Deferred financing costs consist of fees and expenses paid in connection with the credit facility
(as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which
approximate the effective interest method over the term of the Credit Facility.
Deferred Note Offering Costs
–
Deferred note offering costs consist of fees and expenses paid in connection
with the Notes (as defined in Note 9) and are capitalized at this time as these fees and expenses were incurred before the issuance
commenced. These costs are amortized using the straight line method, which approximate the effective interest method over the
term of the Notes.
Valuation of Portfolio Investments
– Portfolio
investments are carried at fair value as determined by the
Board of Directors (the ‘‘Board’’)
of Alcentra
.
The methodologies used in determining these valuations include:
(1) Preferred shares/membership units and common shares/membership
units
In determining estimated fair
value for common shares/membership units and preferred shares, the Company makes assessments of the methodologies and value measurements
which market participants would use in pricing comparable investments, based on market data obtained from independent sources as
well as from the Company’s own assumptions and taking into account all material events and circumstance which would affect
the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair
value of the investments. These include but are not limited to the following:
(i) Any material changes in the
(a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment
operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio
investment, and (e) financial position or operating results of the investment; (ii) pending disposition by the Company of the major
portfolio investment; and (iii) sales prices of recent public or private transactions in identical or comparable investments.
One or a combination of the following
valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices
and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income
Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows
to a net present value amount).
(2) Debt
The fair
value of performing debt investments is typically derived utilizing a market yield analysis. In a market yield analysis, a price
is ascribed to each debt investment based upon an assessment of current and expected market yields for similar debt investments
and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms
and risks associated with a debt investment.
The Company considers many factors
in evaluating the most suitable point within the range of fair values, including, but not limited to, the following:
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·
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the portfolio company’s underlying operating performance
and any related trends;
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|
·
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the improvement or decline in the underlying credit quality
measured on the basis of a loan-to-enterprise value ratio and total outstanding debt to EBITDA ratio; and
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·
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changes or issues related to the portfolio company’s
customer/supplier concentration, regulatory developments and other portfolio company specific considerations.
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(3) Warrants
Where warrants are considered
to be in the money, their incremental value is included within the valuation of the investments.
Valuation techniques are applied consistently from period to
period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair
value. The valuation process begins with each investment being initially valued by the investment professionals of the Adviser.
Preliminary valuation conclusions are then documented and discussed with senior investment professionals of the Adviser. The Investment
Committee of the Adviser reviews the valuation of the investment professionals and then determines the recommended fair value of
each investment in good faith based on the input of the investment professionals.
With respect to the Company’s valuation process, the Board
undertakes a similar multi-step valuation process each quarter, as described below:
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•
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Alcentra’s quarterly valuation process begins with
each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the
portfolio investment;
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•
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preliminary valuation conclusions will then be documented
and discussed with Alcentra’s senior management and the Adviser;
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•
|
Independent valuation firms engaged by the valuation committee
of the board of directors prepare preliminary valuations on a selected basis and submit the reports to the board of directors;
and
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•
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the valuation committee of the board of directors then
reviews these preliminary valuations and makes a recommendation to the board of directors with respect thereto: and
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•
|
the board of directors then discusses valuations and approves
the fair value of each such investment in good faith, based on the input of the Adviser, the independent valuation firms and the
valuation committee.
|
The valuation committee of the board of directors has authorized
the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent
valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio
will be reviewed at least annually by independent valuation firms; however, our Board does not have
de minimis
investments
of less than 1% of our gross assets (up to an aggregate of 10% of our gross assets) independently reviewed. The valuation committee
of the board of directors is ultimately and solely responsible for the valuation of its portfolio investments at fair value as
approved in good faith pursuant to its valuation policy and a consistently applied valuation process.
Because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a readily available market for the securities existed
or from those which will ultimately be realized.
Organizational and Offering
Costs
–
Organization expenses, including reimbursement payments to the Adviser,
are expensed on the Company’s Consolidated Statements of Operations. These expenses consist principally of legal and accounting
fees incurred in connection with the organization of the Company and have been expensed as incurred. Offering expenses consist
principally of underwriter’s fee, legal, accounting, printing fees and other related expenses associated with the filing
of a registration statement. Offering costs are offset against proceeds of the offering in paid-in capital in excess of par in
the Consolidated Statements of Changes in Net Assets. $1.56 million of offering costs were incurred with the initial public offering.
Paid-In-Capital
–
The Company records the proceeds from the sale of its common stock on a net basis to (i)
capital stock and (ii) paid in capital in excess of par value, excluding all commissions
Earnings and Net Asset Value Per Share
– Earnings
per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period.
Net Asset Value per share is calculated using the number of shares outstanding as of the end of the period.
Investments
– Investment security transactions
are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired
including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the accretion
of original issue discounts. Fees may be charged to the issuer by the Company in connection with the origination of a debt security
financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income
over the life of the related debt security.
Original Issue Discount
– When the Company receives
warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the
cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity,
the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”)
to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.
Interest and Dividend Income
– Interest is recorded
on the accrual basis to the extent that the Company expects to collect such amounts. The Company accrues paid in-kind interest
(“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded
on ex-dividend date. Dividends in-kind are recorded as an increase in cost basis of investments and as income.
Investments that are expected to pay regularly scheduled interest
in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or
when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored
to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue
timely payment of their remaining principal and interest obligations. Cash interest payments received on non-accrual designated
investments may be recognized as income or applied to principal depending on management’s judgment. There were four non-accrual
investments as of March 31, 2018 and three non-accrual investment as of December 31, 2017.
Other Income
– The Company may also receive structuring
or closing fees in connection with its investments. Such upfront fees are accreted into income over the life of the investment.
These fees are non-recurring in nature.
Prepayment penalties received by the Company for debt instruments
paid back to the Company prior to the maturity date are recorded as income upon receipt.
Income Taxes
– The Company has elected to be treated
for U.S. federal income tax purposes as a RIC under Subchapter M of the Code, and to operate in a manner so as to qualify for the
tax treatment applicable to RIC’s. To obtain and maintain our qualification for taxation as a RIC, the Company must, among
other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to
its stockholders, for each taxable year, at least 90% of ‘‘investment company taxable income,’’ which is
generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital
losses, or the Annual Distribution Requirement. As a RIC, the Company generally will not pay corporate-level U.S. federal income
taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.
The Taxable Subsidiary permits the Company to hold equity investments
in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source
income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiary is not consolidated with the Company
for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of
its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities
are reflected in the Company’s consolidated financial statements. For the three months ended March 31, 2018 and March 31,
2017, the Company recognized a benefit (provision) for income tax on unrealized gain (loss) on investments of $0 million and $(0.7)
million, respectively, for the Taxable Subsidiaries. As of March 31, 2018 and December 31, 2017, $4.9 million and $4.9 million,
respectively, was included in the deferred tax asset on the Consolidated Statements of Assets and Liabilities.
Indemnification
– In the normal course of business,
the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities
arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant
to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve
future claims that may be made against the Company that have not yet occurred. However, based on management’s experience,
the Company expects the risk of loss to be remote.
Recently Issued Accounting Standards
- In October 2016,
the U.S. Securities and Exchange Commission adopted new rules and amended rules (together, “final rules”) intended
to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation
S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other
amendments. The compliance date for the amendments to Regulation S-X was August 1, 2017. The Company has adopted and implemented
the amendments to Regulation S-X.
In November 2016, the FASB issued ASU 2016-18, Statement of
Cash Flows, which will amend FASB ASC 230. The amendments in this Update require that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. The amendments in this Update apply to all entities that have restricted cash or restricted cash equivalents and are required
to present a statement of cash flows under Topic 230. For public business entities, the amendments are effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption
in an interim period. The Company is evaluating the impact of ASU 2016-18 on its consolidated financial statements and disclosures.
In December 2016, the FASB issued ASU 2016-19, Technical Corrections
and Improvements. As part of this guidance, ASU 2016-19 amends FASB ASC 820 to clarify the difference between a valuation approach
and a valuation technique. The amendment also requires an entity to disclose when there has been a change in either or both a valuation
approach and/or a valuation technique. ASU 2016-19 is effective on a prospective basis for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. The Company
has evaluated the impact of ASU 2016-19 on its consolidated financial statements and disclosures and determined that the adoption
of ASU 2016-19 has not had a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Premium Amortization
on Purchased Callable Debt Securities, which will amend FASB ASC 310-20. The amendments in this Update shorten the amortization
period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest
call date. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company
is evaluating the impact of ASU 2017-08 on its consolidated financial statements and disclosures.
In May 2014, the FASB issued ASC 606, Revenue From Contracts
With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016.
On August 12, 2015, the FASB issued an ASU, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date,
which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts
with customers. For public business entities, ASC 606 is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017. The Company has evaluated
the impact of ASC 606 and does not currently believe that the application of ASC 606 will have a material impact on its consolidated
financial statements and disclosures.
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3.
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Fair Value of Portfolio Investments
|
The Company accounts for its investments in accordance with
FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”),
Fair Value Measurements and Disclosures,
which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which
prioritizes and ranks the level of market price observability used in measuring investments at fair value.
Market price observability is impacted by a number of factors,
including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the
existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices
or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of
market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified
and disclosed in one of the following categories (from highest to lowest) based on inputs:
Level 1
– Quoted
prices (unadjusted) are available in active markets for identical investments that the Company has the ability to access as of
the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and
listed derivatives. As required by ASC Topic 820, the Company, to the extent that it holds such investments, does not adjust the
quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact
the quoted price.
Level 2
– Pricing
inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those
used in Level 1. Fair Value is based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3
– Pricing
inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment.
The inputs into the determination of fair value require significant judgment or estimation by the Company. The types of investments
which would generally be included in this category include debt and equity securities issued by private entities.
In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value
hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement.
The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the investment.
The fair values of our investments disaggregated into the three
levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of March 31, 2018
are as follows:
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|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Senior Secured - First Lien
|
|
$
|
—
|
|
|
$
|
8,085,530
|
|
|
$
|
160,026,333
|
|
|
$
|
168,111,863
|
|
|
Senior Secured - Second Lien
|
|
|
—
|
|
|
|
4,869,445
|
|
|
|
21,203,690
|
|
|
|
26,073,135
|
|
|
Subordinated Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
41,358,480
|
|
|
|
41,358,480
|
|
|
CLO/Structured Credit
|
|
|
—
|
|
|
|
5,347,625
|
|
|
|
—
|
|
|
|
5,347,625
|
|
|
Equity/Other
|
|
|
—
|
|
|
|
—
|
|
|
|
29,295,760
|
|
|
|
29,295,760
|
|
|
Total Investments
|
|
$
|
—
|
|
|
$
|
18,302,600
|
|
|
$
|
251,884,263
|
|
|
$
|
270,186,863
|
|
|
The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2017 are as follows:
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Senior Secured - First Lien
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
177,340,027
|
|
|
$
|
177,340,027
|
|
|
Senior Secured - Second Lien
|
|
|
—
|
|
|
|
—
|
|
|
|
14,203,691
|
|
|
|
14,203,691
|
|
|
Subordinated Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
66,884,849
|
|
|
|
66,884,849
|
|
|
Equity/Other
|
|
|
—
|
|
|
|
—
|
|
|
|
29,125,978
|
|
|
|
29,125,978
|
|
|
Total Investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
287,554,545
|
|
|
$
|
287,554,545
|
|
The changes in investments classified as Level 3 are as follows
for the three months ended March 31, 2018 and March 31, 2017.
As of March 31, 2018:
|
|
|
Senior
|
|
|
Senior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured -
|
|
|
Secured -
|
|
|
Senior
|
|
|
Equity/
|
|
|
|
|
|
|
|
First Lien
|
|
|
Second Lien
|
|
|
Subordinated
|
|
|
Other
|
|
|
Total
|
|
|
Balance as of January 1, 2018
|
|
$
|
177,340,027
|
|
|
$
|
14,203,691
|
|
|
$
|
66,884,849
|
|
|
$
|
29,125,978
|
|
|
$
|
287,554,545
|
|
|
Amortized discounts/premiums
|
|
|
65,851
|
|
|
|
(6,335
|
)
|
|
|
116,605
|
|
|
|
-
|
|
|
|
176,121
|
|
|
Paid in-kind interest
|
|
|
69,813
|
|
|
|
-
|
|
|
|
169,640
|
|
|
|
83,323
|
|
|
|
322,776
|
|
|
Net realized gain (loss)
|
|
|
8,185
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,000
|
)
|
|
|
(14,815
|
)
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
(116,675
|
)
|
|
|
76,334
|
|
|
|
(283,272
|
)
|
|
|
86,459
|
|
|
|
(237,154
|
)
|
|
Purchases
|
|
|
4,781,840
|
|
|
|
6,930,000
|
|
|
|
(854
|
)
|
|
|
-
|
|
|
|
11,710,986
|
|
|
Sales/Return of capital
|
|
|
(22,122,708
|
)
|
|
|
-
|
|
|
|
(25,528,488
|
)
|
|
|
23,000
|
|
|
|
(47,628,196
|
)
|
|
Transfers in
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Transfers out
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance as of March 31, 2018
|
|
$
|
160,026,333
|
|
|
$
|
21,203,690
|
|
|
$
|
41,358,480
|
|
|
$
|
29,295,760
|
|
|
$
|
251,884,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation (depreciation) from investments still held as of March 31, 2018
|
|
$
|
(31,130
|
)
|
|
$
|
76,334
|
|
|
$
|
(14,848
|
)
|
|
$
|
86,459
|
|
|
$
|
116,815
|
|
As of March 31, 2017:
|
|
|
Senior
|
|
|
Senior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured -
|
|
|
Secured -
|
|
|
Senior
|
|
|
Equity/
|
|
|
|
|
|
|
|
First Lien
|
|
|
Second Lien
|
|
|
Subordinated
|
|
|
Other
|
|
|
Total
|
|
|
Balance as of January 1, 2017
|
|
$
|
95,684,153
|
|
|
$
|
84,864,909
|
|
|
$
|
74,050,349
|
|
|
$
|
21,673,539
|
|
|
$
|
276,272,950
|
|
|
Amortized discounts/premiums
|
|
|
87,244
|
|
|
|
872,973
|
|
|
|
20,378
|
|
|
|
-
|
|
|
|
980,595
|
|
|
Paid in-kind interest
|
|
|
216,925
|
|
|
|
150,383
|
|
|
|
263,160
|
|
|
|
271,205
|
|
|
|
901,673
|
|
|
Net realized gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,049,239
|
)
|
|
|
(1,049,239
|
)
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
(867,897
|
)
|
|
|
(4,147,651
|
)
|
|
|
(197,548
|
)
|
|
|
3,425,613
|
|
|
|
(1,787,483
|
)
|
|
Purchases
|
|
|
26,509,556
|
|
|
|
1,096,609
|
|
|
|
2,287,080
|
|
|
|
1,300,020
|
|
|
|
31,193,265
|
|
|
Sales/Return of capital
|
|
|
(600,278
|
)
|
|
|
(18,631,777
|
)
|
|
|
(267
|
)
|
|
|
(3,950,761
|
)
|
|
|
(23,183,083
|
)
|
|
Transfers in
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Transfers out
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance as of March 31, 2017
|
|
$
|
121,029,703
|
|
|
$
|
64,205,446
|
|
|
$
|
76,423,152
|
|
|
$
|
21,670,377
|
|
|
$
|
283,328,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation (depreciation) from investments still held as of March 31, 2017
|
|
$
|
(867,899
|
)
|
|
$
|
(3,520,217
|
)
|
|
$
|
(197,548
|
)
|
|
$
|
2,125,614
|
|
|
$
|
(2,460,050
|
)
|
The following is a summary of the quantitative inputs and assumptions
used for items categorized in Level 3 of the fair value hierarchy as of March 31, 2018 and December 31, 2017, respectively.
As of March 31, 2018:
|
|
|
Fair Value at
|
|
|
|
|
|
|
Range
|
|
|
|
|
|
Assets at Fair Value
|
|
March
31,
2018
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
of
Inputs
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured - First Lien
|
|
$
|
160,026,333
|
|
|
Yield to Maturity
|
|
Comparable Market Rate
|
|
|
8.7% - 14.0%
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured - Second Lien
|
|
$
|
21,203,690
|
|
|
Yield to Maturity
|
|
Comparable Market Rate
|
|
|
10.3% - 15.0%
|
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated
|
|
$
|
41,358,480
|
|
|
Yield to Maturity
|
|
Comparable Market Rate
|
|
|
4.0% - 14.7%
|
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Ownership
|
|
$
|
19,746,122
|
|
|
Market Approach
|
|
Enterprise Value/
LTM EBITDA Multiple
|
|
|
4.5x - 13.0x
|
|
|
|
9.3
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Ownership/
Common Warrants
|
|
$
|
9,549,638
|
|
|
Market Approach
|
|
Enterprise Value/
LTM EBITDA Multiple
|
|
|
4.5x - 13.0x
|
|
|
|
7.7
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
251,884,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value
|
|
December
31,
2017
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
of
Inputs
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured - First Lien
|
|
$
|
177,340,027
|
|
|
Yield to Maturity
|
|
Comparable Market Rate
|
|
|
8.0% - 17.0%
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured - Second Lien
|
|
$
|
14,203,691
|
|
|
Yield to Maturity
|
|
Comparable Market Rate
|
|
|
12.3% - 25.0%
|
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated
|
|
$
|
66,884,849
|
|
|
Yield to Maturity
|
|
Comparable Market Rate
|
|
|
4.0% - 14.7%
|
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Ownership
|
|
$
|
19,751,824
|
|
|
Market Approach
|
|
Enterprise Value/ LTM EBITDA Multiple
|
|
|
4.5x - 13.0x
|
|
|
|
9.3
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Ownership/
Common Warrants
|
|
$
|
9,374,154
|
|
|
Market Approach
|
|
Enterprise Value/ LTM EBITDA Multiple
|
|
|
4.5x - 13.0x
|
|
|
|
8.3
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
287,554,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 2, 2017, the Board of Directors approved a $2.5
million open market stock repurchase program. Pursuant to the program, we are authorized to repurchase up to $2.5 million in aggregate
of our common stock in the open market. The timing, manner, price and amount of any share repurchases will be determined by our
management, in its discretion, based upon the evaluation of economic conditions, stock price, applicable legal and regulatory requirements
and other factors. Repurchases under the program are authorized through November 2, 2018.
On November 16, 2017, the Board of Directors approved to expand
the open market stock repurchase program to $5.0 million and extend the length of the program to January 31, 2019.
The following tables set forth the number of shares of common
stock repurchased by the Company under its share repurchase program for the three months ended March 31, 2018 and 2017:
As of March 31, 2018:
|
Month Ended
|
|
Shares Repurchased
|
|
|
Repurchase Price
Per Share
|
|
|
Aggregate
Consideration for
Repurchased
Shares
|
|
|
January 2018
|
|
|
16,786
|
|
|
|
$8.01 - $8.22
|
|
|
$
|
136,949
|
|
|
March 2018
|
|
|
195,785
|
|
|
|
$6.05 - $7.24
|
|
|
|
1,373,656
|
|
|
Total
|
|
|
212,571
|
|
|
|
|
|
|
$
|
1,510,605
|
|
As of March 31, 2017:
|
Month Ended
|
|
Shares Repurchased
|
|
|
Repurchase Price
Per Share
|
|
|
Aggregate
Consideration for
Repurchased
Shares
|
|
|
January 31, 2017
|
|
|
14,574
|
|
|
|
$12.13 - $12.49
|
|
|
$
|
165,514
|
|
The Company intends to make quarterly distributions of available
net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date.
The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings
estimated by management. Net realized capital gains, if any, will be distributed at least annually. If the Company does not distribute
(or are not deemed to have distributed) at least 98% of the Company's annual ordinary income in the calendar year earned, the Company
will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income exceed the
distributions from such taxable income for the year. To the extent that the Company determines that its estimated current year
annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company
accrues excise taxes, if any, on estimated excess taxable income. As of March 31, 2018 and December 31, 2017, the Company accrued
$329,574 and $250,496, respectively, for any unpaid potential excise tax liability and have included these amounts within income
tax asset or liability on the accompanying Consolidated Statements of Assets and Liabilities.
The following table reflects the Company’s dividends declared
and paid on its common stock for the three months ended March 31, 2018:
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount Per Share
|
|
|
March 8, 2018
|
|
March 30, 2018
|
|
April 4, 2018
|
|
$
|
0.180
|
|
The following table reflects the Company’s dividends declared
and paid on its common stock for the three months ended March 31, 2017:
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount Per Share
|
|
|
March 9, 2017
|
|
March 31, 2017
|
|
April 6, 2017
|
|
$
|
0.340
|
|
|
March 9, 2017
|
|
March 31, 2017
|
|
April 6, 2017
|
|
$
|
0.030
|
|
The Company has adopted a dividend reinvestment plan (“DRIP”)
that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends
in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP
no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s
common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common
stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon
the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in
the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the
plan administrator, before any associated brokerage or other costs.
|
|
6.
|
Related Party Transactions
|
Management Fee
Under the Investment Advisory Agreement, the Company has agreed
to pay Alcentra NY an annual base management fee based on its gross assets as well as an incentive fee based on its performance.
The base management fee is calculated at an annual rate as follows: 1.75% of its gross assets (i.e., total assets held before deduction
of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents
(such as investments in U.S. Treasury Bills), if its gross assets are below $625 million; 1.625% if its gross assets are between
$625 million and $750 million; and 1.5% if its gross assets are greater than $750 million. The various management fee percentages
(i.e. 1.75%, 1.625% and 1.5%) would apply to the Company's entire gross assets in the event its gross assets exceed the various
gross asset thresholds. The base management fee will be payable quarterly in arrears and shall be calculated based on the average
value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar
quarters.
The incentive fee consists of two parts. The first part, which
is calculated and payable quarterly in arrears, equals 20% of the Company's ‘‘pre-incentive fee net investment income’’
for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter, and is subject to a ‘‘catch-up’’
feature. The “catch-up” feature is intended to provide the Adviser with an incentive fee of 50% of the Company’s
“pre-incentive fee net investment income” as if a preferred return did not apply when our net investment income exceeds
2.5% in any quarter.
The foregoing incentive fee is subject to a total return requirement,
which provides that no incentive fee in respect of our pre-incentive fee net investment income is payable except to the extent
20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds
the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive
fee that is payable in a calendar quarter is limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net
investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii)
(x) 20.0% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar
quarters
minus
(y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing
purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum
of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for our then
current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest
(such as PIK interest or OID) is paid to the Adviser, without any interest thereon, only if and to the extent that the Company
actually receives such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed
in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal
of such accounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal
of incentive fees payable) and would result in a reduction and possible elimination of the incentive fees for such quarter. There
is no accumulation of amounts on the hurdle rate or preferred return from quarter to quarter, and accordingly there is no clawback
of amounts previously paid if subsequent quarters are below the quarterly hurdle, and there is no delay of payment if prior quarters
are below the quarterly hurdle.
The second part is calculated and payable in arrears as of the
end of each calendar year (or, upon termination of the Investment Advisory Agreement, as of the termination date) and equals 20%
of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate
cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less
the aggregate amount of any previously paid capital gain incentive fees. Pre-incentive fee net investment income means interest
income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence,
managerial assistance and consulting fees or other fees that the Company receives from portfolio companies) accrued during the
calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative
services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding
preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding
certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral
of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a deferred interest feature
(such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income until the Company
has received such income in cash.
For the three months ended March 31, 2018, the Company recorded
expenses for base management fees of $1,234,863, of which $0 was waived by the Adviser and $1,234,863 was payable at March 31,
2018. For the three months ended March 31, 2017, the Company recorded expenses for base management fees of $1,249,569, of which
$0 was waived by the Adviser and $2,551,159 was payable at March 31, 2017.
For the three months ended March 31, 2018 and March 31, 2017,
the Company incurred incentive fees of $0 and $653,911, respectively, of which $0 and $0 was waived by the Adviser and $1,294,985
and $1,849,135 was payable at March 31, 2018 and March 31, 2017, respectively. For the three months ended March 31, 2018 and March
31, 2017, the Company incurred capital gains incentive fees of $0, of which $0 was waived by the Adviser.
The independent directors of the Company each receive an annual
fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending
in person each board of directors meeting and $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection
with attending each board meeting telephonically. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses
incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the
audit committee, the nominating and corporate governance committee, the valuation committee and the compensation committee will
receive an annual fee of $10,000, $5,000, $5,000 and $5,000, respectively. The Lead Independent Director will receive an annual fee of $15,000. The Company has obtained directors’ and officers’
liability insurance on behalf of its directors and officers.
For the three months ended March 31, 2018 and March 31, 2017
the Company recorded directors' fee expense of $96,202 and $68,136, respectively, of which $72,250 and $81,000 was payable at March
31, 2018 and March 31, 2017, respectively.
|
|
8.
|
Purchases and Sales (Investment Transactions)
|
Investment purchases, sales and principal payments/paydowns
are summarized below for the three months ended March 31, 2018 and March 31, 2017.
|
|
|
For the three months ended March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Investment purchases, at cost (including PIK interest and dividends)
|
|
$
|
30,318,967
|
|
|
$
|
32,094,938
|
|
|
Investment sales, proceeds (including principal payments/paydown proceeds)
|
|
|
47,628,196
|
|
|
|
23,183,083
|
|
|
|
9.
|
Alcentra Capital InterNotes®
|
On January 30, 2015, the Company entered into a Selling Agent
Agreement with Incapital LLC, as purchasing agent for the Company's issuance of $40.0 million of Alcentra Capital InterNotes®.
On January 25, 2016, the Company entered into an additional Selling Agent Agreement with Incapital LLC, as purchasing agent for
the Company’s issuance of up to $15 million of Alcentra Capital InterNotes®.
These notes are direct unsecured obligations and each series
of notes will be issued by a separate trust (administered by U.S. Bank). These notes bear interest at fixed interest rates and
offer a variety of maturities no less than twelve months from the original date of issuance.
During the three months ended March 31, 2018, the Company issued
$0 million in aggregate principal amount of the Alcentra Capital InterNotes® for net proceeds of $0 million. For the three
months ended March 31, 2018 and 2017, the Company borrowed an average of $55.0 million and $55.0 million with a weighted average
interest rate of 6.47% and 6.47%, respectively.
The following table summarizes the Alcentra Capital InterNotes®
issued and outstanding during the three months ended March 31, 2018.
Tenor at
Origination
|
|
Principal
Amount
|
|
|
Interest
Rate
|
|
|
Weighted
Average
|
|
|
|
|
|
(in years)
|
|
(000’s omitted)
|
|
|
Range
|
|
|
Interest Rate
|
|
|
Maturity Date Range
|
|
|
5
|
|
$
|
53,582
|
|
|
|
6.25% - 6.50%
|
|
|
|
6.38
|
%
|
|
|
February 15, 2020 - June 15, 2021
|
|
|
7
|
|
|
1,418
|
|
|
|
6.50% - 6.75%
|
|
|
|
6.63
|
%
|
|
|
January 15, 2022 - April 15, 2022
|
|
|
|
|
$
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the issuance of the Alcentra Capital InterNotes®,
the Company incurred $1.196 million of fees which are being amortized over the term of the notes and are included within deferred
financing costs on the Consolidated Statements of Assets and Liabilities as of March 31, 2018. During the three months ended March
31, 2018 the Company recorded $0.126 million of interest costs and amortization of offering costs on the Alcentra Capital InterNotes®
as interest expense.
|
|
10.
|
Credit Facility/Line of Credit
|
On May 8, 2014, the Company entered into a senior
secured revolving credit agreement (the “Credit Facility”) with ING Capital LLC (“ING”), as administrative
agent, collateral agent and lender, and the lenders from time to time party thereto, to provide liquidity in support of its investment
and operational activities. The Credit Facility had an initial commitment of $80 million with an accordion feature that allowed
for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial
covenants. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase
of the total commitments up to $250 million, subject to satisfaction of certain conditions at the time of any such future increase.
As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum
equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii)
3.25% plus the one, three or six month LIBOR rate, as applicable.
On March 2, 2016, the Company amended certain provisions of
the Credit Facility relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding Notes
that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month
period prior to the maturity of these particular Notes, which mature between February 15 and April 15, 2020, the Company's ability
to borrow under the Credit Facility will be reduced by and in the amount of such Notes still outstanding during such time. The
Credit Facility is secured primarily by the Company’s assets. Costs of $3.8 million were incurred in connection with obtaining
and amending the Credit Facility, which have been recorded as deferred financing costs on the Consolidated Statements of Assets
and Liabilities and are being amortized over the life of the Credit Facility.
Amounts available to borrow under the Credit Facility are subject
to a minimum borrowing /collateral base that applies an advance rate to certain investments held by the Company. The Company is
subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions
on sector concentrations, loan size, portfolio company leverage which may affect the borrowing base and therefore amounts available
to borrow.
The Company pays a commitment fee between 0.5% and 1.0% per
annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s
Consolidated Statements of Operations.
The Company has made customary representations and warranties
and is required to comply with various covenants and reporting requirements. These covenants are subject to important limitations
and exceptions that are described in the documents governing the Credit Facility. On March 9, 2018, the Company entered into Amendment
No. 6 (the “Amendment”) to its Credit Facility. The Credit Facility was amended to modify certain financial covenants
to (i) reduce the stockholders’ equity that the Company is required to maintain for the period from December 31, 2017 to
June 30, 2018, (ii) reduce the asset coverage ratio that the Company is required to maintain from 2.25 to 2.00 for the period from
December 31, 2017 to June 30, 2018, and (iii) reduce the net worth that the Company is required to maintain from $149,559,368 to
$126,201,991 for the period from December 31, 2017 to June 30, 2018. The Credit Facility also contains customary events of default,
including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of
covenant, cross-default to other indebtedness, bankruptcy, and certain change in control events. As of March 31, 2018, and after
giving effect to the Amendment, the Company was in compliance in all material respects with the terms of the Credit Facility.
As of March 31, 2018 and December 31, 2017, the Company had
United States dollar borrowings of $55.4 million and $89.7 million outstanding under the Credit Facility, respectively. For the
three months ended March 31, 2018 and March 31, 2017, the Company borrowed an average of $56.4 million and $38.9 million, respectively,
with a weighted average interest rate of 4.91% and 4.27%, respectively.
|
|
11.
|
Market and Other Risk Factors
|
At March 31, 2018, a portion of the Company’s
portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an
illiquid marketplace. The portfolio is comprised of investments in the 21 industries listed in Note 13. Risks affecting
these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions
and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of
the Company’s investments.
The Company estimates the fair value of investments for which
observable market prices in active markets do not exist based on the best information available, which may differ significantly
from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.
Market conditions may deteriorate, which may negatively impact
the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.
The above events are beyond the control of the Company and cannot
be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties.
There may also be risk associated with the concentration of investments in one geographic region or in certain industries.
|
|
12.
|
Commitments and Contingencies
|
In the normal course of business, the Company enters into contracts
that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has
agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss,
claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted
in good faith. The Company expects the risk of loss related to its indemnifications to be remote.
The Company’s investment portfolio may contain debt investments
that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when
requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2018 and December
31, 2017, the Company had $12.4 million and $17.2 million in unfunded commitments under loan and financing agreements, respectively.
As of March 31, 2018 and December 31, 2017, the Company’s unfunded commitment under loan and financing agreements are presented
below.
|
|
|
As of
|
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Cirrus Medical Staffing, Inc.
|
|
$
|
2,618,182
|
|
|
$
|
4,000,000
|
|
|
Healthcare Associates of Texas, LLC
|
|
|
4,000,000
|
|
|
|
6,900,000
|
|
|
IGT
|
|
|
-
|
|
|
|
500,000
|
|
|
NTI Holdings, LLC
|
|
|
1,258,540
|
|
|
|
1,258,540
|
|
|
Pharmalogics Recruiting, LLC
|
|
|
2,000,000
|
|
|
|
2,000,0000
|
|
|
Superior Controls, Inc.
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
Total
|
|
$
|
12,376,722
|
|
|
$
|
17,158,540
|
|
|
|
13.
|
Classification of Portfolio Investments
|
As of March 31, 2018, the Company’s portfolio investments
were categorized as follows:
|
Industry
|
|
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets*
|
|
|
Healthcare Services
|
|
$
|
49,095,740
|
|
|
$
|
49,190,603
|
|
|
|
31.30
|
%
|
|
Business Services
|
|
|
46,169,106
|
|
|
|
46,502,027
|
|
|
|
29.58
|
%
|
|
Technology & Telecom
|
|
|
23,810,912
|
|
|
|
23,353,553
|
|
|
|
14.86
|
%
|
|
Industrial Services
|
|
|
21,772,785
|
|
|
|
21,635,435
|
|
|
|
13.76
|
%
|
|
High Tech Industries
|
|
|
20,722,196
|
|
|
|
20,760,955
|
|
|
|
13.21
|
%
|
|
Telecommunications
|
|
|
17,579,877
|
|
|
|
19,617,336
|
|
|
|
12.48
|
%
|
|
Wholesale/Distribution
|
|
|
15,179,205
|
|
|
|
15,614,192
|
|
|
|
9.93
|
%
|
|
Security
|
|
|
15,388,870
|
|
|
|
14,153,009
|
|
|
|
9.00
|
%
|
|
Retail
|
|
|
13,287,908
|
|
|
|
13,676,206
|
|
|
|
8.70
|
%
|
|
Oil & Gas Services
|
|
|
16,263,301
|
|
|
|
11,225,377
|
|
|
|
7.14
|
%
|
|
Environmental/Recycling Services
|
|
|
6,474,293
|
|
|
|
6,693,294
|
|
|
|
4.26
|
%
|
|
Media: Advertising, Printing & Publishing
|
|
|
12,677,834
|
|
|
|
6,554,225
|
|
|
|
4.17
|
%
|
|
Transportation Logistics
|
|
|
7,674,454
|
|
|
|
5,474,294
|
|
|
|
3.48
|
%
|
|
USD CLO
|
|
|
5,347,625
|
|
|
|
5,347,625
|
|
|
|
3.40
|
%
|
|
Insurance
|
|
|
4,845,217
|
|
|
|
4,869,445
|
|
|
|
3.10
|
%
|
|
Waste Services
|
|
|
2,529,303
|
|
|
|
2,771,797
|
|
|
|
1.76
|
%
|
|
Consumer Services
|
|
|
2,035,000
|
|
|
|
2,028,440
|
|
|
|
1.29
|
%
|
|
Industrial Manufacturing
|
|
|
500,000
|
|
|
|
719,046
|
|
|
|
0.47
|
%
|
|
Media & Entertainment
|
|
|
10,355,366
|
|
|
|
2
|
|
|
|
0.0
|
%
|
|
Automotive Business Services
|
|
|
8,496,239
|
|
|
|
1
|
|
|
|
0.0
|
%
|
|
Education
|
|
|
15,863,517
|
|
|
|
1
|
|
|
|
0.0
|
%
|
|
Total
|
|
$
|
316,068,748
|
|
|
$
|
270,186,863
|
|
|
|
171.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured - First Lien
|
|
$
|
172,559,747
|
|
|
$
|
168,111,863
|
|
|
|
106.95
|
%
|
|
Senior Subordinated
|
|
|
56,154,289
|
|
|
|
41,358,480
|
|
|
|
26.31
|
%
|
|
Equity/Other
|
|
|
45,907,387
|
|
|
|
29,295,760
|
|
|
|
18.64
|
%
|
|
Senior Secured - Second Lien
|
|
|
36,099,700
|
|
|
|
26,073,135
|
|
|
|
16.59
|
%
|
|
CLO/Structured Credit
|
|
|
5,347,625
|
|
|
|
5,347,625
|
|
|
|
3.40
|
%
|
|
Total
|
|
$
|
316,068,748
|
|
|
$
|
270,186,863
|
|
|
|
171.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Fair value as a percentage of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
|
|
$
|
93,534,143
|
|
|
$
|
72,546,667
|
|
|
|
46.15
|
%
|
|
South
|
|
|
61,512,509
|
|
|
|
53,181,960
|
|
|
|
33.84
|
%
|
|
Northeast
|
|
|
48,441,597
|
|
|
|
45,660,945
|
|
|
|
29.05
|
%
|
|
Midwest
|
|
|
40,555,021
|
|
|
|
34,187,044
|
|
|
|
21.75
|
%
|
|
West
|
|
|
41,654,345
|
|
|
|
34,031,063
|
|
|
|
21.65
|
%
|
|
Canada
|
|
|
22,988,508
|
|
|
|
23,199,999
|
|
|
|
14.76
|
%
|
|
US
|
|
|
5,347,625
|
|
|
|
5,347,625
|
|
|
|
3.40
|
%
|
|
Netherlands
|
|
|
2,035,000
|
|
|
|
2,031,560
|
|
|
|
1.29
|
%
|
|
Total
|
|
$
|
316,068,748
|
|
|
$
|
270,186,863
|
|
|
|
171.89
|
%
|
As of December 31, 2017, the Company’s portfolio investments
were categorized as follows:
|
Industry
|
|
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets*
|
|
|
Healthcare Services
|
|
$
|
55,159,796
|
|
|
$
|
55,289,718
|
|
|
|
35.06
|
%
|
|
Business Services
|
|
|
51,334,231
|
|
|
|
51,724,999
|
|
|
|
32.80
|
%
|
|
Industrial Services
|
|
|
29,762,072
|
|
|
|
29,668,447
|
|
|
|
18.81
|
%
|
|
Technology & Telecom
|
|
|
23,951,328
|
|
|
|
23,318,694
|
|
|
|
14.79
|
%
|
|
Wholesale/Distribution
|
|
|
19,281,908
|
|
|
|
19,684,932
|
|
|
|
12.48
|
%
|
|
High Tech Industries
|
|
|
18,677,481
|
|
|
|
18,729,396
|
|
|
|
11.88
|
%
|
|
Telecommunications
|
|
|
15,641,231
|
|
|
|
17,677,538
|
|
|
|
11.21
|
%
|
|
Retail
|
|
|
13,807,599
|
|
|
|
14,192,432
|
|
|
|
9.00
|
%
|
|
Security
|
|
|
15,358,937
|
|
|
|
14,135,409
|
|
|
|
8.96
|
%
|
|
Oil & Gas Services
|
|
|
16,193,495
|
|
|
|
11,168,822
|
|
|
|
7.08
|
%
|
|
Industrial Manufacturing
|
|
|
8,833,734
|
|
|
|
9,219,455
|
|
|
|
5.85
|
%
|
|
Environmental/Recycling Services
|
|
|
7,601,167
|
|
|
|
7,820,167
|
|
|
|
4.96
|
%
|
|
Media: Advertising, Printing & Publishing
|
|
|
12,677,834
|
|
|
|
6,678,442
|
|
|
|
4.22
|
%
|
|
Transportation Logistics
|
|
|
7,691,296
|
|
|
|
5,474,294
|
|
|
|
3.47
|
%
|
|
Waste Services
|
|
|
2,529,303
|
|
|
|
2,771,797
|
|
|
|
1.76
|
%
|
|
Media & Entertainment
|
|
|
10,355,366
|
|
|
|
2
|
|
|
|
0.0
|
%
|
|
Education
|
|
|
15,863,517
|
|
|
|
1
|
|
|
|
0.0
|
%
|
|
Automotive Business Services
|
|
|
8,496,239
|
|
|
|
—
|
|
|
|
0.0
|
%
|
|
Total
|
|
$
|
333,216,534
|
|
|
$
|
287,554,545
|
|
|
|
182.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
|
|
$
|
99,474,605
|
|
|
$
|
78,667,734
|
|
|
|
49.88
|
%
|
|
Northeast
|
|
|
57,107,756
|
|
|
|
54,446,210
|
|
|
|
34.52
|
%
|
|
West
|
|
|
57,327,891
|
|
|
|
49,593,273
|
|
|
|
31.45
|
%
|
|
South
|
|
|
56,444,310
|
|
|
|
48,087,167
|
|
|
|
30.49
|
%
|
|
Midwest
|
|
|
39,883,664
|
|
|
|
33,560,162
|
|
|
|
21.28
|
%
|
|
Canada
|
|
|
22,978,308
|
|
|
|
23,199,999
|
|
|
|
14.71
|
%
|
|
Total
|
|
$
|
333,216,534
|
|
|
$
|
287,554,545
|
|
|
|
182.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured - First Lien
|
|
$
|
181,664,266
|
|
|
$
|
177,340,027
|
|
|
|
112.44
|
%
|
|
Senior Subordinated
|
|
|
81,397,386
|
|
|
|
66,884,849
|
|
|
|
42.41
|
%
|
|
Equity/Other
|
|
|
45,824,064
|
|
|
|
29,125,978
|
|
|
|
18.47
|
%
|
|
Senior Secured - Second Lien
|
|
|
24,330,818
|
|
|
|
14,203,691
|
|
|
|
9.01
|
%
|
|
Total
|
|
$
|
333,216,534
|
|
|
$
|
287,554,545
|
|
|
|
182.33
|
%
|
*Fair value as a percentage of Net Assets
The following per share data and financial ratios have been
derived from information provided in the consolidated financial statements of the Company. The following is a schedule of financial
highlights for the three months ended March 31, 2018 and March 31, 2017.
|
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For the three months
ended
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For the three months
ended
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March 31, 2018
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March 31, 2017
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(Unaudited)
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(Unaudited)
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Per share data
(1)
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Net asset value, beginning of period
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$
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11.09
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$
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13.72
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Net investment income (loss)
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|
0.27
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|
0.34
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Net realized and unrealized gains (losses)
(7)
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0.04
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|
(0.21
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)
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Benefit (Provision) for taxes on unrealized appreciation (depreciation) on investments
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0.00
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(0.05
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)
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Net increase (decrease) in net assets resulting from operations
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0.31
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0.08
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Distributions to shareholders:
(2)
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From net investment income
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(0.18
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)
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(0.34
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)
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Net realized gains
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0.00
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|
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|
(0.03
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)
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Total dividend distributions declared
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(0.18
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)
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(0.37
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)
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Net asset value, end of period
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$
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11.22
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|
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$
|
13.43
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Market value per share, end of period
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$
|
6.96
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$
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13.74
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Total return based on net asset value
(3)(4)
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2.8
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%
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0.6
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%
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Total return based on market value
(3)(4)
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(14.9
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)%
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|
17.9
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%
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Shares outstanding at end of period
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|
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14,010,374
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|
|
|
13,437,059
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Ratio/Supplemental Data:
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Net assets, at end of period
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$
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157,182,400
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$
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180,418,443
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Ratio of total expenses before waiver to average net assets
(5)
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10.76
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%
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10.24
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%
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Ratio of interest expenses to average net assets
(5)
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|
4.63
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%
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|
4.03
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%
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Ratio of incentive fees to average net assets
(5)
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—
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%
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1.45
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%
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Ratio of net expenses to average net assets
(5)
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10.76
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%
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10.24
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%
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Ratio of net investment income (loss) before waiver to average net assets
(5)
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10.32
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%
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10.21
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%
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Ratio of net investment income (loss) after waiver to average net assets
(5)
|
|
|
10.32
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%
|
|
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10.21
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%
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|
|
|
|
|
|
|
|
|
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Total Credit Facility payable outstanding
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|
$
|
55,403,273
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|
|
$
|
46,933,273
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|
|
Total Notes payable outstanding
|
|
$
|
55,000,000
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|
|
$
|
55,000,000
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Asset coverage ratio
(6)
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2.4
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2.8
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Portfolio turnover rate
(4)
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|
|
11
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%
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|
|
8
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%
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(1)
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The per share data was derived by using the average shares
outstanding during the period.
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|
(2)
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The per share data for distributions is the actual amount
of distributions paid or payable per share of common stock outstanding during the entire period.
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(3)
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Returns are historical and are calculated by determining
the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested
at prices obtained under the Company’s dividend reinvestment plan.
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(5)
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Annualized, except for consulting fees.
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(6)
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Asset coverage ratio is equal to (i) the sum of (A) net
assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the
end of the period.
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(7)
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The amount shown at this caption is the balancing figure derived from the other figures in
the schedule. The amount shown at this caption for a share outstanding throughout the year may not agree with the change in
the aggregate gains and losses in portfolio securities for the year because of the timing of purchases or sales of the
Company's shares in relation to fluctuating market values for the portfolio.
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15.
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Unconsolidated Significant Subsidiaries
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In accordance with the SEC’s Regulation S-X and GAAP,
we have a subsidiary that is not required to be consolidated. We have a certain unconsolidated significant subsidiary, FST Technical
Services, LLC ("FST") that pursuant to Rule 4-08(g) of Regulation S-X, summarized financial information is presented
below in aggregate as of and for the three months ended March 31, 2018 and as of and for the year ended December 31, 2017.
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As of
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|
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|
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For the three months ended
|
|
|
Balance Sheet
|
|
March 31, 2018
|
|
|
Income Statement
|
|
March 31, 2018
|
|
|
|
|
|
|
|
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|
Current Assets
|
|
|
7,254,001
|
|
|
Net Sales
|
|
|
4,044,685
|
|
|
Noncurrent Assets
|
|
|
18,367,144
|
|
|
Gross Profit
|
|
|
1,314,079
|
|
|
Current Liabilities
|
|
|
1,782,310
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|
Net Income/EBITDA
|
|
|
708,274
|
|
|
Noncurrent Liabilities
|
|
|
14,003,599
|
|
|
|
|
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As of
|
|
|
|
|
For the year ended
|
|
|
Balance Sheet
|
|
December 31, 2017
|
|
|
Income Statement
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
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|
Current Assets
|
|
|
6,276,379
|
|
|
Net Sales
|
|
|
19,716,632
|
|
|
Noncurrent Assets
|
|
|
18,281,690
|
|
|
Gross Profit
|
|
|
6,534,303
|
|
|
Current Liabilities
|
|
|
1,022,247
|
|
|
Net Income/EBITDA
|
|
|
3,339,407
|
|
|
Noncurrent Liabilities
|
|
|
14,003,599
|
|
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|
In addition to the risks associated with our investments in
general, there are unique risks associated with our investment in this entity.
The business and growth of FST depends in large part on the
continued trend toward outsourcing of certain services in the semiconductor and biopharmaceutical industries. There can be no assurance
that this trend in outsourcing will continue, as companies may elect to perform such services internally. A significant change
in the direction of this trend generally, or a trend in the semiconductor and biopharmaceutical industry not to use, or to reduce
the use of, outsourced services such as those provided by it, could significantly decrease its revenues and such decreased revenues
could have a material adverse effect on it or its results operations or financial condition.
The Company has evaluated the need for disclosures and/or adjustments
resulting from subsequent events through the date the financial statements were issued.
Subsequent to March 31, 2018, the following activity occurred:
On April 2, 2018, Cirrus Medical Staffing paid down $290,909
of its revolver.
On April 4, 2018, Alcentra paid a dividend to shareholders of
record as of March 30, 2018 of $0.18 per share.
On April 4, 2018, Superior Controls paid back $3 million of
its 1st lien debt.
On April 30, 2018, Cirrus Medical Staffing paid down $363,636
of its revolver.
On May 4, 2018, the Board of Directors approved the 2018 second
quarter dividend of $0.18 per share for shareholders of record June 29, 2018 and payable July 5, 2018.
As of May 4, 2018, $3.2 million of common stock had been repurchased by the Company through the $5.0 million share repurchase program.
On May 4, 2018, the Adviser agreed to a permanent 25 basis
point reduction, effective as of May 1, 2018, across all of the base management fee breakpoints under the Company’s investment
advisory agreement. The Adviser has also agreed to an additional temporary 25 basis point reduction, from May 1, 2018 to April
30, 2019, across all of these base management fee breakpoints.