Alcentra Capital (ABDC) 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

COMMISSION FILE NUMBER: 1-36447

ALCENTRA CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Maryland	46-2961489
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

200 Park Avenue, 7th Floor
New York, NY	10166
(Address of Principal Executive Offices)	(Zip Code)

(212) 922-8240

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ¨     No  ¨

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  x

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

There were 13,517,234 shares of the Registrant’s common stock outstanding as of November 5, 2018.

ALCENTRA CAPITAL CORPORATION

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements of Alcentra Capital Corporation:
Consolidated Statements of Assets and Liabilities as of September 30, 2018 (unaudited) and December 31, 2017	3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 (unaudited) and 2017 (unaudited)	4
Consolidated Statements of Changes in Net Assets for the Three and Nine Months Ended September 30, 2018 (unaudited) and 2017 (unaudited)	5
Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2018 (unaudited) and 2017 (unaudited)	6
Consolidated Schedule of Investments as of September 30, 2018 (unaudited) and December 31, 2017	7
Notes to Unaudited Consolidated Financial Statements	16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	45
Item 4. Controls and Procedures	45
PART II. OTHER INFORMATION	45
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults Upon Senior Securities	46
Item 4. Mine Safety Disclosures	46
Item 5. Other Information	46
Item 6. Exhibits	47
SIGNATURES

2

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Assets and Liabilities

	As of September 30, 2018 (Unaudited)			As of December 31, 2017
Assets
Portfolio investments, at fair value
Non-controlled, non-affiliated investments, at fair value (cost of $224,244,959 and $265,675,598, respectively)	$	217,130,492		$	252,325,403
Non-controlled, affiliated investments, at fair value (cost of $40,659,071 and $51,734,635, respectively)		16,499,213			19,972,905
Controlled, affiliated investments, at fair value (cost $15,336,406 and $15,806,301, respectively)		15,007,246			15,256,237
Cash		7,791,745			13,882,956
Dividends and interest receivable		1,400,706			1,942,300
Receivable for investments sold		644,733			669,733
Deferred financing costs		1,521,603			514,241
Deferred tax asset		5,365,469			4,934,962
Income tax asset		614,781			748,408
Prepaid expenses and other assets		143,986			79,005
Total Assets	$	266,119,974		$	310,326,150
Liabilities
Credit facility payable	$	54,457,145		$	89,703,273
Notes payable (net of deferred note offering costs of $950,726 and $1,252,165, respectively)		54,049,274			53,747,835
Other accrued expenses and liabilities		371,444			447,589
Directors’ fees payable		78,500			68,917
Professional fees payable		318,505			548,455
Interest and credit facility expense payable		1,342,528			1,248,791
Management fee payable		1,712,974			1,265,172
Income-based incentive fees payable		1,251,180			1,294,985
Distributions payable		2,449,591			3,561,305
Unearned structuring fee revenue		275,020			725,653
Total Liabilities		116,306,161			152,611,975
Commitments and Contingencies (Note 12)
Net Assets
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,517,234 and 14,222,945 shares issued and outstanding, respectively)		13,517			14,223
Additional paid-in capital		201,748,407			206,570,701
Accumulated net realized loss		(31,765,697	)		(11,436,155	)
Undistributed net investment income		7,215,213			4,449,122
Net unrealized appreciation (depreciation) on investments, net of benefit/(provision) for taxes of $4,205,858 and $3,778,273 as of September 30, 2018 and December 31, 2017, respectively		(27,397,627	)		(41,883,716	)
Total Net Assets		149,813,813			157,714,175
Total Liabilities and Net Assets	$	266,119,974		$	310,326,150
Net Asset Value Per Share	$	11.08		$	11.09

See notes to unaudited consolidated financial statements

3

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Operations

	For the three months ended September 30, 2018 (Unaudited)			For the three months ended September 30, 2017  (Unaudited)			For the nine months ended September 30, 2018 (Unaudited)			For the nine months ended September 30, 2017 (Unaudited)
Investment Income:
From non-controlled, non-affiliated investments:
Interest income from portfolio investments	$	5,676,759		$	5,374,814		$	17,284,856		$	18,567,193
Paid-in-kind interest income from portfolio investments		107,164			226,519			352,295			876,901
Other income from portfolio investments		94,668			377,071			2,213,784			1,574,818
Dividend income from portfolio investments		30,756			30,661			92,268			87,230
From non-controlled, affiliated investments:
Interest income from portfolio investments		58,881			405,892			265,414			937,704
Paid in-kind income from portfolio investments		96,816			609,854			309,946			1,375,173
Other income from portfolio investments		—			—			—			—
From controlled, affiliated investments:
Interest income from portfolio investments		488,036			411,262			1,470,032			1,219,767
Paid in-kind income from portfolio investments		—			174,448			—			511,292
Other income from portfolio investments		—			—			—			—
Total investment income		6,553,080			7,610,521			21,988,595			25,150,078
Expenses:
Management fees		943,360			1,230,961			3,214,345			3,710,178
Income-based incentive fees		(43,805	)		—			(43,805	)		638,244
Professional fees		362,625			368,909			1,095,777			862,097
Valuation services		78,346			41,346			132,279			211,087
Interest and credit facility expense		1,705,992			1,549,462			5,146,364			4,589,436
Amortization of deferred financing costs		117,587			232,807			325,138			806,418
Directors’ fees		87,076			112,281			300,104			254,761
Insurance expense		57,076			57,232			169,583			181,815
Amortization of deferred note offering costs		97,478			111,726			343,439			315,554
Consulting fees		54,152			—			535,892			—
Other expenses		284,764			223,318			810,583			631,542
Total expenses		3,744,651			3,928,042			12,029,699			12,201,132
Waiver of management fees		(157,227	)		(1,160,896	)		(266,508	)		(1,330,420	)
Net expenses		3,587,424			2,767,146			11,763,191			10,870,712
Net investment income		2,965,656			4,843,375			10,225,404			14,279,366
Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments
Net realized gain (loss) on:
Non-controlled, non-affiliated investments		(38,921	)		(10,477,819	)		(10,162,013	)		(11,497,056	)
Non-controlled, affiliated investments		(12	)		72,164			(10,167,529	)		72,164
Controlled, affiliated investments		—			—			—			—
Net realized gain (loss) from portfolio investments		(38,933	)		(10,405,655	)		(20,329,542	)		(11,424,892	)
Net change in unrealized appreciation (depreciation) on:
Non-controlled, non-affiliated investments		2,355,583			6,824,145			6,235,728			(2,376,265	)
Non-controlled, affiliated investments		(1,610,661	)		(8,156,756	)		7,601,872			(11,143,489	)
Controlled, affiliated investments		—			473			220,904			475,999
Net change in unrealized appreciation (depreciation) from portfolio investments		744,922			(1,332,138	)		14,058,504			(13,043,755	)
Benefit (Provision) for income taxes on unrealized gain (loss) on investments		(589,643	)		5,282,934			427,585			4,455,809
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments		116,346			(6,454,859	)		(5,843,453	)		(20,012,838	)
Net Increase (Decrease) in Net Assets Resulting from Operations	$	3,082,002		$	(1,611,484	)	$	4,381,951		$	(5,733,472	)
Basic and diluted:
Net investment income per share	$	0.22		$	0.34		$	0.74		$	1.03
Earnings (loss) per share	$	0.23		$	(0.11	)	$	0.32		$	(0.41	)
Weighted Average Shares of Common Stock Outstanding		13,530,129			14,245,220			13,815,619			13,825,432
Dividends declared per common share	$	0.180		$	0.340		$	0.540		$	1.050

See notes to unaudited consolidated financial statements

4

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Changes in Net Assets

	For the nine months ended September 30, 2018 (Unaudited)			For the nine months ended September 30, 2017 (Unaudited)
Increase (decrease) in net assets resulting from operations
Net investment income	$	10,225,404		$	14,279,366
Net realized gain (loss) on investments		(20,329,542	)		(11,424,892	)
Net change in unrealized appreciation (depreciation) on investments		14,058,504			(13,043,755	)
Benefit (Provision) for income taxes on unrealized gain (loss) on investments		427,585			4,455,809
Net increase (decrease) in net assets resulting from operations		4,381,951			(5,733,472	)
Capital transactions
Issuance of common stock (0 and 808,161 shares, respectively)		—			10,853,602
Repurchase of common stock (705,711 and 14,574 shares, respectively)		(4,823,000	)		(165,514	)
Net increase (decrease) in net assets resulting from capital transactions		(4,823,000	)		10,688,088
Distributions to shareholders from:
Net investment income		(7,459,313	)		(14,255,349	)
Realized gains		—			(403,112	)
Total distributions to shareholders		(7,459,313	)		(14,658,461	)
Total increase (decrease) in net assets		(7,900,362	)		(9,703,845	)
Net assets at beginning of period		157,714,175			184,524,591
Net assets at end of period [including undistributed net investment income of $7,215,213 and $4,914,082, respectively]	$	149,813,813		$	174,820,746

See notes to unaudited consolidated financial statements

5

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Cash Flows

	For the nine months ended September 30, 2018 (Unaudited)			For the nine months ended September 30, 2017 (Unaudited)
Cash Flows from Operating Activities
Net increase/(decrease) in net assets resulting from operations	$	4,381,951		$	(5,733,472	)
Adjustments to reconcile net increase/(decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Net realized loss from portfolio investments		20,329,542			11,424,892
Net change in unrealized (appreciation) depreciation of portfolio investments		(14,058,504	)		13,043,755
Deferred tax asset		(430,507	)		(5,518,012	)
Paid in-kind interest income from portfolio investments		(662,241	)		(2,763,366	)
Accretion of discount on debt securities		(481,690	)		(1,639,421	)
Purchases of portfolio investments		(50,049,494	)		(96,881,887	)
Net proceeds from sales/return of capital of portfolio investments		83,839,981			70,750,013
Amortization of deferred financing costs		325,138			806,418
Amortization of deferred note offering costs		343,439			315,554
(Increase) decrease in operating assets:
Dividends and interest receivable		541,594			456,765
Receivable for investments sold		25,000			1,418,480
Income tax asset		133,627			(796,241	)
Prepaid expenses and other assets		(64,981	)		(43,223	)
Increase (decrease) in operating liabilities:
Other accrued expenses and liabilities		(76,145	)		195,331
Directors' fees payable		9,583			(9,583	)
Professional fees payable		(229,950	)		57,413
Interest and credit facility expense payable		93,737			611,907
Management fee payable		447,802			(171,400	)
Income-based incentive fees payable		(43,805	)		(776,676	)
Unearned structuring fee revenue		(450,633	)		(174,666	)
Income tax liability		—			(182,699	)
Net cash provided by (used in) operating activities		43,923,444			(15,610,118	)
Cash Flows from Financing Activities
Issuance of common stock		—			10,853,602
Financing costs paid		(1,332,500	)		(139,144	)
Offering costs paid		(42,000	)		(153,045	)
Proceeds from credit facility payable		26,253,872			74,100,000
Repayments of credit facility payable		(61,500,000	)		(53,450,000	)
Distributions paid to shareholders		(8,571,027	)		(14,401,902	)
Repurchase of common stock		(4,823,000	)		(165,514	)
Net cash provided by (used in) financing activities		(50,014,655	)		16,643,997
Increase (decrease) in cash		(6,091,211	)		1,033,879
Cash at beginning of period		13,882,956			3,891,606
Cash at End of Period	$	7,791,745		$	4,925,485
Supplemental and non-cash financing activities:
Cash paid during the period for interest	$	5,052,627		$	3,977,529
Accrued offering costs	$	2,485		$	2,485
Accrued distributions payable	$	2,449,591		$	4,843,375

See notes to unaudited consolidated financial statements

6

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of September 30, 2018

(Unaudited)

Company(+) ***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost(1)		Fair Value		% of Net Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 144.93%
Senior Secured - First Lien — 94.52%
Black Diamond Rentals(2),(3),(4),(5)	Oil & Gas Services	12% Cash, 2% PIK					14.00	%	12/31/2018		5,937,501	$	5,937,501	$	4,875,828		3.25	%
		4% Cash, 10% PIK					14.00	%	12/31/2018		2,465,672		2,465,671		2,465,671		1.65	%
													8,403,172		7,341,499		4.90	%
CGGR Operations Holdings Corporation(3),(6)	Business Services	LIBOR + 11.5%		1.00	%		13.84	%	9/30/2023		13,431,579		13,318,702		13,431,578		8.97	%
		LIBOR + 7.0%		1.00	%		9.34	%	9/30/2022		9,618,421		9,541,428		9,618,421		6.42	%
													22,860,130		23,049,999		15.39	%
Champion ONE(3),(6)	Technology & Telecom	LIBOR + 10.5%		1.00	%		12.84	%	3/17/2022		6,071,730		6,026,185		6,071,730		4.05	%
Envocore Holding, LLC(3),(6),(7)	Industrial Services	LIBOR + 9.25%		1.00	%		11.59	%	6/30/2022		18,750,000		18,699,344		18,750,000		12.52	%
Epic Healthcare Staffing Intermediate Holdco, LLC(3),(6),(8),(9)	Business Services	LIBOR + 8.25%		1.00	%		10.59	%	10/19/2022		10,226,136		10,185,797		10,226,136		6.82	%
Healthcare Associates of Texas, LLC(3),(6),(8)	Healthcare Services	LIBOR + 8.0%		1.00	%		10.34	%	11/8/2022		20,139,704		20,139,704		20,139,704		13.44	%
Lugano Diamonds & Jewelry, Inc.(3),(6)	Retail	LIBOR + 10.00%		0.75	%		12.34	%	10/24/2021		6,750,000		6,191,976		6,331,000		4.23	%
Lumileds(6),(10)	High Tech Industries	LIBOR + 3.50%		1.00	%		5.83	%	6/30/2024		1,985,000		2,018,035		1,965,358		1.31	%
Manna Pro Products, LLC(3),(6),(8)	Consumer Services	LIBOR + 6.0%		1.00	%		8.15	%	12/8/2023		1,325,459		1,318,794		1,325,459		0.89	%
NTI Holdings, LLC(3),(6)	Telecommunications	LIBOR + 8.0%		1.00	%		10.08	%	3/30/2021		16,127,374		15,951,108		16,023,540		10.70	%
Palmetto Moon LLC(3)	Retail	11.5% Cash, 1.0% PIK					12.50	%	10/31/2021		4,768,505		4,750,675		4,768,505		3.18	%
Pharmalogics Recruiting, LLC(3),(8)	Business Services	10.25% Cash					10.25	%	1/31/2022		9,850,000		9,778,172		9,850,000		6.58	%
Superior Controls, Inc.(3),(6),(8)	Wholesale/Distribution	LIBOR + 7.25%		1.00	%		9.59	%	3/22/2021		11,825,000		11,785,913		11,825,000		7.89	%
Weight Watchers International, Inc.(6),(10)	Consumer Services	LIBOR + 4.75%		0.75	%		7.09	%	11/29/2024		1,925,000		1,956,746		1,950,670		1.30	%
West Corp.(6),(10)	Telecommunications	LIBOR + 3.50%		1.00	%		5.58	%	10/10/2024		1,995,000		1,992,649		1,980,875		1.32	%
Total Senior Secured - First Lien													142,058,400		141,599,475		94.52	%
Senior Secured - Second Lien — 25.31%
Asurion(6),(10)	Insurance	LIBOR + 6.50%					8.58	%	8/4/2025		3,000,000	$	3,088,000	$	3,089,070		2.06	%

See notes to unaudited consolidated financial statements

7

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2018

(Unaudited)

Company(+) ***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost(1)		Fair Value		% of Net Assets
BayMark Health Services, Inc.(3),(6)	Healthcare Services	LIBOR + 8.25%		1.00	%		10.33	%	3/1/2025		7,000,000	$	6,935,712	$	7,000,000		4.67	%
Mayfield Agency Borrower Inc.(6),(10)	Insurance	LIBOR + 8.50%					10.58	%	3/2/2026		1,778,000		1,753,113		1,764,665		1.18	%
Medsurant Holdings, LLC(3)	High Tech Industries	13.00% Cash					13.00	%	6/30/2020		8,729,396		8,696,546		8,729,396		5.83	%
Pharmalogic Holdings Corp.(3),(6),(8)	Healthcare Services	LIBOR + 8.0%					10.08	%	12/11/2023		11,340,000		11,263,870		11,340,000		7.56	%
VVC Holding Corp.(3),(6),(14)	Healthcare Services	LIBOR + 8.13%		1.00	%		10.19	%	7/9/2026		6,000,000		5,941,617		6,000,000		4.01	%
Total Senior Secured - Second Lien													37,678,858		37,923,131		25.31	%
Senior Subordinated — 15.01%
Acuity Technologies Holding Company, LLC(3),(11)	High Tech Industries	12.25% Cash					12.25	%	11/19/2021		10,000,000	$	10,000,000	$	10,000,000		6.68	%
Black Diamond Rentals(2),(3),(4)	Oil & Gas Services	4% Cash					4.00	%	12/31/2018		8,009,188		8,009,188		2,384,000		1.59	%
Security Alarm Financing Enterprises L. P.(3),(6),(12)	Security	LIBOR + 13.00%, 1.34% PIK		1.00	%		15.34	%	6/19/2020		10,104,612		9,996,769		10,104,611		6.74	%
Total Senior Subordinated													28,005,957		22,488,611		15.01	%
CLO/Structured Credit — 1.28%
Goldentree Loan Management US CLO 2 Ltd.(6),(10)	USD CLO	LIBOR + 4.70%					7.06	%	11/28/2030		2,000,000	$	1,947,170	$	1,919,696		1.28	%
Total CLO/Structured Credit													1,947,170		1,919,696		1.28	%
Equity/Other — 8.81%
Champion ONE, Common Shares(2),(3)	Technology & Telecom										11,250	$	1,125,000	$	938,913		0.63	%
Envocore Holding, LLC, Preferred Shares(2),(3),(7)	Industrial Services										1,139,725		1,160,360		2,119,006		1.41	%
IGT,   Preferred Shares(2),(3)	Industrial Services	11% PIK					11.00	%	12/10/2019		1,110,922		1,110,923		—		—
Common Shares(2),(3)											44,000		44,000		—		—
Preferred AA Shares(3)		15% PIK					15.00	%	12/10/2019		326,789		326,789		326,789		0.22	%
													1,481,712		326,789		0.22	%
Lugano Diamonds & Jewelry, Inc., Warrants(2),(3)	Retail										666,615		666,615		1,000,000		0.67	%

See notes to unaudited consolidated financial statements

8

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2018

(Unaudited)

Company(+) ***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost(1)		Fair Value		% of Net Assets
Metal Powder Products, LLC, Common Shares(2),(3)	Industrial Manufacturing										500,000	$	500,000	$	719,047		0.48	%
My Alarm Center, LLC, Common Shares(2),(3)	Security										129,582		256,793		—		—
Junior Preferred Shares(2),(3)											2,420		2,366,549		—		—
Senior Preferred Shares(2),(3)		8% PIK					8.00	%	7/14/2022		2,998,437		2,862,059		1,023,999		0.68	%
													5,485,401		1,023,999		0.68	%
NTI Holdings, LLC, Preferred Shares(2),(3)	Telecommunications										424,621		547,349		3,119,000		2.08	%
Warrants(2),(3)											417,823		224,689		2,088,000		1.39	%
													772,038		5,207,000		3.47	%
Palmetto Moon LLC, Common Shares(2),(3)	Retail										434,145		434,145		329,633		0.22	%
Superior Controls, Inc., Preferred Shares(2),(3)	Wholesale/Distribution										400,000		400,000		789,192		0.53	%
Tunnel Hill, Class B Common Units(2),(3),(13)	Waste Services										98,418		2,529,303		746,000		0.50	%
Total Equity/Other													14,554,574		13,199,579		8.81	%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies													224,244,959		217,130,492		144.93	%
Investments in Non-Controlled, Affiliated Portfolio Companies — 11.01%*
Senior Secured - First Lien — —
Show Media, Inc.(2),(3)	Media & Entertainment	8% Cash, 3% PIK					11.00	%	12/31/2018		4,153,393	$	4,153,393	$	1		—
Total Senior Secured - First Lien													4,153,393		1		—
Senior Secured - Second Lien — 2.05%
Xpress Global Systems, LLC(3),(6)	Transportation Logistics	15% PIK					15.00	%	7/9/2020		5,455,263	$	5,291,181	$	1,100,000		0.74	%
		LIBOR + 11.00%		1.00	%		13.33	%	7/9/2020		1,964,871		1,943,133		1,964,872		1.31	%
Total Senior Secured - Second Lien													7,234,314		3,064,872		2.05	%
Senior Subordinated — 0.80%
Battery Solutions, Inc.(3)	Environmental/Recycling Services	12% Cash, 2% PIK					14.00	%	11/6/2021		1,206,595	$	1,206,595	$	1,206,596		0.80	%
Southern Technical Institute, Inc.(2),(3)	Education	6% PIK					6.00	%	12/31/2021		3,528,988		3,528,988		—		—
Total Senior Subordinated													4,735,583		1,206,596		0.80	%

See notes to unaudited consolidated financial statements 

9

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2018

(Unaudited)

Company(+) ***	Industry	Spread Above Index	Base Rate Floor	Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost(1)		Fair Value			% of Net Assets
Equity/Other — 8.16%
Battery Solutions, Inc.,   Class A and F Units(2),(3)	Environmental/Recycling Services								5,000,000	$	1,058,000	$	1,277,000			0.85	%
Class E Units(3)		8% PIK			8.00	%	11/6/2021		4,396,519		4,396,519		4,396,519			2.93	%
											5,454,519		5,673,519			3.78	%
Conisus, LLC, Common Shares(2),(3)	Media: Advertising, Printing & Publishing								4,914,556		—		—			—
Preferred Equity(3)		12% PIK			12.00	%			12,677,834		12,677,834		6,554,225			4.38	%
											12,677,834		6,554,225			4.38	%
Show Media, Inc., Units(2),(3)	Media & Entertainment								4,092,210		3,747,428		—			—
Southern Technical Institute, Inc.,   Class A Units(2),(3)	Education								3,164,063		2,167,000		—			—
Class A1 Units(2),(3)									4,235,280		—		—			—
											2,167,000		—			—
Xpress Global Systems, LLC, Warrants(2),(3)	Transportation Logistics								489,000		489,000		—			—
Total Equity/Other											24,535,781		12,227,744			8.16	%
Total Investments in Non-Controlled, Affiliated Portfolio Companies											40,659,071		16,499,213			11.01	%
Investments in Controlled, Affiliated Portfolio Companies — 10.02%**
Senior Secured - First Lien — 9.03%
FST Technical Services, LLC(3)	Technology & Telecom	14% Cash			14.00	%	6/30/2019		13,529,865	$	13,529,865	$	13,529,865			9.03	%
Total Senior Secured - First Lien											13,529,865		13,529,865			9.03	%
Equity/Other — 0.99%
FST Technical Services, LLC, Common Class B Shares(2),(3)	Technology & Telecom	9% PIK			9.00	%			1,750,000	$	1,806,541	$	1,477,381			0.99	%
Total Equity/Other											1,806,541		1,477,381			0.99	%
Total Investments in Controlled, Affiliated Portfolio Companies											15,336,406		15,007,246			10.02	%
Total Investments											280,240,436		248,636,951			165.96	%
Liabilities In Excess Of Other Assets													(98,823,138	)		(65.96	)%
Net Assets												$	149,813,813			100.00	%

⁽⁺⁾ All portfolio companies listed, other than Goldentree Loan Management US CLO 2 Ltd. and CGGR Operations Holdings Corporation, are qualifying assets.

See notes to unaudited consolidated financial statements

10

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2018

(Unaudited)

^* Denotes investments in which the Company is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2018 in these affiliated investments are as follows:

			Gross					Change in
	Fair Value at		Additions/					Unrealized						Fair Value at		Interest/
	December 31,		(Gross			Transfers		Appreciation/			Realized			September 30,		Dividend/
Name of Issuers	2017		Reductions)			In/Out		(Depreciation)			Gain/(Loss)			2018		Other Income
Battery Solutions, Inc.	$	7,820,167	$	(940,053	)	$	-	$	1		$	-		$	6,880,115	$	416,003
Conisus, LLC		6,678,442		-			-		(124,217	)		-			6,554,225		-
Show Media, Inc.		1		-			-		-			-			1		-
Southern Technical Institute, Inc.		1		-			-		10,167,528			(10,167,529	)		-		-
Xpress Global Systems, LLC		5,474,294		32,018			-		(2,441,440	)		-			3,064,872		159,357
	$	19,972,905	$	(908,035	)	$	-	$	7,601,872		$	(10,167,529	)	$	16,499,213	$	575,360

^** Denotes investments in which the Company is an “Affiliated Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2018 in these affiliated and controlled investments are as follows:

			Gross					Change in
	Fair value at		Additions/					Unrealized				Fair Value at		Interest/
	December 31,		(Gross			Transfers		Appreciation/		Realized		September 30,		Dividend/
Name of Issuers	2017		Reductions)			In/Out		(Depreciation)		Gain/(Loss)		2018		Other Income
FST Technical Services, LLC	$	15,256,237	$	(469,895	)	$	-	$	220,904	$	-	$	15,007,246	$	1,470,032
	$	15,256,237	$	(469,895	)	$	-	$	220,904	$	-	$	15,007,246	$	1,470,032

^*** Pledged as collateral under the Credit Facility with ING Capital LLC.

⁽¹⁾ The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.

⁽²⁾ Non-income producing security.

⁽³⁾ Security is classified as Level 3 in the Company’s fair value hierarchy (see Note 3).

⁽⁴⁾ Black Diamond Rentals is currently exploring opportunities and as a result our maturity date is 12/31/2018.

⁽⁵⁾ Black Diamond Rentals has a revolving credit facility which has a priority lien position over the Company’s investment, in conformance with industry practices for such facilities.

⁽⁶⁾ The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.

⁽⁷⁾ The investment was formerly known as LRI Holding, Inc. and Integrated Efficiency Solutions, Inc. On March 16, 2018, the name was changed to Envocore Holding, LLC.

⁽⁸⁾ The investment has an unfunded commitment as of September 30, 2018 which is excluded from the presentation (see Note 12).

⁽⁹⁾ The investment was formerly known as Cirrus Medical Staffing, Inc. On May 25, 2018, the name was changed to Epic Healthcare Staffing Intermediate Holdco, LLC.

⁽¹⁰⁾ Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 3).

⁽¹¹⁾ The investment was formerly known as QRC Holdings, LLC. On February 8, 2018, the name was changed to Acuity Technologies Holding Company, LLC.

⁽¹²⁾ When the LIBOR rate exceeds 1.00% the remaining portion of interest becomes PIK.

⁽¹³⁾ The investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P.

⁽¹⁴⁾ The investment is also known as Value-Based Care Solutions Group, or VBC (since re-named Virence Health Technologies).

Abbreviation Legend

PIK - Payment-In-Kind

See notes to unaudited consolidated financial statements

11

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments
As of December 31, 2017

Company (+)(^)***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/  Principal Amount		Cost (1)		Fair Value		% of Net Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 159.99%
Senior Secured – First Lien — 103.57%
Black Diamond Rentals	Oil & Gas Services	12% Cash, 2% PIK (2)					14.00	%	7/9/2018		5,937,501	$	5,937,501	$	4,875,828		3.09	%
		4% Cash, 10% PIK					14.00	%	7/9/2018		2,288,381		2,246,806		2,288,400		1.45	%
													8,184,307		7,164,228		4.54	%
CGGR Operations Holdings Corporation (3)	Business Services	11.5%		1.00	%		12.50	%	10/2/2023		13,431,579		13,302,663		13,431,578		8.52	%
		7.0%		1.00	%		8.00	%	9/30/2022		9,768,421		9,675,645		9,768,421		6.19	%
													22,978,308		23,199,999		14.71	%
Champion ONE (3)	Technology & Telecom	LIBOR + 10.5%		1.00	%		11.83	%	3/17/2022		7,078,125		7,020,027		7,078,125		4.49	%
Cirrus Medical Staffing, Inc. (3),(4)	Business Services	LIBOR + 8.25%		1.00	%		9.61	%	10/19/2022		18,600,000		18,510,539		18,600,000		11.79	%
Healthcare Associates of Texas, LLC (3),(4)	Healthcare Services	LIBOR + 8.0%		1.00	%		9.39	%	11/8/2022		23,334,250		23,334,250		23,334,250		14.80	%
IGT (3),(4)	Industrial Services	LIBOR + 8.50%		1.00	%		9.86	%	12/10/2019		7,783,012		7,743,557		7,783,012		4.94	%
Integrated Efficiency Solutions, Inc. (3),(5)	Industrial Services	LIBOR + 9.25%		1.00	%		10.59	%	6/30/2022		19,500,000		19,436,803		19,500,000		12.36	%
Lugano Diamonds & Jewelry, Inc. (3)	Retail	LIBOR + 10.0%		0.75	%		11.34	%	10/24/2021		8,000,000		7,349,002		7,483,890		4.75	%
NTI Holdings, LLC (3),(4)	Telecommunications	LIBOR + 8.0%		1.00	%		9.57	%	3/30/2021		15,097,584		14,869,193		14,961,923		9.49	%
Palmetto Moon LLC	Retail	11.5% Cash, 1.0% PIK					12.50	%	10/31/2021		5,378,909		5,357,837		5,378,909		3.41	%
Pharmalogics Recruiting, LLC (4)	Business Services	10.25% Cash					10.25	%	1/31/2022		9,925,000		9,845,384		9,925,000		6.29	%
Stancor, Inc. (3)	Wholesale/  Distribution	LIBOR + 8.00%		0.75	%		9.37	%	8/19/2019		4,105,932		4,105,932		4,105,932		2.60	%
Superior Controls, Inc. (3),(4)	Wholesale/  Distribution	LIBOR + 8.75%		1.00	%		10.09	%	3/22/2021		14,825,000		14,775,976		14,825,000		9.40	%
Total Senior Secured – First Lien													163,511,115		163,340,268		103.57	%
Senior Secured – Second Lien — 5.54%
Medsurant Holdings, LLC	High Tech Industries	13.00% Cash					13.00	%	6/30/2020		8,729,396	$	8,677,481	$	8,729,396		5.54	%
Total Senior Secured – Second Lien													8,677,481		8,729,396		5.54	%
Senior Subordinated — 40.88%
Black Diamond Rentals (2)	Oil & Gas Services	4% Cash					4.00	%	7/9/2018		8,009,188	$	8,009,188	$	4,004,594		2.54	%
GST Autoleather (2),(6)	Automotive Business Services	11% Cash, 2.0% PIK					13.00	%	1/11/2021		8,496,238		8,496,239		—		—
Media Storm, LLC (2)	Media & Entertainment	10% PIK					10.00	%	8/28/2019		2,454,545		2,454,545		1		—
Metal Powder Products LLC (3)	Industrial Manufacturing	LIBOR + 11.25%, 1.0% PIK		0.75	%		13.59	%	11/5/2021		8,333,733		8,333,734		8,500,408		5.39	%
NextCare Holdings, Inc.	Healthcare Services	10% Cash, 4% PIK					14.00	%	12/31/2018		15,833,365		15,731,616		15,833,365		10.04	%
Pharmalogic Holdings Corp.	Healthcare Services	12% Cash					12.00	%	9/1/2021		16,122,103		16,093,930		16,122,103		10.22	%
QRC Holdings, LLC	High Tech Industries	12.25% Cash					12.25	%	11/19/2021		10,000,000		10,000,000		10,000,000		6.34	%
Security Alarm Financing Enterprises L. P. (3),(7)	Security	LIBOR + 13.00%, 0.34% PIK		1.00	%		14.34	%	6/19/2020		10,019,787		9,873,536		10,019,780		6.35	%
Total Senior Subordinated													78,992,788		64,480,251		40.88	%

See notes to consolidated financial statements

12

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)
As of December 31, 2017
 

Company (+)(^)***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/  Principal Amount		Cost (1)		Fair Value		% of Net Assets
Equity/Other — 10.00%
Champion ONE, Common Shares (2)	Technology & Telecom										11,250	$	1,125,000	$	984,332		0.62	%
IGT, Preferred Shares (2)	Industrial Services	11% PIK					11.00	%	12/10/2019		1,110,922		1,110,923		—		—
Common Shares (2)											44,000		44,000		—		—
Preferred AA Shares		15% PIK					15.00	%	12/10/2019		326,789		326,789		326,789		0.21	%
													1,481,712		326,789		0.21	%
Integrated Efficiency Solutions, Inc. Preferred Shares (2),(5)	Industrial Services										1,079,365		1,100,000		2,058,646		1.31	%
Lugano Diamonds & Jewelry, Inc, Warrants (2)	Retail										666,615		666,615		1,000,000		0.63	%
Metal Powder Products, LLC, Common Shares (2)	Industrial Manufacturing										500,000		500,000		719,047		0.46	%
My Alarm Center, LLC, Common Shares (2)	Security										129,582		256,793		—		—
Junior Preferred Shares (2)											2,420		2,366,549		1,253,570		0.79	%
Senior Preferred Shares (2)		8% PIK					8.00	%	7/14/2022		2,998,437		2,862,059		2,862,059		1.81	%
													5,485,401		4,115,629		2.60	%
NTI Holdings, LLC, Preferred Shares (2)	Telecommunications										424,621		547,349		1,679,748		1.06	%
Warrants (2)											417,823		224,689		1,035,867		0.66	%
													772,038		2,715,615		1.72	%
Palmetto Moon LLC, Common Shares (2)	Retail										434,145		434,145		329,633		0.21	%
Superior Controls, Inc., Preferred Shares (2)	Wholesale/  Distribution										400,000		400,000		754,000		0.48	%
Tunnel Hill Class B Common Units (2),(8)	Waste Services										98,418		2,529,303		2,771,797		1.76	%
Total Equity/Other													14,494,214		15,775,488		10.00	%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies													265,675,598		252,325,403		159.99	%
Investments in Non-Controlled, Affiliated Portfolio Companies — 12.67%*
Senior Secured – First Lien —
Show Media, Inc. (2)	Media & Entertainment	8% Cash, 3% PIK					11.00	%	12/31/2018		4,153,393	$	4,153,393	$	1		—
Total Senior Secured – First Lien													4,153,393		1		—
Senior Secured – Second Lien — 3.47%
Southern Technical Institute, Inc.	Education	15% PIK					15.00	%	12/2/2020		8,451,041	$	8,451,041	$	1		—
Xpress Global Systems, LLC (3)	Transportation Logistics	15% PIK					15.00	%	7/9/2020		5,455,263		5,222,687		3,509,422		2.22	%
		LIBOR + 11.0%		1.00	%		12.33	%	7/9/2020		1,964,872		1,979,609		1,964,872		1.25	%
													7,202,296		5,474,294		3.47	%
Total Senior Secured – Second Lien													15,653,337		5,474,295		3.47	%
Senior Subordinated — 1.53%
Battery Solutions, Inc.	Environmental/  Recycling Services	6% Cash, 8% PIK					14.00	%	11/6/2021		2,404,598	$	2,404,598	$	2,404,598		1.53	%
Total Senior Subordinated													2,404,598		2,404,598		1.53	%

See notes to consolidated financial statements

13

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)
As of December 31, 2017
 

Company (+)(^)***	Industry	Spread Above Index	Interest Rate			Maturity Date	No. Shares/  Principal Amount		Cost (1)		Fair Value			% of Net Assets
Equity/Other — 7.67%
Battery Solutions, Inc., Class A and F Units (2)	Environmental/  Recycling Services							5,000,000	$	1,058,000	$	1,277,000			0.81	%
Class E Units		8% PIK		8.00	%	11/6/2021		4,138,569		4,138,569		4,138,569			2.62	%
										5,196,569		5,415,569			3.43	%
Conisus, LLC, Common Shares (2)	Media: Advertising, Printing & Publishing							4,914,556		—		—			—
Preferred Equity		12% PIK		12.00	%			12,677,834		12,677,834		6,678,442			4.24	%
										12,677,834		6,678,442			4.24	%
Show Media, Inc., Units (2)	Media & Entertainment							4,092,210		3,747,428		—			—
Southern Technical Institute, Inc., Class A Units (2)	Education							3,164,063		2,167,000		—			—
Preferred Shares		15.75% PIK		15.75	%	3/30/2026		5,135,209		5,024,209		—			—
Warrants (2)								221,267		221,267		—			—
										7,412,476		—			—
Xpress Global Systems, LLC, Warrants (2)	Transportation Logistics							489,000		489,000		—			—
Total Equity/Other										29,523,307		12,094,011			7.67	%
Total Investments in Non-Controlled, Affiliated Portfolio Companies										51,734,635		19,972,905			12.67	%
Investments in Controlled, Affiliated Portfolio Companies — 9.67%**
Senior Secured – First Lien — 8.87%
FST Technical Services, LLC	Technology & Telecom	12% Cash, 5% PIK		17.00	%	6/30/2019		13,999,758	$	13,999,758	$	13,999,758			8.87	%
Total Senior Secured – First Lien										13,999,758		13,999,758			8.87	%
Equity/Other — 0.80%
FST Technical Services, LLC, Common Class B Shares (2)	Technology & Telecom	9% PIK		9.00	%			1,750,000	$	1,806,543	$	1,256,479			0.80	%
Total Equity/Other										1,806,543		1,256,479			0.80	%
Total Investments in Controlled, Affiliated Portfolio Companies										15,806,301		15,256,237			9.67	%
Total Investments										333,216,534		287,554,545			182.33	%
Liabilities In Excess Of Other Assets												(129,840,370	)		(82.33	)%
Net Assets											$	157,714,175			100.00	%

__________________________

(+) All portfolio companies listed are qualifying assets.

(^) All investments are level 3 investments and are therefore valued using unobservable inputs.

* Denotes investments in which the Company is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2017 in these affiliated investments are as follows:

Name of Issuers	Fair Value at December 31, 2016		Gross Addition		Gross Reductions		Transfers In/Out		Paid-in-kind/  Interest/  Dividend/  Other Income		Fair Value at December 31, 2017
Battery Solutions, Inc.	$	6,517,046	$	—	$	—	$	—	$	650,999	$	7,820,167
Conisus, LLC		—		—		—		—		1,121,469		6,678,442
Show Media, Inc.		2,077,000		—		—		—		95,164		1
Southern Technical Institute, Inc.		13,500,157		—		—		—		1,205,438		1
Xpress Global Systems, LLC		—		—		—		7,475,203		455,272		5,474,294
	$	22,094,203	$	—	$	—	$	7,475,203	$	3,528,342	$	19,972,905

See notes to consolidated financial statements

14

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)
As of December 31, 2017
 

** Denotes investments in which the Company is an “Affiliated Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2017 in these affiliated and controlled investments are as follows:

Name of Issuers	Fair value at December 31, 2016		Gross Additions		Gross Reductions		Transfers In/Out		Interest/  Dividend/  Other Income		Fair Value at December 31, 2017
FST Technical Services, LLC	$	14,456,630	$	—	$	—		—	$	2,349,538	$	15,256,237
	$	14,456,630	$	—	$	—		—	$	2,349,538	$	15,256,237

__________________________

*** Pledged as collateral under the Credit Facility with ING Capital LLC.

(1) The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.

(2) Non-income producing security.

(3) The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.

(4) The investment has an unfunded commitment as of December 31, 2017 which is excluded from the presentation (see Note 12).

(5) The investment was formerly known as LRI Holding, Inc. On July 20, 2017, the name was changed to Integrated Efficiency Solutions, Inc.

(6) Security is in default.

(7) When the LIBOR rate exceeds 1.00% the remaining portion of interest becomes PIK.

(8) The investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P.

Abbreviation Legend
PIK — Payment-In-Kind

See notes to consolidated financial statements

15

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

1. Organization and Purpose

Alcentra Capital Corporation (the “Company” or “Alcentra”) was formed as a Maryland corporation on June 6, 2013 as 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 middle market companies, which we define as companies having annual earnings, before interest, taxes, depreciation and amortization, or EBITDA of between $15 million and $75 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 our 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”).

16

2. Summary of Significant Accounting Policies

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 September 30, 2018, cash balances totaling $7.8 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 the time these fees and expenses are 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 theBoard 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 circumstances 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:

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(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:

• the portfolio company’s underlying operating performance and any related trends;

• 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

• changes or issues related to the portfolio company’s customer/supplier concentration, regulatory developments and other portfolio company specific considerations.

(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:

• 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;

• Preliminary valuation conclusions will then be documented and discussed with Alcentra’s senior management and the Adviser;

• 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

• 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

• 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.

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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 havede minimis investments of less than 1% of our gross assets (up to an aggregate of 10% of our gross assets) independently reviewed. The board of directors is ultimately responsible for the valuation of portfolio investments at fair value as approved in good faith pursuant to Alcentra’s 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 and three non-accrual investments as of September 30, 2018 and December 31, 2017, respectively.

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.

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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 and nine months ended September 30, 2018, the Company recognized a benefit (provision) for income taxes on unrealized gain (loss) on investments of $(0.6) million and $0.4 million for the Taxable Subsidiary, respectively. For the three and nine months ended September 30, 2017, the Company recognized a benefit for income taxes on unrealized gain (loss) on investments of $5.3 million and $4.5 million for the Taxable Subsidiary, respectively. As of September 30, 2018 and December 31, 2017, $5.4 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 has evaluated that there is no impact from 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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of ASU 2018-13 on its consolidated financial statements and disclosures.

In August 2018, the U.S. Securities and Exchange Commission adopted final rules to eliminate redundant, duplicative, overlapping, outdated or superseded disclosure requirements in light of other disclosure requirements, GAAP or changes in the information environment. These rules amend certain provisions of Regulation S-X and Regulation S-K, certain rules promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 and certain related forms. These changes become effective 30 days after the date of publication in the Federal Register. The Company is evaluating the impact of these changes 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 determined that it will not have a material impact on its consolidated financial statements and disclosures.

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3. 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 September 30, 2018 are as follows:

	Level 1		Level 2		Level 3		Total
Senior Secured - First Lien	$	-	$	5,896,903	$	149,232,438	$	155,129,341
Senior Secured - Second Lien		-		4,853,735		36,134,268		40,988,003
Subordinated Debt		-		-		23,695,207		23,695,207
CLO/Structured Credit		-		1,919,696		-		1,919,696
Equity/Other		-		-		26,904,704		26,904,704
Total Investments	$	-	$	12,670,334	$	235,966,617	$	248,636,951

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

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The changes in investments classified as Level 3 are as follows for the nine months ended September 30, 2018 and September 30, 2017.

As of September 30, 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		259,001			62,780			168,329			-			490,110
Paid in-kind interest		154,487			-			249,805			257,949			662,241
Net realized gain (loss)		(24,417	)		(4,922,053	)		(10,098,674	)		(5,245,476	)		(20,290,620	)
Net change in unrealized appreciation (depreciation)		(217,553	)		6,189,339			5,466,204			2,705,893			14,143,883
Purchases		10,881,573			24,129,501			2,277,393			60,360			37,348,827
Sales/Return of capital		(39,160,680	)		(3,528,990	)		(41,252,699	)		-			(83,942,369	)
Transfers in		-			-			-			-			-
Transfers out		-			-			-			-			-
Balance as of September 30, 2018	$	149,232,438		$	36,134,268		$	23,695,207		$	26,904,704		$	235,966,617
Net change in unrealized appreciation (depreciation) from investments still held as of September 30, 2018	$	(109,819	)	$	(2,261,703	)	$	(1,658,994	)	$	(2,539,583	)	$	(6,570,099	)

As of September 30, 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		624,323			920,525			94,573			-			1,639,421
Paid in-kind interest		675,761			419,383			762,686			905,536			2,763,366
Net realized gain (loss)		-			(10,405,106	)		74			(1,019,860	)		(11,424,892	)
Net change in unrealized appreciation (depreciation)		(2,485,598	)		(2,034,795	)		(9,395,743	)		872,381			(13,043,755	)
Purchases		76,078,616			15,184,964			2,128,562			7,014,224			100,406,366
Sales/Return of capital		(34,208,231	)		(36,085,854	)		(267	)		(3,980,140	)		(74,274,492	)
Transfers in		-			-			-			-			-
Transfers out		-			-			-			-			-
Balance as of September 30, 2017	$	136,369,024		$	52,864,026		$	67,640,234		$	25,465,680		$	282,338,964
Net change in unrealized appreciation (depreciation) from investments still held as of September 30, 2017	$	(2,259,917	)	$	(1,944,392	)	$	(9,395,668	)	$	(119,380	)	$	(13,719,357	)

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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 September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018:

	Fair Value at				Range
Assets at Fair Value	September 30, 2018		Valuation Technique	Unobservable Input	of Inputs			Weighted Average
Senior Secured - First Lien	$	149,232,438	Yield to Maturity	Comparable Market Rate		8.2% - 14.0	%		11.4	%
Senior Secured - Second Lien		36,134,268	Yield to Maturity	Comparable Market Rate		10.1% - 15.0	%		11.2	%
Senior Subordinated		23,695,207	Yield to Maturity	Comparable Market Rate		4.0% - 15.3	%		12.8	%
Preferred Ownership		19,806,111	Market Approach	Enterprise Value/LTM EBITDA Multiple/ Transaction price		4.5x - 13.0	x		9.3	x
Common Ownership/ Common Warrants		7,098,593	Market Approach	Enterprise Value/LTM EBITDA Multiple/ Transaction price		4.5x - 13.0	x		7.8	x
Total	$	235,966,617

As of December 31, 2017:

	Fair Value at				Range
Assets at Fair Value	December 31, 2017		Valuation Technique	Unobservable Input	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 - 13.0	x		9.3	x
Common Ownership/ Common Warrants		9,374,154	Market Approach	Enterprise Value/ LTM EBITDA Multiple		4.5x - 13.0	x		8.3	x
Total	$	287,554,545

4. Share Transactions

On November 2, 2017, the Board of Directors approved a $2.5 million open market stock repurchase program. Pursuant to the program, we were 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 were 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 were authorized through November 2, 2018.

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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.

As of August 8, 2018, we had repurchased an aggregate of $5.0 million shares of our common stock under the discretionary open-market share repurchase program and, as a result, the program terminated on such date in accordance with its terms.

The following tables set forth the number of shares of common stock repurchased by the Company under its share repurchase program for the nine months ended September 30, 2018 and 2017:

As of September 30, 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
April 2018		231,343	$6.12 - $7.20		1,599,304
May 2018		136,819	$6.18 - $6.85		901,837
June 2018		59,461	$6.30 - $6.80		397,913
July 2018		49,974	$6.13 - $6.48		316,614
August 2018		15,543	$6.12 - $6.22		96,727
Total		705,711		$	4,823,000

As of September 30, 2017:

Month Ended	Shares Repurchased		Repurchase Price Per Share	Aggregate Consideration for Repurchased Shares
January 2017		14,574	$12.13 - $12.49	$	165,514

On November 5, 2018, the Company’s Board of Directors approved a stock repurchase program.  Pursuant to the program, the Company is authorized to repurchase up to $10 million in the aggregate of its outstanding common stock in the open market.   The timing, manner, price and amount of any share repurchases will be determined by the Company’s management, in its discretion, based upon the evaluation of economic and market conditions, stock price, applicable legal and regulatory requirements and other factors.  The program will be in effect until the approved dollar amount has been used to repurchase shares. The program does not require the Company to repurchase any specific number of shares and the Company cannot assure you that any shares will be repurchased under the program.  The program may be suspended, extended, modified or discontinued at any time.

5. Distributions

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 September 30, 2018 and December 31, 2017, the Company accrued $394,846 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.

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The following table reflects the Company’s dividends declared and paid on its common stock for the nine months ended September 30, 2018:

Date Declared	Record Date	Payment Date	Amount Per Share
March 8, 2018	March 30, 2018	April 4, 2018	$	0.180
May 4, 2018	June 29, 2018	July 5, 2018	$	0.180
August 6, 2018	September 28, 2018	October 4, 2018	$	0.180

The following table reflects the Company’s dividends declared and paid on its common stock for the nine months ended September 30, 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
May 4, 2017	June 30, 2017	July 6, 2017	$	0.340
August 3, 2017	September 30, 2017	October 5, 2017	$	0.340

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: 1.50% 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 less than or equal to $625,000,000; 1.40% if its gross assets are greater than or equal to $625,000,001 but less than or equal to $750,000,000; and 1.25% if its gross assets are greater than or equal to $750,000,001. The various management fee percentages (i.e. 1.50%, 1.40% and 1.25%) 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.  

On May 4, 2018, the Adviser agreed to a temporary 25 basis point reduction, from May 1, 2018 to April 30, 2019, across all of these base management fee breakpoints.

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 quartersminus (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.

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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 and nine months ended September 30, 2018, the Company recorded expenses for base management fees of $943,360 and $3,214,345, respectively, of which $157,227 and $266,508, respectively, was waived by the Adviser and $1,712,974 was payable at September 30, 2018. For the three and nine months ended September 30, 2017, the Company recorded expenses for base management fees of $1,230,961 and $3,710,178, respectively, of which $1,160,896 and $1,330,420, respectively, was waived by the Adviser and $1,130,191 was payable at September 30, 2017.

For the three and nine months ended September 30, 2018, the Company wrote off income-based incentive fees of $(43,805) and $(43,805), respectively, of which $0 and $0 was waived by the Adviser, respectively. For the three and nine months ended September 30, 2017, the Company incurred income-based incentive fees of $0 and $638,244, respectively, of which $0 and $0 was waived by the Adviser, respectively. For the three and nine months ended September 30, 2018, the Company incurred capital gains incentive fees of $0 and $0, respectively, of which $0 and $0, respectively, was waived by the Adviser. For the three and nine months ended September 30, 2017, the Company incurred capital gains incentive fees of $0 and $0, respectively, of which $0 and $0, respectively, was waived by the Adviser.

7. Directors' Fees

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 receives an annual fee of $10,000, $5,000, $5,000 and $5,000, respectively. The Lead Independent Director receives an annual fee of $15,000. In addition, the Board may establish ad hoc committees or working groups from time to time to assist the Board in fulfilling its oversight responsibilities and the independent directors will receive fees and be reimbursed for reasonable out-of-pocket expenses incurred in connection therewith. The Company has obtained directors’ and officers’ liability insurance on behalf of its directors and officers.

For the three and nine months ended September 30, 2018, the Company recorded directors' fee expense of $87,076 and $300,104, respectively, of which $78,500 was payable at September 30, 2018. For the three and nine months ended September 30, 2017, the Company recorded directors' fee expense of $112,281 and $254,761, respectively, of which $85,417 was payable at September 30, 2017.

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8. Purchases and Sales (Investment Transactions)

Investment purchases, sales and principal payments/paydowns are summarized below for the nine months ended September 30, 2018 and September 30, 2017.

	For the nine months ended September 30,
	2018		2017
Investment purchases, at cost (including PIK interest and dividends)	$	50,711,735	$	99,645,253
Investment sales, proceeds (including principal payments/paydown proceeds)		83,839,981		70,750,013

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 (the “Notes”) are direct unsecured obligations and each series of notes will be issued by a separate trust (administered by U.S. Bank). The 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 nine months ended September 30, 2018, the Company did not issue any Alcentra Capital InterNotes®. For the three and nine months ended September 30, 2018, the Company had average Notes outstanding of $55.0 million and $55.0 million, respectively, with a weighted average interest rate of 6.33% and 6.40%, respectively. For the three and nine months ended September 30, 2017, the Company had average Notes outstanding of $55.0 million and $55.0 million, respectively, with a weighted average interest rate of 6.33% and 6.40%, respectively.

The following table summarizes the Alcentra Capital InterNotes® issued and outstanding during the nine months ended September 30, 2018.

Tenor at	Principal		Interest		Weighted
Origination	Amount		Rate		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 September 30, 2018. During the nine months ended September 30, 2018 the Company recorded $0.343 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 commitments and the accordion feature. The total commitments and accordion feature were $135 million and up to $250 million respectively, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility had a maturity date of August 11, 2020 and bore 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.

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On September 21, 2018, the Company amended certain provisions of the Credit Facility. Under the Amended Credit Agreement, (i) revolving commitments by lenders were reduced from $135 million to $115 million, with an accordion feature that allows for an increase in total commitments up to $180 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the credit facility was extended to September 21, 2022 and the revolving period was extended to September 21, 2021, and (iii) borrowings under the credit facility bear interest, at our election, at a rate per annum equal to (a) 2.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 2.75% if such contribution is less than 70%) plus the one, three or six month LIBOR rate, as applicable, or (b) 1.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 1.75% if such contribution is less than 70%) plus the highest of  (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero.
 
The Amended Credit Agreement also modifies certain covenants in the credit facility, including to provide for a minimum asset coverage ratio of 2.00 to 1, a minimum interest coverage ratio of 2.00 to 1 as of the last day of any fiscal quarter, and a requirement to maintain stockholder’s equity as of the last day of any fiscal quarter to be no less than the greater of (i) 45% of the total assets of the Company and its subsidiaries as at the last day of such fiscal quarter and (ii) the sum of (x) $120,000,000 plus (y) 65% of the aggregate net proceeds of all sales of equity interests by the Company and its subsidiaries after the closing date of the Amended Credit Agreement. In addition, the Amended Credit Agreement requires payment of a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of our direct and indirect subsidiaries, and substantially all of our other assets.

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 has made customary representations and warranties and is required to comply with various covenants and reporting requirements. 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 September 30, 2018, and after giving effect to the Amendment, the Company was in compliance in all material respects with the terms of the Credit Facility.

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.

As of September 30, 2018 and December 31, 2017, the Company had United States dollar borrowings of $54.5 million and $89.7 million outstanding under the Credit Facility, respectively. For the three and nine months ended September 30, 2018, the Company borrowed an average of $53.0 million and $55.9 million with a weighted average interest rate of 5.44% and 5.21%, respectively. For the three and nine months ended September 30, 2017, the Company borrowed an average of $36.2 million and $37.9 million with a weighted average interest rate of 4.59% and 4.41%, respectively.

In accordance with the 1940 Act, the Company is currently allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, is at least 200% after such borrowing. On May 4, 2018, the Company’s board of directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Company’s board of directors, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, effective on May 4, 2019 (unless the Company receives earlier stockholder approval), the Company’s asset coverage requirement applicable to senior securities will be reduced to 150%. As of September 30, 2018, the aggregate amount outstanding of the senior securities issued by the Company was $55.0 million. As of September 30, 2018, the Company’s asset coverage was 237%.

11. Market and Other Risk Factors

At September 30, 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 20 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.

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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 September 30, 2018 and December 31, 2017, the Company had $15.1 million and $17.2 million in unfunded commitments under loan and financing agreements, respectively. As of September 30, 2018 and December 31, 2017, the Company’s unfunded commitment under loan and financing agreements are presented below.

	As of
	September 30, 2018		December 31, 2017
Pharmalogic Holdings Corp.	$	4,760,000	$	-
Pharmalogics Recruiting, LLC		2,000,000		2,000,000
Epic Healthcare Staffing Intermediate Holdco, LLC		3,636,364		4,000,000
Superior Controls, Inc.		2,500,000		2,500,000
Healthcare Associates of Texas, LLC		2,137,192		6,900,000
Manna Pro Products, LLC		92,764		-
NTI Holdings, LLC		-		1,258,540
IGT		-		500,000
Total	$	15,126,320	$	17,158,540

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13. Classification of Portfolio Investments

As of September 30, 2018, the Company’s portfolio investments were categorized as follows:

Investment Type	Cost		Fair Value		% of Net Assets*
Senior Secured - First Lien	$	159,741,658	$	155,129,341		103.55	%
Senior Secured - Second Lien		44,913,172		40,988,003		27.36	%
Equity/Other		40,896,896		26,904,704		17.96	%
Senior Subordinated		32,741,540		23,695,207		15.81	%
CLO/Structured Credit		1,947,170		1,919,696		1.28	%
Total	$	280,240,436	$	248,636,951		165.96	%
Geographic Region
Southeast	$	63,604,143	$	52,747,505		35.21	%
Northeast		54,149,064		48,737,969		32.53	%
South		55,780,802		43,345,934		28.93	%
West		48,052,239		40,408,216		26.97	%
Midwest		33,846,888		38,427,632		25.65	%
Canada		22,860,130		23,049,999		15.39	%
US (CLO)		1,947,170		1,919,696		1.28	%
Total	$	280,240,436	$	248,636,951		165.96	%
Industry
Healthcare Services	$	44,280,903	$	44,479,704		29.69	%
Business Services		42,824,099		43,126,135		28.79	%
Telecommunications		18,715,795		23,211,415		15.49	%
Technology & Telecom		22,487,591		22,017,889		14.70	%
Industrial Services		21,341,416		21,195,795		14.15	%
High Tech Industries		20,714,581		20,694,754		13.81	%
Wholesale/Distribution		12,185,913		12,614,192		8.42	%
Retail		12,043,411		12,429,138		8.30	%
Security		15,482,170		11,128,610		7.43	%
Oil & Gas Services		16,412,360		9,725,499		6.49	%
Environmental/Recycling Services		6,661,114		6,880,115		4.59	%
Media: Advertising, Printing & Publishing		12,677,834		6,554,225		4.37	%
Insurance		4,841,113		4,853,735		3.24	%
Consumer Services		3,275,540		3,276,129		2.19	%
Transportation Logistics		7,723,314		3,064,872		2.05	%
USD CLO		1,947,170		1,919,696		1.28	%
Waste Services		2,529,303		746,000		0.50	%
Industrial Manufacturing		500,000		719,047		0.47	%
Media & Entertainment		7,900,821		1		0.0	%
Education		5,695,988		—		0.0	%
Total	$	280,240,436	$	248,636,951		165.96	%

*Fair value as a percentage of Net Assets

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As of December 31, 2017, the Company’s portfolio investments were categorized as follows:

Investment Type	Cost		Fair Value		% of Net Assets*
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	%
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	%
Industry
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	%

*Fair value as a percentage of Net Assets

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14. Financial Highlights

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 nine months ended September 30, 2018 and September 30, 2017.

	For the nine months ended			For the nine months ended
	September 30, 2018			September 30, 2017
	(Unaudited)			(Unaudited)
Per share data(1)
Net asset value, beginning of period	$	11.09		$	13.72
Net investment income (loss)		0.74			1.03
Net realized and unrealized gains (losses)(2)		(0.24	)		(1.75	)
Benefit (Provision) for income taxes on unrealized gain (loss) on investments		0.03			0.32
Net increase (decrease) in net assets resulting from operations		0.53			(0.40	)
Distributions to shareholders:(3)
From net investment income		(0.54	)		(1.02	)
Net realized gains		0.00			(0.03	)
Total dividend distributions declared		(0.54	)		(1.05	)
Net asset value, end of period	$	11.08		$	12.27
Market value per share, end of period	$	5.98		$	10.71
Total return based on net asset value(4)(5)		4.8	%		(2.9	)%
Total return based on market value(4)(5)		(22.3	)%		(1.8	)%
Shares outstanding at end of period		13,517,234			14,245,220
Ratio/Supplemental Data:
Net assets, at end of period	$	149,813,813		$	174,820,746
Ratio of total expenses before waiver to average net assets(6)		10.36	%		9.05	%
Ratio of interest expenses to average net assets(6)		4.76	%		4.00	%
Ratio of incentive fees to average net assets(6)		(0.04	)%		0.47	%
Ratio of waiver of management and incentive fees to average net assets(6)		0.23	%		(0.99	)%
Ratio of net expenses to average net assets(6)		10.12	%		8.06	%
Ratio of net investment income (loss) before waiver to average net assets(6)		8.79	%		9.60	%
Ratio of net investment income (loss) after waiver to average net assets(6)		8.56	%		10.59	%
Total Credit Facility payable outstanding	$	54,457,145		$	59,783,273
Total Notes payable outstanding	$	55,000,000		$	55,000,000
Asset coverage ratio(7)		2.4			2.5
Portfolio turnover rate(5)		19	%		26	%

32

(1) The per share data was derived by using the average shares outstanding during the period.

(2) 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.

(3) 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.

(4) 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.

(5) Not Annualized.

(6) Annualized, except for consulting fees.

(7) 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.

15. Unconsolidated Significant Subsidiaries

In accordance with the SEC’s Regulation S-X and GAAP, we have two subsidiaries that are not required to be consolidated. We have certain unconsolidated significant subsidiaries, FST Technical Services, LLC ("FST") and Southern Technical College (“STI”), that pursuant to Rule 4-08(g) of Regulation S-X, summarized financial information is presented below in aggregate as of and for the nine months ended September 30, 2018 and as of and for the year ended December 31, 2017.

	As of			For the nine months ended
Balance Sheet	September 30, 2018		Income Statement	September 30, 2018
Current Assets	$	12,848,612	Net Sales	$	30,009,973
Noncurrent Assets	$	63,917,262	Gross Profit	$	7,738,584
Current Liabilities	$	9,037,309	EBITDA	$	4,651,688
Noncurrent Liabilities	$	30,780,000

	As of			For the year ended
Balance Sheet	December 31, 2017		Income Statement	December 31, 2017
Current Assets	$	7,203,311	Net Sales	$	53,412,485
Noncurrent Assets	$	78,558,864	Gross Profit	$	12,085,847
Current Liabilities	$	5,132,008	EBITDA	$	6,040,192
Noncurrent Liabilities	$	37,603,460

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 business and growth of STI have been impacted by regulatory changes that have affected for-profit institutions. Although the regulatory climate has since improved, there is no assurance that this will continue to improve enrollment or retention rates.

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16. Subsequent Events

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 September 30, 2018, the following activity occurred:

On October 4, 2018, Alcentra paid a dividend of $0.18 per share to shareholders of record as of September 28, 2018.

On October 15, 2018, Alcentra sold Weight Watchers International for $1.9 million (Senior Secured L + 4.75%).

On October 16, 2018, Alcentra sold Lumileds and Asurion, LLC for $1.96 million and $3.1 million, respectively. Lumileds and Asurion were both senior secured loans at L + 5.00% and L +6.00%, respectively.

On October 17, 2018, Alcentra invested $12.9 million in Impact Group (L + 6.25% 1^st Lien).

On October 19, 2018, Acuity Technologies (fka QRC) repaid their debt (subordinated notes) in full in the amount of $10.0 million.

On October 22, 2018, Alcentra sold West Corporation and Mayfield Agency (“Feeco”) for $1.76million and $1.98 million, respectively. Both loans were senior secured at L +3.50% and L + 8.50%, respectively.

On November 2, 2018, Alcentra invested $4.5 million in Sandvine Corporation (2^nd Lien at L + 8.00%).

On November 2, 2018, Security Alarm Financing Enterprises, L.P. (“SAFE”) repaid their debt (subordinated notes) for total proceeds of $10.4 million.

On November 5, 2018, the Company’s Board of Directors declared a dividend of $0.18 per share for the third quarter of 2018, which is payable on January 3, 2019.

34

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

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

• our future operating results, including the performance of our existing investments;

• the introduction, withdrawal, success and timing of business initiatives and strategies;

• changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

• the relative and absolute investment performance and operations of our investment adviser;

• the impact of increased competition;

• the impact of investments we intend to make and future acquisitions and divestitures;

• our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;

• the unfavorable resolution of any future legal proceedings;

• our business prospects and the prospects of our portfolio companies;

• our regulatory structure and tax status;

• the adequacy of our cash resources and working capital;

• the timing of cash flows, if any, from the operations of our portfolio companies;

• the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;

• the ability of our portfolio companies to achieve their objective;

• the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our investment adviser;

• the impact of activist shareholders on professional fees and management distractions;

• our contractual arrangements and relationships with third parties;

• our ability to access capital and any future financings by us;

• the ability of our investment adviser to attract and retain talented professionals; and

• the impact of changes to tax legislation and, generally, our tax position.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

35

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained in this quarterly report on Form 10-Q.

Overview

Alcentra Capital Corporation (the “Company”, “Alcentra”, “ACC”, “we”, “us” or “our”) was formed as a Maryland corporation on June 4, 2013 as 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”). 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”). State Street Bank and Trust Company (“State Street”) provides us with financial reporting, post-trade compliance, and treasury services. In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”), commencing with tax year ended December 31, 2014, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). 

BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership” or “Fund III”) is a Delaware limited partnership, which commenced operations on May 14, 2010. The Partnership was formed for the purpose of seeking current income and long-term capital appreciation by making investments in senior debt securities, mezzanine debt securities, and common and preferred equity securities with equity rights or participations in U.S.-based middle market companies. 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, LLC (“Alcentra Group”) and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY, LLC is a majority-owned, indirect subsidiary of The Bank of New York Mellon Corporation.

On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100,000,000. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters' exercise of the overallotment option for gross proceeds of $11,250,000.

Immediately prior to the Offering, Fund III sold all of its assets other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) to the Company for $64.4 million in cash and $91.5 million in shares of the Company's common stock. Concurrent with the acquisition of the Fund III Acquired Assets from Fund III, the Company also purchased for $29 million in cash certain additional investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio consisted of approximately $29 million in debt investments originated by the investment professionals of the Manager 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 Offering.

The Company entered into a senior secured term loan agreement (the “Bridge Facility”) with ING Capital LLC as lender that it used to fund the purchase of the Warehouse Portfolio and to fund the cash portion of the consideration paid to Fund III. In May 2014, the Company used $94.2 million of the proceeds from the Offering to repay the Bridge Facility in full.

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 $10.9 million after deducting sales load and offering expenses.

Our investment objective is to generate primarily current income and, to a lesser extent, capital appreciation through debt and equity investments, respectively by targeting middle-market companies (typically those with $15 million to up to $75 million of EBITDA) through first lien, second lien, unitranche and, to a lesser extent given the current credit environment, mezzanine debt and equity investments. 

We are required to comply with certain regulatory requirements such as not acquiring any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.

Board Composition

On September 16, 2018, the board of directors (the “Board”) of Alcentra Capital Corporation (the “Company”) approved an increase in the size of the Board from three to five members and appointed each of William H. Wright II and Frederick Van Zijl to the Board effective as of September 16, 2018. Each of Messrs. Wright and Van Zijl were also appointed to the Company’s Audit Committee (the “Audit Committee”), Compensation Committee, and Nominating and Corporate Governance Committee, effective as of September 16, 2018.

36

Portfolio Composition and Investment Activity

Portfolio Composition

We invest primarily in middle-market companies (typically those with $15 million to up to $75 million of EBITDA) through first lien, second lien, unitranche and, to a lesser extent given the current credit environment, mezzanine debt. We have expanded our investment strategy to include larger middle market companies and investments that have more seniority in a portfolio company’s capital structure, a security interest in the company’s collateral, and floating rate exposure that generally have more of a propensity to withstand changes in the economy, capital markets or other factors affecting such portfolio company. This expansion is a reflection of the current conditions of the debt capital markets combined with the Adviser’s view that we are in the later stages of the credit cycle. We are executing this portfolio rotation to focus on stabilizing net asset value per share and minimizing credit losses associated with our historic focus on unsecured mezzanine debt and equity investment. The rotation to having a larger percentage of our portfolio in the senior part of the capital structure provides added protections, rights and remedies in case of a downturn in the economy or specific company performance issues. The addition of collateral also enhances our creditor rights during a workout or bankruptcy proceeding relative to other unsecured creditors. Lastly, more floating rate debt investments, versus fixed rate mezzanine debt, should reduce our exposure to interest rate increases. We believe that these measures are in the best interests of our stockholders; however, these shifts will likely result in a decrease in the weighted average yield on our investment portfolio.

Additionally, we will seek to increase the diversification of our portfolio through several measures including, but not limited to syndication of larger exposures to single issuers, the addition of “club” and syndicated loans that may, or may not be rated, through both primary and secondary market purchases and through co-investment with other funds sponsored by our Adviser in accordance with our recently approved co-investment application by the SEC. We will also utilize our new risk rating system, implemented in the third quarter of 2017, to guide the implementation of our diversification strategy and provide enhanced transparency to our stockholders. 

During the three months ended September 30, 2018, we invested $6.1 million in debt and equity investments, including one new portfolio company and one add on investment. These investments consisted of senior secured debt ($6.0 million or 99% of the total amount invested) and preferred equity ($0.06 million or 1% of the total amount invested). During the three months ended September 30, 2018 we received proceeds from repayments and amortizations on investments of $4.6 million. During the three months ended September 30, 2017, we invested $28.1 million in debt and equity investments, including one new portfolio investment and three add on investments. These investments consisted of senior secured loans ($26.2 million, or 93.2% of the total invested) and equity securities ($1.9 million, or 6.8% of the total amount invested). During the three months ended September 30, 2017, we received proceeds from sales or repayments, including principal, return of capital dividends and realized gains, of $3.9 million.

As of September 30, 2018, we had $248.6 million (at fair value) invested in 28 companies, 5 broadly syndicated loans, and 1 rated debt security in a collateralized loan obligation fund (“CLO”). Our portfolio included approximately 62.4% of first lien debt, 16.5% of second lien debt, 9.5% of subordinated debt, 0.8% of CLOs, and 10.8% of equity investments at fair value. At September 30, 2018, our average portfolio company investment at amortized cost and fair value was approximately $6.9 million and $6.6 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $23.0 million and $23.0 million, respectively. At September 30, 2018, 73.2% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 26.8% bore interest at fixed rates.

As of December 31, 2017, we had $287.6 million (at fair value) invested in 29 companies. Our portfolio included approximately 61.7% of first lien debt, 4.9% of second lien debt, 23.3% of subordinated debt and 10.1% of equity investments at fair value. At December 31, 2017, our average portfolio company investment at amortized cost and fair value was approximately $11.5 million and $9.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $23.3 million and $23.3 million, respectively. At December 31, 2017, 53.5% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 46.5% bore interest at fixed rates.

The weighted average yield on debt investments as of September 30, 2018 and December 31, 2017 was 10.9 % and 11.3%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount but excluding investments on non-accrual status, if any. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiary’s fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2018 we had 6 such investments with an aggregate unfunded commitment of $15.1 million and at December 31, 2017 we had 6 such investments with an aggregate unfunded commitment of $17.2 million.

37

The following table shows the portfolio composition by investment type at cost and fair value with the corresponding percentage of total investments:

	Cost								Fair Value
	September 30, 2018				December 31, 2017				September 30, 2018				December 31, 2017
	(dollars in thousands)
Senior Secured - First Lien	$	159,742	57.0	%	$	181,664	54.5	%	$	155,129	62.4	%	$	177,340	61.7	%
Senior Secured - Second Lien		44,913	16.0	%		24,331	7.3	%		40,988	16.5	%		14,204	4.9	%
Equity/Other		40,897	14.6	%		45,824	13.8	%		26,905	10.8	%		29,126	10.1	%
Senior Subordinated		32,741	11.7	%		81,397	24.4	%		23,695	9.5	%		66,885	23.3	%
CLO/Structured Credit		1,947	0.7	%		-	-	%		1,920	0.8	%		-	-	%
Total	$	280,240	100.0	%	$	333,216	100.0	%	$	248,637	100.0	%	$	287,555	100.0	%

The following table shows portfolio composition by geographic region at cost and fair value with the corresponding percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

	Cost								Fair Value
	September 30, 2018				December 31, 2017				September 30, 2018				December 31, 2017
	(dollars in thousands)
Southeast	$	63,604	22.7	%	$	99,475	29.9	%	$	52,747	21.2	%	$	78,668	27.4	%
Northeast		54,149	19.3	%		57,108	17.1	%		48,738	19.6	%		54,446	18.9	%
South		55,781	19.9	%		56,444	16.9	%		43,346	17.4	%		48,087	16.7	%
West		48,052	17.1	%		57,327	17.2	%		40,408	16.2	%		49,593	17.2	%
Midwest		33,847	12.1	%		39,884	12.0	%		38,428	15.5	%		33,560	11.7	%
Canada		22,860	8.2	%		22,978	6.9	%		23,050	9.3	%		23,200	8.1	%
US (CLO)		1,947	0.7	%		-	-	%		1,920	0.8	%		-	-	%
Total	$	280,240	100.0	%	$	333,216	100.0	%	$	248,637	100.0	%	$	287,555	100.0	%

The following table shows the detailed industry composition of our portfolio at cost and fair value as a percentage of total investments: 

	Cost						Fair Value
	September 30, 2018			December 31, 2017			September 30, 2018			December 31, 2017
Healthcare Services		15.80	%		16.55	%		17.89	%		19.23	%
Business Services		15.28	%		15.41	%		17.34	%		17.99	%
Telecommunications		6.68	%		4.69	%		9.34	%		6.15	%
Technology & Telecom		8.02	%		7.19	%		8.86	%		8.10	%
Industrial Services		7.62	%		8.93	%		8.52	%		10.32	%
High Tech Industries		7.39	%		5.61	%		8.32	%		6.51	%
Wholesale/Distribution		4.35	%		5.79	%		5.07	%		6.85	%
Retail		4.30	%		4.14	%		5.00	%		4.94	%
Security		5.52	%		4.61	%		4.48	%		4.92	%
Oil & Gas Services		5.86	%		4.86	%		3.91	%		3.88	%
Environmental/Recycling Services		2.38	%		2.28	%		2.77	%		2.72	%
Media: Advertising, Printing & Publishing		4.52	%		3.80	%		2.64	%		2.32	%
Insurance		1.73	%		0.00	%		1.95	%		0.00	%
Consumer Services		1.17	%		0.00	%		1.32	%		0.00	%
Transportation Logistics		2.76	%		2.31	%		1.23	%		1.90	%
USD CLO		0.69	%		0.00	%		0.77	%		0.00	%
Waste Services		0.90	%		0.76	%		0.30	%		0.96	%
Industrial Manufacturing		0.18	%		2.65	%		0.29	%		3.21	%
Media & Entertainment		2.82	%		3.11	%		0.00	%		0.00	%
Education		2.03	%		4.76	%		0.00	%		0.00	%
Automotive Business Services		0.00	%		2.55	%		0.00	%		0.00	%
Total		100.00	%		100.00	%		100.00	%		100.00	%

Portfolio Asset Quality

We will generally not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or we have reason to doubt our ability to collect such interest. As of September 30, 2018 and December 31, 2017, we had four and three loans on non-accrual respectively. 

38

Results of Operations

Comparison of three months ended September 30, 2018 and September 30, 2017

Investment Income

For the three months ended September 30, 2018, total investment income was $6.6 million, a decrease of $1.0 million, or a (13.9)% decrease from the $7.6 million of total investment income for the three months ended September 30, 2017. This decrease was due to the continued spread compression in the markets as well as the continued transition of the portfolio to senior secured debt.

We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Our investment strategy will continue to focus on more floating rate investments to protect against rising interest rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK, however, we will continue to avoid PIK features in new portfolio investments. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn to fluctuate as the size of our investment portfolio changes. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees. All of these fees, net of any out-of-pocket expenses are passed on as income to our shareholders. 

Expenses

For the three months ended September 30, 2018, total expenses, before the waiver of management fees, were $3.7 million, which was a decrease of $0.2 million, or (4.7)%, over the $3.9 million for the three months ended September 30, 2017. Interest and financing expenses for the three months ended September 30, 2018 and 2017 were $1.9 million, and $1.9 million, respectively. Although the interest expense under the Credit Facility rose due to the increase in LIBOR rates during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, our interest and financing expense was largely unchanged between the two periods due to a decrease in the amortization of deferred financing costs recognized during the three months ended September 30, 2018 as compared to the prior year period. The administrative service fee, professional fees and other general and administrative expenses totaled $0.9 million, an increase of $0.1million, or 15.1%, compared to $0.8 million for the three months ended September 30, 2017. The slight increase was due to non-recurring expenses which were incurred as we explored lowering our cost of capital and the overall capital structure.

For the three months ended September 30, 2018, the base management fee was $0.9 million, a decrease of $0.3 million, or (23.4)%, over the $1.2 million for the three months ended September 30, 2017 due to lower average total assets and a temporary 25 bps reduction from May 1, 2018 to April 30, 2019, across the management fee breakpoints under our investment advisory agreement. For the three months ended September 30, 2018 the waiver of management fees was $(0.2) million, a decrease of (86.5)%, over the $(1.2) million waiver for the three months ended September 30, 2017. There were no incentive fees earned for the three months ended September 30, 2018 but there was a slight decrease in the expense as the portion previously attributable to GST Autoleather was written off. There was no incentive fee for the comparable period in 2017.

Net Investment Income

Net investment income for the three months ended September 30, 2018 was $3.0 million, a decrease of $1.9 million, or (38.8)%, compared to net investment income of $4.8 million during the three months ended September 30, 2017 as discussed in the Investment Income and Expense sections above.

Net Increase (Decrease) in Net Assets Resulting From Operations

For the three months ended September 30, 2018, the net realized loss from portfolio investments was $(0.04) million. For the three months ended September 30, 2017, the net realized loss from portfolio investments was $(10.4) million which was due largely to the write off of My Alarm Center, LLC.  

During the three months ended September 30, 2018, we recorded a net change in unrealized appreciation from portfolio investments of $0.7 million. This is the net result of a write up on NTI Holdings, LLC and a write down on Xpress Global Systems, LLC as both companies pursue sales options. During the three months ended September 30, 2017, we recorded a net change in unrealized depreciation from portfolio investments of $(1.3) million. This was due largely to the write down of GST Autoleather and the reversal of the net unrealized depreciation on My Alarm Center, LLC.

As a result of these events, our net increase in net assets resulting from operations during the three months ended September 30, 2018 was $3.1 million, an increase of $4.7 million, or 291.3%, compared to a net decrease in net assets resulting from operations of $1.6 million during the three months ended September 30, 2017.

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Provision for Taxes on Unrealized Appreciation on Investments

We have a direct wholly owned subsidiary that has elected to be a taxable entity (the "Taxable Subsidiary"). The Taxable Subsidiary permits us 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 us for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended September 30, 2018, we recognized a provision for income taxes on unrealized gain (loss) on investments of $(0.6) million.

Comparison of nine months ended September 30, 2018 and September 30, 2017

Investment Income

For the nine months ended September 30, 2018, total investment income was $22.0 million, a decrease of $3.2 million, or (12.6)%, over the $25.2 million of total investment income for the nine months ended September 30, 2017. The decrease was primarily attributable to spread compression as well as a conversion of various debt portfolio investments to equity which are non-income producing. 

Expenses

For the nine months ended September 30, 2018, total expenses, before the waiver of management fees, were $12.0 million, which was a decrease of $0.2 million, or (1.4)%, over the $12.2 million for the nine months ended September 30, 2017. Interest and financing expenses for the nine months ended September 30, 2018 were $5.8 million, an increase of $0.1 million or 1.8%, compared to $5.7 million for the nine months ended September 30, 2017. Although the interest expense under the Credit Facility rose due to the increase in LIBOR rates during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, our interest and financing expense was largely unchanged between the two periods due to a decrease in the amortization of deferred financing costs recognized during the nine months ended September 30, 2018 as compared to the prior year period. The administrative service fee, professional fees and other general and administrative expenses totaled $3.0 million for the nine months ended September 30, 2018 an increase of $0.9 million, or 42.2%, compared to $2.1 million for the nine months ended September 30, 2017, which primarily resulted from non-recurring consulting fees of $0.5 million and an increase in professional fees of $0.2 million. There were no consulting fees for the comparable period in 2017. The consulting fees were incurred as we explored lowering our cost of capital and the overall capital structure.

For the nine months ended September 30, 2018, the base management fee was $3.2 million, a decrease of $0.5 million, or (13.4)%, over the $3.7 million for the nine months ended September 30, 2017 due to lower average total assets and a temporary 25 bps reduction from May 1, 2018 to April 30, 2019, across the management fee breakpoints under our investment advisory agreement. For the nine months ended September 30, 2018 the waiver of management fees was $(0.3) million, a decrease of $1.1 million, or (80.0)%, over the $(1.3) million waiver for the nine months ended September 30, 2017. The incentive fee for the nine months ended September 30, 2018 was $(0.04) million, a decrease of $0.7 million, or (106.9)% from the $0.6 million incentive fee for the nine months ended September 30, 2017 which was the result of lower net investment income during the past 4 quarters which resulted in not earning the income incentive fee. 

Net Investment Income

Net investment income for the nine months ended September 30, 2018 was $10.2 million, which was a decrease of $4.1 million, or (28.4)%, compared to net investment income of $14.3 million during the nine months ended September 30, 2017 as a result of the $3.2 million decrease in total investment income.

Net Increase/(Decrease) in Net Assets Resulting From Operations

For the nine months ended September 30, 2018, the net realized loss from portfolio investments was $(20.3) million due to the realized loss on GST Autoleather, Media Storm and the restructuring of Southern Technical Institute, Inc. For the nine months ended September 30, 2017, the net realized loss from portfolio investments was $(11.4) million which was due largely to the conversion of My Alarm Center, LLC from debt to equity

. 

During the nine months ended September 30, 2018, we recorded a net change in unrealized appreciation from portfolio investments of $14.1 million which was attributable to the realization of unrealized losses for GST Autoleather, Media Storm, LLC, and Southern Technical Institute, Inc. as well as the current period net increase in unrealized appreciation. The net change in unrealized depreciation on investments for the nine months ended September 30, 2017 was $(13.0) million attributable mainly to the write down on Show Media, GST Autoleather and Southern Technical Institute, Inc.

As a result of these events, our net increase in net assets resulting from operations during the nine months ended September 30, 2018 was $4.4 million, an increase of $10.1 million, or 176.4%, compared to a net decrease in net assets resulting from operations of $(5.7) million during the nine months ended September 30, 2017.

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Liquidity and Capital Resources

As of September 30, 2018, we had $7.8 million in cash and our net assets totaled $149.8 million.

Our liquidity and capital resources are derived from the capital contributions and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as distributions to our stockholders. We expect to use these capital resources as well as proceeds from turnover within our portfolio, borrowings under the Credit Facility and from public and private offerings of securities to finance our investment activities.

Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our board of directors makes certain determinations in connection therewith.

Cash Flows

For the nine months ended September 30, 2018, there was a net decrease in cash in the amount of $(6.1) million. During that period, $43.9 million was provided in cash from operating activities, primarily due to the return of capital of portfolio investments of approximately $83.8 million and net realized loss from portfolio investments of approximately $20.3 million partially offset by purchases of portfolio investments in the amount of approximately $50.0 million and the change in unrealized appreciation of portfolio investments of approximately $14.1 million. During the same period, net cash used in financing activities of $50.0 million was due primarily due to the net repayments of the credit facility, distributions to shareholders and payments for the share repurchase program.

For the nine months ended September 30, 2017, there was a net increase in cash in the amount of $1.0 million. During that period, we used $15.6 million in cash from operating activities, primarily due to the purchase of portfolio investments of approximately $96.9 million. This was partially offset by proceeds from the return of capital of portfolio investments of approximately $70.8 million, $13.0 million of change in unrealized depreciation of portfolio investments and a realized loss of $11.4 million from portfolio investments. During the same period, financing activities increased cash by $16.6 million primarily due to net proceeds from the credit facility and the issuance of common stock offset by distributions to shareholders.

Capital Resources

On May 8, 2014, we entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital LLC, as administrative agent, collateral agent and a lender, and the lenders from time to time party thereto. The Credit Facility had outstanding commitments of $135 million, with an accordion feature that allowed for an increase in total commitments up to $250 million, subject to satisfaction of certain conditions at the time of any such future increase. The Credit Facility had a maturity date of August 11, 2020 and a revolving period that expired on August 11, 2019. Amounts available to borrow under the Credit Facility were subject to a minimum borrowing base that applies an advance rate to certain portfolio investments. Borrowings under the Credit Facility bear interest, at our election, at a rate per annum equal to (i) 3.25% plus the one, three or six month LIBOR rate, as applicable, or (ii) 2.25% plus the highest of  (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero. We paid a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of our direct and indirect subsidiaries, and substantially all of our other assets.

On September 21, 2018, the Company amended certain provisions of the Credit Facility. Under the Amended Credit Agreement, (i) revolving commitments by lenders were reduced from $135 million to $115 million, with an accordion feature that allows for an increase in total commitments up to $180 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the credit facility was extended to September 21, 2022 and the revolving period was extended to September 21, 2021, and (iii) borrowings under the credit facility bear interest, at our election, at a rate per annum equal to (a) 2.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 2.75% if such contribution is less than 70%) plus the one, three or six month LIBOR rate, as applicable, or (b) 1.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 1.75% if such contribution is less than 70%) plus the highest of  (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero.

The Amended Credit Agreement also modifies certain covenants in the credit facility, including to provide for a minimum asset coverage ratio of 2.00 to 1, a minimum interest coverage ratio of 2.00 to 1 as of the last day of any fiscal quarter, and a requirement to maintain stockholder’s equity as of the last day of any fiscal quarter to be no less than the greater of (i) 45% of the total assets of the Company and its subsidiaries as at the last day of such fiscal quarter and (ii) the sum of (x) $120,000,000 plus (y) 65% of the aggregate net proceeds of all sales of equity interests by the Company and its subsidiaries after the closing date of the Amended Credit Agreement. In addition, the Amended Credit Agreement requires payment of a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of our direct and indirect subsidiaries, and substantially all of our other assets.

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As of September 30, 2018, we are in compliance with all covenants of the Credit Facility and there was $54.5 million outstanding.

We may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities, including unsecured debt and/or debt securities convertible into common stock. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. In accordance with the 1940 Act, we are currently allowed to borrow amounts such that our asset coverage, calculated pursuant to the 1940 Act, is at least 200% after such borrowings. On May 4, 2018, our board of directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of our board of directors, approved the application of the modified asset coverage requirement set forth in Section 61(a)(2) of the Investment Company Act, as amended by the Small Business Credit Availability Act. As a result, effective on May 4, 2019 (unless we receive earlier stockholder approval), our asset coverage requirement under the 1940 Act applicable to senior securities will be reduced to 150%. As of September 30, 2018, the aggregate principal amount outstanding of the senior securities issued by us was $109.5 million. As of September 30, 2018, our asset coverage was 237%.

Regulated Investment Company Status and Distributions

We have elected to be treated as a RIC under Subchapter M of the Code beginning the fiscal year ending December 31, 2014. If we continue to qualify for taxation as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains to the extent that such taxable income or gains are distributed, or, in the case of net capital gains, deemed to be distributed, to stockholders on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To maintain our qualification for taxation as a RIC, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). In addition, if we continue to qualify for taxation as a RIC, we will be subject to a federal excise tax unless we meet certain minimum distribution requirements on a calendar year basis.

We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income).

Investment Advisory Agreement

Under the Advisory Agreement, Alcentra pays Alcentra NY, LLC (the “Adviser”) a base management fee calculated at an annual rate as follows: 1.50% 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 less than or equal to $625,000,000; 1.40% of its total gross assets if our gross assets are greater than or equal to $625,000,001 but less than or equal to $750,000,000; and 1.25% of its gross assets if its assets are greater than or equal to $750,000,001. These various management fee percentages (i.e. 1.50%, 1.40% and 1.25%) would apply to ACC’s entire gross assets in the event its gross assets exceed the various gross asset thresholds.

On May 4, 2018, the Adviser agreed to a temporary 25 basis point reduction, from May 1, 2018 to April 30, 2019, across all of these base management fee breakpoints.

In addition, ACC pays the Adviser an incentive fee under the Advisory Agreement which consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of ACC’s “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized), and is subject to a “catch-up” feature. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Advisory Agreement, as of the termination date) and equals 20% of ACC’s 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.

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Critical Accounting Policies

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. See “Note 2 - Summary of Significant Accounting Policies” in the notes to our financial statements for a description of our significant accounting policies. 

Valuation of portfolio investments

We generally invest in illiquid loans and securities including debt of middle-market companies and, to a lesser extent, equity investments in such companies. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by our board of directors. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once annually. With respect to unquoted securities, we value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies and other factors.

Because there is not a readily available market for a substantial amount of the investments in our portfolio, we value most of our portfolio investments at fair value as determined in good faith by our board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:

• Our 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;

• Preliminary valuation conclusions are then documented and discussed with our Adviser’s Investment Committee;

• Independent valuation firms engaged by the valuation committee of our board of directors will prepare valuations on a selected basis and submit reports to the board of directors;

• The valuation committee of our board of directors then reviews these preliminary valuations; and

• The board of directors then discusses valuations and approves the fair value of each investment in our portfolio in good faith, based on the input of the Adviser, the independent valuation firm and the valuation committee.

As part of our valuation procedures, we risk rate all of our investments. In general, our investment rating system uses a scale of 1 to 5. Our internal rating is not an exact system, but it is used internally to estimate the probability, among other things, of: (i) default on our investments and (ii) loss of our principal. In general, our internal rating system may also assist our board of directors in its determination of the fair value of our investments. Our internal risk rating system generally encompasses both qualitative and quantitative aspects of our portfolio companies.

Rating Definition

1	The investment has an acceptable level of risk and the company is generally performing with risk factors being neutral to favorable. All investments in new investments and certain restructured investments are initially assessed a grade of 1.
2	The investment is performing with risk factors being neutral to slightly unfavorable since the time of underwriting.
3	The investment is performing below expectations. With respect to debt investments, the company is generally out of compliance with certain covenants, current or future interest payments could be impacted. With respect to equity investments, dividend payments or return of capital could be impacted.
4	The investment is performing materially below expectations. With respect to debt investments, debt covenants are out of compliance and interest payments are, or expected to be, delinquent and the principal amount of the debt investment is not expected to be repaid in full. With respect to equity investments, dividend payments are not expected to be paid and the principal amount of the equity investment is not expected to be returned.
5	The investment is performing substantially below expectations. With respect to debt investments, interest payments are not being made and the investment is on non-accrual. With respect to equity investments, dividend payments are not being paid or accrued and the principal amount of the equity investment is not expected to be returned.

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Our internal performance ratings do not constitute any rating of investments by a nationally recognized statistical rating organization or represent or reflect any third-party assessment of any of our investments. A review of each investment is made regularly and any changes will be made to the internal performance ratings accordingly. In connection with our valuation process, our board of directors along with the valuation committee of our board of directors will review these internal performance ratings on a quarterly basis.

Rating Summary – September 30, 2018
(dollars in thousands)
Risk Rating	Cost		% of Cost			FMV		% of FMV
1	$	85,550		32	%	$	90,927		39	%
2		118,518		45	%		117,466		50	%
3		23,075		9	%		16,606		7	%
4		19,646		7	%		7,904		3	%
5		19,428		7	%		3,065		1	%
	$	266,217		100	%	$	235,968		100	%

This table does not take into account the syndicated loans and CLO position. 

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We will not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or more and/or we have reason to doubt our ability to collect such interest.

Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income.

Recent Developments

Subsequent to September 30, 2018, the following activity occurred:

On October 4, 2018, Alcentra paid a dividend of $0.18 per share to shareholders of record as of September 28, 2018.

On October 15, 2018, Alcentra sold Weight Watchers International for $1.9 million (Senior Secured L + 4.75%).

On October 16, 2018, Alcentra sold Lumileds and Asurion, LLC for $1.96 million and $3.1 million, respectively. Lumileds and Asurion were both senior secured loans at L + 5.00% and L +6.00%, respectively.

On October 17, 2018, Alcentra invested $12.9 million in Impact Group (L + 6.25% 1^st Lien).

On October 19, 2018, Acuity Technologies (fka QRC) repaid their debt (subordinated notes) in full in the amount of $10.0 million.

On October 22, 2018, Alcentra sold West Corporation and Mayfield Agency (“Feeco”) for $1.76 million and $1.98 million, respectively. Both loans were senior secured at L +3.50% and L + 8.50%, respectively.

On November 2, 2018, Alcentra invested $4.5 million in Sandvine Corporation (2^nd Lien at L + 8.00%).

On November 2, 2018, Security Alarm Financing Enterprises, L.P. (“SAFE”) repaid their debt (subordinated notes) for total proceeds of $10.4 million.

On November 5, 2018, the Company’s Board of Directors declared a dividend of $0.18 per share for the third quarter of 2018, which is payable on January 3, 2019.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. For the nine months ended September 30, 2018, 20 loans in the portfolio bore interest at floating rates, or 73.2% of the fair value of our portfolio. For the year ended December 31, 2017, 12 of the loans in the portfolio bore interest at floating rates, or 54.0% of the fair value of our portfolio. Assuming that the Statement of Assets and Liabilities as of September 30, 2018, were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical one or two percent increase in LIBOR would have less than a 2% effect on our portfolio. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. We have not engaged in any hedging activities to date.

Changes in interest rates will affect our cost of funding. Our interest expense will be affected by changes in certain published indices such as the LIBOR rate in connection with the Credit Facility.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”), has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

(b) Changes in Internal Control Over Financial Reporting

Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is not currently subject to any material legal proceedings, nor, to its knowledge, is any material legal proceeding threatened against it. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of its rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its financial condition or results of operations.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed below and the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and discussed below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

Effective on May 4, 2019 (unless we receive earlier stockholder approval), our asset coverage requirement will reduce from 200% to 150%, which may increase the risk of investing with us.

On May 4, 2018, our board of directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of our board of directors, approved the applicability of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, effective on May 4, 2019 (unless we receive earlier stockholder approval), our asset coverage requirement applicable to senior securities will be reduced from 200% to 150%, and the risks associated with an investment in us may increase.

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Incurring additional leverage may magnify our exposure to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability.

As part of our business strategy, we may borrow money and issue additional senior debt securities to banks, insurance companies and other lenders. Holders of these loans or senior securities would have fixed-dollar claims on our assets that are superior to the claims of our stockholders. If the value of our assets decreases, leverage will cause our net asset value to decline more sharply than it otherwise would have without leverage. Similarly, any decrease in our income would cause our net income to decline more sharply than it would have if we had not borrowed. This decline could negatively affect our ability to make dividend payments on our common stock.

If we incur additional leverage as a result of our board of directors’ approval to authorize us to be subject to the reduced asset coverage ratio of at least 150% under the 1940 Act, effective on May 4, 2019 (unless we receive earlier stockholder approval), general interest rate fluctuations may have a more significant negative impact on our investments than they would have absent such approval, and, accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we will borrow money to make investments and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our interest earning investments will accrue and pay interest at variable rates. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

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

Stock Repurchase Program

On November 2, 2017, our board of directors authorized a $2.5 million discretionary open-market share repurchase program under which we may repurchase shares of our common stock in the open market until the earlier of  (i) November 2, 2018 or (ii) the repurchase of  $2.5 million in aggregate amount of our common stock. On November 16, 2017, our board of directors authorized an extension of, and an increase in the amount of shares of our common stock that may be repurchased under, the discretionary share repurchase program until the earlier of  (i) January 31, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of our common stock. As of August 8, 2018, we had repurchased an aggregate of $5.0 million shares of our common stock under the discretionary open-market share repurchase program and, as a result, the program terminated on such date in accordance with its terms.

The following table summarizes our share repurchases under our stock repurchase program for the nine months ended September 30, 2018:  

	January			February		March			April			May			June			July			August			September
	2018			2018		2018			2018			2018			2018			2018			2018			2018
Dollar amount repurchased	$	136,949			-	$	1,373,656		$	1,599,304		$	901,837		$	397,913		$	316,614		$	96,727			-
Shares repurchased		16,786			-		195,785			231,343			136,819			59,461			49,974			15,543			-
Average price per share (including commission)	$	8.16			N/A	$	7.02		$	6.91		$	6.59		$	6.69		$	6.34		$	6.22			N/A
Weighted average discount to net asset value		27.3	%		N/A		37.5	%		37.4	%		40.3	%		39.4	%		42.8	%		43.8	%		N/A

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

46

Item 6.  Exhibits

3.1	Articles of Amendment and Restatement(1)
3.2	Amended and Restated Bylaws(2)
10.1	Amended and Restated Senior Secured Revolving Credit Agreement, dated as of September 21, 2018, by and among Alcentra Capital Corporation, as borrower, the lenders party thereto, and ING Capital LLC, as administrative agent, arranger, and bookrunner.(3)
10.2	Amended and Restated Guarantee, Pledge and Security Agreement, dates as of September 21, 2018, by and among Alcentra Capital Corporation, as borrower, the subsidiary guarantors party thereto, ING Capital LLC, as revolving administrative agent, and ING Capital LLC, as collateral agent.(3)
31.1	Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Filed herewith

(1)	Incorporated by reference to the Registrant’s Registration Statement on Form N-2 (File No. 333-194521) filed with the SEC on March 12, 2014.
(2)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 814-01064) filed with the SEC on March 14, 2018.
(3)	Incorporated by reference to the Registrant’s Form 8-K (File No. 814-01064) filed with the SEC on September 21, 2018.

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 6, 2018

By:	/s/ Vijay Rajguru
	Name:  Vijay Rajguru
	Title:   Chief Executive Officer
By:	/s/ Ellida McMillan
	Name:   Ellida McMillan
	Title:   Chief Financial Officer, Chief Operating Officer, Secretary, and Treasurer