U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF REGISTERED MANAGEMENT
INVESTMENT COMPANY
Investment Company Act File Number 811-23447
A3 ALTERNATIVE INCOME FUND
(Exact name of registrant as specified in charter)
90 Madison Street, Suite 303
Denver, Colorado 80206
(Address of Principal Executive Offices)
Registrant’s Telephone Number, including Area Code: (303) 997-9010
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
(Name and address of agent for service)
Date of fiscal year end: September 30
Date of reporting period: September 30, 2021
Item 1. Report to Shareholders
(a)
A3 ALTERNATIVE INCOME FUND
(formerly A3 ALTERNATIVE CREDIT FUND)
AAACX
Annual Report
For the Year Ended September 30, 2021
A3 Alternative Income Fund, (AAACX)
Table of Contents
For the Year Ended September 30, 2021
| | |
Portfolio Manager Commentary | 2 |
Report of Independent Registered Public Accounting Firm | 4 |
Fund Performance | 5 |
Schedule of Investments | 6 |
Statement of Assets and Liabilities | 10 |
Statement of Operations | 11 |
Statements of Changes in Net Assets | 12 |
Statement of Cash Flows | 13 |
Financial Highlights | 14 |
Notes to Financial Statements | 15 |
Other Information | 28 |
Fund Management | 29 |
Privacy Policy | 32 |
This report is submitted for the general information of the shareholders of the Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus, which includes information regarding the Fund’s risks, objectives, fees and expenses, experience of its management and other information.
www.a3.financial
1
A3 Alternative Income Fund, (AAACX)
Portfolio Manager Commentary
As of September 30, 2021 (Unaudited)
Recent Developments
In August 2021, John G. Brant, Jr. and C. Spencer Brant joined A3 Financial Investments, LLC (the “Advisor”) as portfolio managers. John Brant and Spencer Brant have significant experience in private alternative investments and, in particular, in identifying and investing in non-traditional income generating opportunities. The Advisor is pleased to welcome them to the team and expect them to make an immediate contribution to the investment process.
Performance
A3 Alternative Income Fund (the “Fund”) had a net return of -1.57% for the month of September 2021 resulting in a -1.77% return for the third quarter 2021. Year-to-date through September 30, 2021, the Fund had a return of -3.31%. For the 12 months’ ending September 30, 2021, the Fund had a return of -3.25%. Since inception on October 1, 2019 the Fund has a cumulative total net return of 4.99%. As of September 30, 2021, 53.02% of the portfolio holdings were U.S. Government Agency securities, which have an “implied AAA rating” and carry the full faith and credit guarantee of the U.S. Government.
The Fund had a current 30-Day SEC yield of 5.65% (subsidized) and 2.61% (unsubsidized) as of quarter end. The Advisor continues to subsidize the Fund for reimbursement of startup expenses.
In addition to an attractive risk adjusted yield, the Fund has appealing correlation metrics relative to traditional credit indices. Correlations are measured from +1.00 to -1.00, with 0 signifying no correlation. Since inception through September 2021, the Fund has had a +0.16 correlation to the Bloomberg Global Aggregate Index and a +0.09 correlation to the Bloomberg US Corporate High Yield Bond Index.
Past Performance is not indicative of future results.*
Portfolio Review
As most asset classes continue trading at elevated levels, we remain cautious. We do not believe now is the time to take undue risk. We are concerned about inflation and believe it has moved from being more “transitory” in nature to being embedded in the system. The Federal Reserve thus far is tolerant of increased inflation, but we expect it may have to move more aggressively if inflation continues to accelerate. As a result, we continue to favor more short duration, floating rate investments that would likely be less affected in the event the Federal Reserve begins raising interest rates to combat inflation.
The Fund maintained its overweight position in floating rate reverse mortgages in the 3rd quarter of 2021. The mortgages are government guaranteed and are secured by portfolios of residential homes across the country. The collateral coverage and government guaranty provide significant downside mitigation. However, that collateral coverage and government guaranty have not insulated these mortgages from price declines due to higher than anticipated prepayment rates. Unprecedented home price appreciation over the past 18 months has allowed many homeowners to refinance reverse mortgages at rates much faster than historical rates. This negatively affected the price of many of these securities and the income streams they produce. We believe that the rate of home price appreciation will likely moderate in the 4th quarter of 2021 and into 2022 as affordability becomes a more significant issue for new buyers. Further, we believe that reverse mortgage balances in more recent-vintage securities will grow past what is attractive to refinance (prepay). If this occurs, prepayment rates should decline closer to historical rates and prices of these securities should recover. In the meantime, the Fund should continue to collect the income these securities have been generating.
The Fund continues to have exposure to certain credit-centric business development companies. Some of the business development companies invest directly in senior secured loans while others invest in collateralized loan obligations. In both cases, the underlying portfolios are primarily floating rate securities which help offset the effects of an increase in interest rates. The credit quality of the underlying portfolios is relatively strong and the portfolios have been generating significant cash flow. This asset class contributed meaningfully to the Fund’s performance during the 3rd quarter. We expect to continue to grow this investment exposure where we find opportunities to acquire the business development companies at discounts to their net asset values.
At quarter end, the Fund had approximately 22% in cash and equivalents. We anticipate investing the cash balance over time as additional attractive opportunities are identified.
2
A3 Alternative Income Fund, (AAACX)
Portfolio Manager Commentary
As of September 30, 2021 (Unaudited) (continued)
With the addition of John and Spencer Brant on the portfolio management team, we expect to allocate to more private income producing opportunities going forward which should further drive our objective of building a non-correlated, income focused fund. Historically, private markets are more inefficient which often allows for more attractive pricing and structure. However, those advantages need to be balanced with the risk of more limited liquidity. Given our concerns over future interest rate increases, we also anticipate focusing on shorter duration investments.
With the seemingly never-ending global search for yield due to artificially low interest rates, we believe it is more and more difficult to find attractive income opportunities in the widely-traded public markets. It is vital to look elsewhere. The interval fund structure of the Fund provides us the flexibility to invest in income producing assets outside of the traditional fixed income markets, including private investments. We believe this sets the Fund apart from many other income investment alternatives and gives our investors access to investments that they likely could not access through traditional mutual funds.
* | The Adviser and the Fund have entered into an operating expenses limitation agreement (the “Expense Limitation Agreement”) through at least January 21, 2022. Without a waiver, returns would have been lower and any rankings/ratings might have been less favorable. |
The performance shown is net of all fees (including a monthly advisory fee of 1.50% per annum) and expenses and reflects the reinvestment of dividends and investment income. Depending on an investor’s investment date, holding period and other factors, an investor may have an overall performance that underperforms or outperforms the data shown. Returns greater than one year are annualized. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that shared, when redeemed, may be worth more of less than their original cost.
3
A3 Alternative Income Fund, (AAACX)
Report of Independent Registered Public Accounting Firm
September 30, 2021
To the Board of Trustees and Shareholders of
A3 Alternative Income Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of A3 Alternative Income Fund (formerly, A3 Alternative Credit Fund) (the “Fund”), including the schedule of investments, as of September 30, 2021, and the related statements of operations, cash flows and changes in net assets and the financial highlights for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of September 30, 2021, and the results of its operations, the changes in its net assets, its cash flows and its financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The statement of changes in net assets and the financial highlights for the period October 1, 2019 (commencement of operations) to September 30, 2020 were audited by other auditors, whose report dated November 30, 2020, expressed an unqualified opinion on such financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities law and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2021 by correspondence with the custodian. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
BBD, LLP
We have served as the auditor of the A3 Alternative Income Fund since 2021.
Philadelphia, Pennsylvania
November 29, 2021
4
A3 Alternative Income Fund, (AAACX)
Fund Performance
As of September 30, 2021 (Unaudited)
Performance of a $100,000 Investment
This graph compares a hypothetical $100,000 investment in the Fund’s shares, made at its inception, with a similar investment in the Bloomberg Global Aggregate Index. Results include the reinvestment of all dividends and capital gains.
The Bloomberg Global Aggregate Index is a broad-based flagship benchmark that measures the investment grade, global multi-currency, fixed-rate taxable bond market. The index does not reflect expenses, fees or sales charge, which would lower performance. The index is unmanaged and it is not possible to invest in an index.
Average Annual Total Returns as September 30, 2021 | 1 Year | Since
Inception* |
A3 Alternative Income Fund | -3.25% | 2.46% |
Bloomberg Global Aggregate Index | -0.91% | 2.60% |
* | The Fund commenced operations on October 1, 2019 |
The performance data quoted here represents past performance and past performance is not a guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. The most recent month end performance may be obtained by calling (877) 774-7724.
The expense ratio for the Fund was 8.55%, before fee waivers and expense reimbursement, and 3.21% after fee waiver and expense reimbursement, which was stated in the current prospectus. For the Fund’s current one year expense ratios, please refer to the Financial Highlights Section of this report. The Adviser and the Fund have entered into an operating expenses limitation agreement (the “Expense Limitation Agreement”) under which the Adviser has agreed, until at least January 31, 2022, to pay or absorb the ordinary operating expenses of the Fund (excluding (i) interest expenses and dividends on short sales, and any fees and expenses incurred in connection with credit facilities including any commitment fees on borrowings, if any, obtained by the Fund; (ii) transaction costs and other expenses incurred in connection with the acquisition, financing, maintenance, and disposition of the Fund’s investments and prospective investments, including without limitation bank and custody fees, brokerage commissions, legal, data, consulting and due diligence costs, servicing and property management costs, collateral valuations, liquidation and custody costs; (iii) acquired fund fees and expenses; (iv) taxes; and (v) extraordinary expenses including but not limited to litigation costs) to the extent that its management fees plus applicable distribution and shareholder servicing fees and the Fund’s ordinary operating expenses would otherwise exceed, on a year-to-date basis, 1.95% per annum of the Fund’s average daily net assets.
Returns reflect the reinvestment of distributions made by the Fund, if any. The graph and the performance table above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
5
A3 Alternative Income Fund, (AAACX)
Schedule of Investments
As of September 30, 2021
| | Number
of Shares | | | | Value | |
| | | | | CLOSED-END FUNDS — 3.7% | | | | |
| | | 29,882 | | Eagle Point Credit Co., Inc. | | $ | 406,993 | |
| | | | | TOTAL CLOSED-END FUNDS | | | | |
| | | | | (Cost $407,920) | | | 406,993 | |
| | | | | | | | | |
| | | | | BUSINESS DEVELOPMENT COMPANIES — 15.2% | | | | |
| | | 30,100 | | Ares Capital Corp. | | | 611,933 | |
| | | 41,000 | | Owl Rock Capital Corp. | | | 578,920 | |
| | | 73,470 | | PennantPark Investment Corp. | | | 476,820 | |
| | | | | TOTAL BUSINESS DEVELOPMENT COMPANIES | | | | |
| | | | | (Cost $1,676,071) | | | 1,667,673 | |
| | | | | | | | | |
| | | | | PREFERRED STOCKS — 2.3% | | | | |
| | | | | FINANCIAL — 2.3% | | | | |
| | | 10,100 | | Oxford Lane Capital Corp. 6.250%, 2/28/2027 (Callable 2/28/2023)1 | | | 256,035 | |
| | | | | TOTAL PREFERRED STOCKS | | | | |
| | | | | (Cost $244,604) | | | 256,035 | |
| | | | | | | | | |
| | | | | REAL ESTATE INVESTMENT TRUSTS — 1.8% | | | | |
| | | 6,500 | | Ares Commercial Real Estate Corp. | | | 98,020 | |
| | | 6,700 | | Ready Capital Corp. | | | 96,681 | |
| | | | | TOTAL REAL ESTATE INVESTMENT TRUSTS | | | | |
| | | | | (Cost $198,242) | | | 194,701 | |
| | | | | | | | | |
| | Principal
Amount | | | | | | |
| | | | | SYNDICATED PARTICIPATIONS — 0.4% | | | | |
| | | | | Global Merchant Cash, Inc. | | | | |
| | $ | 29,927 | | 1.30, 10/15/20212,3,4,5,6 | | | 6,042 | |
| | | 65,100 | | 1.40, 12/21/20212,3,4,5,6 | | | 13,020 | |
| | | 6,230 | | 1.35, 12/31/20212,3,4,5,6 | | | 1,994 | |
| | | 90,309 | | 1.30, 6/22/20222,3,4,5,6 | | | 10,521 | |
| | | 29,967 | | 1.39, 6/22/20222,3,4,5,6 | | | 6,036 | |
| | | 3,615 | | 1.30, 7/18/20222,3,4,5 | | | 3,163 | |
| | | | | TOTAL SYNDICATED PARTICIPATIONS | | | | |
| | | | | (Cost $199,273) | | | 40,776 | |
See accompanying Notes to Financial Statements.
6
A3 Alternative Income Fund, (AAACX)
Schedule of Investments
As of September 30, 2021 (continued)
| | Principal
Amount | | | | Value | |
| | | | | U.S. GOVERNMENT AND AGENCIES — 54.9% | | | | |
| | | | | COLLATERALIZED MORTGAGE OBLIGATIONS — 54.9% | | | | |
| | | | | Government National Mortgage Association | | | | |
| | $ | 1,488,960 | | 2.118%, 11/20/2067 (Callable 4/20/2033)1,7,8 | | $ | 124,401 | |
| | | 1,433,618 | | 2.307%, 1/20/2068 (Callable 3/20/2034)1,7,8 | | | 159,970 | |
| | | 558,457 | | 2.116%, 10/20/2067 (Callable 8/20/2034)1,7,8 | | | 64,215 | |
| | | 5,854,969 | | 2.073%, 12/20/2066 (Callable 11/20/2033)1,7,8,9 | | | 425,680 | |
| | | 3,221,421 | | 2.225%, 2/20/2067 (Callable 11/20/2031)1,7,8,9 | | | 291,493 | |
| | | 2,634,674 | | 0.811%, 9/20/2069 1,7,8,10 | | | 155,222 | |
| | | 2,787,027 | | 0.719%, 7/20/2069 1,7,8,10 | | | 141,084 | |
| | | 1,197,498 | | 2.329%, 10/20/2066 (Callable 1/20/2031)1,7,8 | | | 91,821 | |
| | | 827,980 | | 1.634%, 2/20/2066 (Callable 3/20/2034)1,7,8 | | | 57,268 | |
| | | 891,576 | | 2.129%, 4/20/2066 (Callable 9/20/2030)1,7,8 | | | 74,289 | |
| | | 1,626,369 | | 1.154%, 8/20/2063 (Callable 3/20/2037)1,7,8 | | | 42,936 | |
| | | 712,814 | | 1.717%, 4/20/2065 (Callable 11/20/2033)1,7,8 | | | 44,847 | |
| | | 572,549 | | 2.436%, 1/20/2067 (Callable 12/20/2033)1,7,8 | | | 49,190 | |
| | | 1,540,022 | | 1.840%, 10/20/2066 (Callable 3/20/2035)1,7,8 | | | 98,395 | |
| | | 412,243 | | 1.872%, 7/20/2065 (Callable 12/20/2034)1,7,8 | | | 35,527 | |
| | | 994,578 | | 1.900%, 9/20/2065 (Callable 6/20/2038)1,7,8 | | | 76,303 | |
| | | 694,916 | | 1.604%, 9/20/2065 (Callable 8/20/2034)1,7,8 | | | 41,200 | |
| | | 687,508 | | 1.761%, 1/20/2066 (Callable 8/20/2032)1,7,8 | | | 45,930 | |
| | | 1,242,021 | | 1.603%, 7/20/2065 (Callable 6/20/2037)1,7,8 | | | 67,166 | |
| | | 1,077,201 | | 1.830%, 4/20/2067 (Callable 11/20/2033)1,7,8 | | | 71,924 | |
| | | 1,712,441 | | 1.866%, 8/20/2067 (Callable 5/20/2034)1,7,8 | | | 116,391 | |
| | | 1,694,940 | | 1.440%, 3/20/2064 (Callable 7/20/2032)1,7,8 | | | 72,204 | |
| | | 1,558,693 | | 1.462%, 5/20/2064 (Callable 2/20/2035)1,7,8 | | | 92,193 | |
| | | 2,356,929 | | 1.930%, 6/20/2065 (Callable 9/20/2030)1,7,8 | | | 173,726 | |
| | | 1,045,162 | | 2.194%, 6/20/2066 (Callable 5/20/2031)1,7,8 | | | 84,593 | |
| | | 2,118,823 | | 2.448%, 2/20/2068 (Callable 10/20/2035)1,7,8 | | | 186,727 | |
| | | 487,134 | | 1.744%, 10/20/2062 (Callable 3/20/2030)1,7,8 | | | 24,103 | |
| | | 688,954 | | 2.209%, 8/20/2067 (Callable 7/20/2032)1,7,8 | | | 65,348 | |
| | | 1,299,534 | | 1.527%, 10/20/2064 (Callable 6/20/2040)1,7,8 | | | 67,838 | |
| | | 3,311,647 | | 1.344%, 11/20/2069 1,7,8,10 | | | 252,281 | |
| | | 3,246,290 | | 1.202%, 11/20/2069 1,7,8,10 | | | 210,648 | |
| | | 3,794,329 | | 1.122%, 12/20/2069 (Callable 12/20/2035)1,7,8 | | | 272,158 | |
| | | 3,588,778 | | 1.022%, 12/20/2069 (Callable 9/20/2033)1,7,8 | | | 186,308 | |
| | | 2,890,357 | | 1.137%, 6/20/2069 (Callable 10/20/2035)1,7,8 | | | 153,391 | |
| | | 2,660,356 | | 1.642%, 5/20/2063 (Callable 10/20/2031)1,7,8 | | | 130,434 | |
| | | 3,566,553 | | 1.670%, 5/20/2063 (Callable 9/20/2028)1,7,8 | | | 257,549 | |
| | | 1,585,944 | | 1.297%, 6/20/2063 (Callable 12/20/2029)1,7,8 | | | 82,842 | |
| | | 1,442,014 | | 1.558%, 11/20/2064 (Callable 3/20/2035)1,7,8 | | | 91,632 | |
| | | 1,722,106 | | 1.620%, 9/20/2066 (Callable 8/20/2034)1,7,8 | | | 99,105 | |
| | | 4,421,427 | | 0.988%, 3/20/2070 1,7,8,10 | | | 234,677 | |
| | | 2,870,294 | | 1.263%, 9/20/2069 1,7,8,10 | | | 194,575 | |
| | | 3,611,246 | | 1.057%, 7/20/2069 (Callable 8/20/2039)1,7,8 | | | 233,377 | |
See accompanying Notes to Financial Statements.
7
A3 Alternative Income Fund, (AAACX)
Schedule of Investments
As of September 30, 2021 (continued)
| | Principal
Amount | | | | Value | |
| | | | | U.S. GOVERNMENT AND AGENCIES (Continued) | | | | |
| | | | | COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) | | | | |
| | | | | Government National Mortgage Association (Continued) | | | | |
| | $ | 2,121,203 | | 1.050%, 11/20/2069 1,7,8,10 | | $ | 130,395 | |
| | | 4,764,532 | | 0.739%, 4/20/2070 1,7,8,10 | | | 232,986 | |
| | | 1,570,813 | | 2.196%, 10/20/2067 (Callable 1/20/2033)1,7,8 | | | 163,458 | |
| | | 764,063 | | 1.705%, 3/20/2068 (Callable 2/20/2038)1,7,8 | | | 35,623 | |
| | | | | | | | 6,003,423 | |
| | | | | TOTAL U.S. GOVERNMENT AND AGENCIES | | | | |
| | | | | (Cost $7,480,631) | | | 6,003,423 | |
| | | | | | | | | |
| | Number
of Shares | | | | | | |
| | | | | SHORT-TERM INVESTMENTS — 25.0% | | | | |
| | | 2,732,773 | | Fidelity Investments Money Market Government Portfolio - Institutional Class, 0.01%9,11 | | | 2,732,773 | |
| | | | | TOTAL SHORT-TERM INVESTMENTS | | | | |
| | | | | (Cost $2,732,773) | | | 2,732,773 | |
| | | | | | | | | |
| | | | | TOTAL INVESTMENTS — 103.3% | | | | |
| | | | | (Cost $12,939,514) | | | 11,302,374 | |
| | | | | Liabilities In Excess of Other Assets — (3.3)% | | | (357,162 | ) |
| | | | | TOTAL NET ASSETS — 100.0% | | $ | 10,945,212 | |
2 | The factor listed represents the repayment amount divided by the advance amount, quoted in a decimal format. |
3 | Level 3 securities fair valued under procedures established by the Board of Trustees. The total value of these securities is $40,776, which represents 0.4% of total net assets of the Fund. |
4 | The maturity date listed is an estimate of the anticipated timing of full repayment. |
5 | Restricted security. The total value of these securities is $40,776, which represents 0.4% of total net assets of the Fund. |
8 | Variable rate security. Rate shown is the rate in effect as of period end. |
9 | All or a portion of this security is segregated as collateral for futures and other derivative instruments. The market value of the securities pledged as collateral was $1,003,467, which represents 9.2% of total net assets of the Fund. |
10 | Call date not available. |
11 | The rate is the annualized seven-day yield at period end. |
See accompanying Notes to Financial Statements.
8
A3 Alternative Income Fund, (AAACX)
Summary of Investments
As of September 30, 2021
| | Security Type/Sector | Percent of Total
Net Assets |
| U.S. Government and Agencies | 54.9% |
| Cash and Other Assets and Liabilities | 21.7% |
| Business Development Companies | 15.2% |
| Closed-End Funds | 3.7% |
| Preferred Stocks | 2.3% |
| Real Estate Investment Trusts | 1.8% |
| Syndicated Participations | 0.4% |
| | Total Net Assets | 100.0% |
See accompanying Notes to Financial Statements.
9
A3 Alternative Income Fund, (AAACX)
Statement of Assets and Liabilities
As of September 30, 2021
Assets: | | | | |
Investments, at value (cost $12,939,514) | | $ | 11,302,374 | |
Cash deposited with broker for futures contracts | | | 284 | |
Receivables: | | | | |
Dividends and interest | | | 171,686 | |
Due from Adviser | | | 94,249 | |
Prepaid expenses | | | 23,565 | |
Total assets | | | 11,592,158 | |
| | | | | |
Liabilities: | | | | |
Due to custodian | | | 2,976 | |
Payables: | | | | |
Fund shares redeemed | | | 495,075 | |
Tax expense payable | | | 66,033 | |
Audit and tax fees | | | 29,500 | |
Fund administration fees | | | 7,609 | |
Transfer agent fees and expenses | | | 4,400 | |
Chief Compliance Officer fees | | | 4,116 | |
Trustees’ fees and expenses | | | 3,709 | |
Fund accounting fees | | | 3,274 | |
Custody fees | | | 930 | |
Accrued other expenses | | | 29,324 | |
Total liabilities | | | 646,946 | |
| | | | | |
Net Assets | | $ | 10,945,212 | |
| | | | | |
Components of Net Assets: | | | | |
Paid-in capital (par value of $0.01 per share with an unlimited number of shares authorized) | | $ | 11,901,308 | |
Total accumulated deficit | | | (956,096 | ) |
Net Assets | | $ | 10,945,212 | |
| | | | | |
Shares of beneficial interest issued and outstanding | | | 1,160,511 | |
Net asset value, offering, and redemption price per share | | $ | 9.43 | |
See accompanying Notes to Financial Statements.
10
A3 Alternative Income Fund, (AAACX)
Statement of Operations
For the Year Ended September 30, 2021
Investment income: | | | | |
Dividends | | $ | 190,497 | |
Interest | | | 595,574 | |
Total investment income | | | 786,071 | |
| | | | | |
Expenses: | | | | |
Advisory fees | | | 170,608 | |
Legal fees | | | 92,323 | |
Tax expenses (see Note 2) | | | 66,033 | |
Chief Compliance Officer fees | | | 50,315 | |
Transfer agent fees and expenses | | | 44,953 | |
Fund administration fees | | | 41,373 | |
Audit and tax fees | | | 30,581 | |
Pricing fees | | | 29,170 | |
Registration fees | | | 27,424 | |
Fund accounting fees | | | 17,496 | |
Shareholder reporting fees | | | 16,368 | |
Insurance fees | | | 16,047 | |
Trustees’ fees and expenses | | | 15,002 | |
Custody fees | | | 14,303 | |
Miscellaneous fees | | | 12,733 | |
Brokerage fees | | | 445 | |
Total expenses | | | 645,174 | |
Advisory fees waived and other expenses absorbed | | | (356,998 | ) |
Advisor reimbursement of tax expense | | | (66,033 | ) |
Net expenses | | | 222,143 | |
Net investment income | | | 563,928 | |
| | | | | |
Realized and Unrealized Gain (Loss): | | | | |
Net realized gain on: | | | | |
Investments | | | 809,922 | |
Futures contracts | | | 256,215 | |
Total net realized gain | | | 1,066,137 | |
Net change in unrealized appreciation/depreciation on investments | | | (2,026,801 | ) |
Net realized and unrealized loss | | | (960,664 | ) |
| | | | | |
Net Decrease in Net Assets from Operations | | $ | (396,736 | ) |
See accompanying Notes to Financial Statements.
11
A3 Alternative Income Fund, (AAACX)
Statements of Changes in Net Assets
| | | For the
Year Ended
September 30,
2021 | | | For the
Year Ended
September 30,
2020* | |
Increase (Decrease) in Net Assets from: | | | | | | | | |
Operations: | | | | | | | | |
Net investment income | | $ | 563,928 | | | $ | 428,392 | |
Net realized gain (loss) on investments and future contracts | | | 1,066,137 | | | | (421,112 | ) |
Net change in unrealized appreciation/depreciation on investments | | | (2,026,801 | ) | | | 389,661 | |
Net increase (decrease) in net assets resulting from operations | | | (396,736 | ) | | | 396,941 | |
| | | | | | | | | |
Distributions to shareholders: | | | | | | | | |
Total distributions to shareholders | | | (567,136 | ) | | | (396,121 | ) |
| | | | | | | | | |
Capital Transactions: | | | | | | | | |
Net proceeds from shares sold | | | 1,574,842 | | | | 10,136,006 | |
Reinvestment of distributions | | | 432,852 | | | | 331,418 | |
Cost of shares redeemed | | | (640,604 | ) | | | (26,250 | ) |
Net increase in net assets from capital transactions | | | 1,367,090 | | | | 10,441,174 | |
| | | | | | | | | |
Total increase in net assets | | | 403,218 | | | | 10,441,994 | |
| | | | | | | | | |
Net Assets: | | | | | | | | |
Beginning of year | | | 10,541,994 | | | | 100,000 | |
End of year | | $ | 10,945,212 | | | $ | 10,541,994 | |
| | | | | | | | | |
Capital Share Transactions: | | | | | | | | |
Shares sold | | | 155,275 | | | | 988,175 | |
Shares reinvested | | | 44,285 | | | | 32,316 | |
Shares redeemed | | | (67,041 | ) | | | (2,500 | ) |
Net increase in capital share transactions | | | 132,519 | | | | 1,017,991 | |
* | The Fund was organized with 10,000 shares of beneficial interest on August 29, 2019 for $100,000, which represents the seed investment made by the Principals of the Adviser. The Fund commenced operations on October 1, 2019. |
See accompanying Notes to Financial Statements.
12
A3 Alternative Income Fund, (AAACX)
Statement of Cash Flows
For the Year Ended September 30, 2021
Cash flows provided by (used in) operating activities: | | | | |
Net decrease in net assets from operations | | $ | (396,736 | ) |
Adjustments to reconcile net decrease in net assets from operations to net cash used in operating activities: | | | | |
Purchases of investments | | | (14,970,716 | ) |
Sales of investments | | | 13,525,858 | |
Net amortization on investments | | | 1,256,417 | |
Net realized gain on investments | | | (809,922 | ) |
Return of capital dividends received | | | 81,568 | |
Net realized gain on paydowns | | | (32,991 | ) |
Net change in unrealized appreciation/depreciation on investments | | | 2,026,801 | |
Change in short-term investments, net | | | (2,161,040 | ) |
(Increase)/Decrease in assets: | | | | |
Dividends and interest | | | 47,182 | |
Due from Adviser | | | (58,470 | ) |
Prepaid expenses | | | (4,645 | ) |
Increase/(Decrease) in liabilities: | | | | |
Offering costs - Adviser | | | (4,256 | ) |
Audit and tax fees | | | (419 | ) |
Custody fees | | | (4,024 | ) |
Transfer agent fees and expenses | | | (4,383 | ) |
Fund administration fees | | | 2,815 | |
Chief Compliance Officer fees | | | 315 | |
Trustees’ fees and expenses | | | 1 | |
Fund accounting fees | | | 1,225 | |
Distributions to shareholders | | | (17 | ) |
Tax expense | | | 66,033 | |
Other accrued expenses | | | 20,181 | |
Net cash used in operating activities | | | (1,419,223 | ) |
| | | | | |
Cash flows provided by (used in) financing activities: | | | | |
Proceeds from shares sold, net of receivable for fund shares sold | | | 1,574,842 | |
Cost of shares repurchased | | | (145,529 | ) |
Distributions paid to shareholders, net of reinvestments | | | (134,284 | ) |
Net cash provided by financing activities | | | 1,295,029 | |
| | | | | |
Net Decrease in Cash and Restricted Cash | | | (124,194 | ) |
| | | | | |
Cash and Restricted Cash: | | | | |
Cash, beginning of year | | | 121,502 | |
End of year1 | | $ | (2,692 | ) |
Non-cash financing activities not included herein consist of $432,852 of reinvested dividends.
1 | Cash and restricted cash include cash, cash deposited with broker and cash due to custodian, as outlined further on the Statement of Assets and Liabilities. |
See accompanying Notes to Financial Statements.
13
A3 Alternative Income Fund, (AAACX)
Financial Highlights
Per share operating performance.
For a capital share outstanding throughout each year.
| | | For the Year Ended
September 30, | |
| | | 2021 | | | 2020* | |
Net asset value, beginning of year | | $ | 10.25 | | | $ | 10.00 | |
Income from Investment Operations: | | | | | | | | |
Net investment income1 | | | 0.49 | | | | 0.68 | |
Net realized and unrealized gain (loss) | | | (0.81 | ) | | | 0.16 | |
Total from investment operations | | | (0.32 | ) | | | 0.84 | |
| | | | | | | | | |
Less Distributions: | | | | | | | | |
From net investment income | | | (0.50 | ) | | | (0.59 | ) |
| | | | | | | | | |
Net asset value, end of year | | $ | 9.43 | | | $ | 10.25 | |
| | | | | | | | | |
Total return2 | | | (3.25 | )%3 | | | 8.52 | % |
| | | | | | | | | |
Ratios and Supplemental Data: | | | | | | | | |
Net assets, end of year (in thousands) | | $ | 10,945 | | | $ | 10,542 | |
| | | | | | | | | |
Ratio of expenses to average net assets (including brokerage fees): | | | | | | | | |
Before fees waived | | | 5.66 | %4,5 | | | 7.99 | %4 |
After fees waived | | | 1.95 | %4 | | | 1.95 | %4 |
Ratio of net investment income to average net assets (including brokerage fees): | | | | | | | | |
Before fees waived | | | 1.24 | %6 | | | 0.53 | % |
After fees waived | | | 4.95 | % | | | 6.57 | % |
| | | | | | | | | |
Portfolio turnover rate | | | 132 | % | | | 89 | % |
* | The Fund was organized with 10,000 shares of beneficial interest on August 29, 2019 for $100,000, which represents the seed investment made by the Principals of the Adviser. The Fund commenced operations on October 1, 2019. |
1 | Based on average shares outstanding for the period. |
2 | Total returns would have been lower had expenses not been waived by the investment advisor. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the repurchase of Fund shares. |
3 | 0.62% of the Fund’s total return consists of a voluntary reimbursement by the adviser for tax expense. Excluding this item, total return would have been (3.87)%. |
4 | Ratio of brokerage fees to average net assets was less than 0.005%. |
5 | Includes tax expense. If this expense was excluded, the ratio of expenses to average net assets before fees waived would have been 5.09%. |
6 | Includes tax expense. If this expense was excluded, the ratio of net investment income to average net assets before fees waived would have been 1.82%. |
See accompanying Notes to Financial Statements.
14
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021
1. Organization
The A3 Alternative Income Fund (the “Fund”), formerly known as the A3 Alternative Credit Fund, is a continuously offered, non-diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”), and organized as a Delaware statutory trust on May 9, 2019. The Fund operates as an interval fund. A3 Financial Investments, LLC serves as the investment adviser (the “Adviser”) of the Fund. The Fund’s investment objective is to seek total return through investments that offer regular income or the potential for price and capital appreciation. The Fund commenced operations on October 1, 2019.
The Fund expects to invest primarily in income-generating assets and will seek the best available risk-adjusted opportunities in fixed income that offer the potential for both stable, regular cash flows and price appreciation.
2. Significant Accounting Policies
Basis of Preparation and Use of Estimates
The Fund is an investment company and follows the accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies and Accounting Standards Update 2013-08. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the 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 at the date of the financial statements, as well as reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from these estimates.
Investment Transactions and Related Investment Income
Investment transactions are accounted for on a trade-date basis. However, for daily net asset value (“NAV”) determination, portfolio securities transactions are reflected no later than in the first calculation on the first business day following trade date. Interest income is recognized on an accrual basis and includes, where applicable, the amortization of premium or accretion of discount using the effective interest method.
Realized gains and losses on investment transactions are determined using cost calculated on a specific identification basis. Paydown gains and losses are recorded as an adjustment to interest income in the Statement of Operations. Dividends are recorded on the ex-dividend date. Distributions from private investments that represent returns of capital in excess of cumulative profits and losses are credited to investment cost rather than investment income.
Federal Income Taxes
The Fund intends to continue to qualify as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended. As so qualified, the Fund will not be subject to federal income tax to the extent it distributes substantially all of its net investment income and capital gains to shareholders. Therefore, no federal income tax provision is required. Management of the Fund is required to determine whether a tax position taken by the Fund is more likely than not to be sustained upon examination by the applicable taxing authority, based on the technical merits of the position. Based on its analysis, there were no tax positions identified by management of the Fund that did not meet the “more likely than not” standard as of September 30, 2021.
The Fund’s policy is to classify interest and penalties associated with underpayment of federal and state income taxes, if any, as income tax expense on its Statement of Operations. As of September 30, 2021, the Fund did not have any interest or penalties associated with the underpayment of any income taxes.
For the tax year ended September 30, 2021, the Fund did not meet the gross income test for qualification as a RIC. In order to continue to qualify as a RIC, the Fund elected to pay an excise tax in the amount of $66,033. The Fund did not meet the gross income test due to the significant price appreciation of certain hedge positions that generated income that was not considered to be qualifying income under the gross income test.
15
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
2. Significant Accounting Policies (continued)
Distributions to Shareholders
Distributions are paid at least quarterly on the Fund’s shares of beneficial interest (“Shares”) in amounts representing substantially all of the Fund’s net investment income, if any, earned each year. The Fund determines annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses (including capital loss carryover); however, it may distribute any excess annually to its shareholders. Distributions to shareholders are recorded on ex-date.
The exact amount of distributable income for each fiscal year can only be determined at the end of the Fund’s fiscal year. Under Section 19 of the Investment Company Act, the Fund is required to indicate the sources of certain distributions to shareholders. The estimated distribution composition may vary from quarter to quarter because it may be materially impacted by future income, expenses and realized gains and losses on securities and fluctuations in the value of the currencies in which Fund assets are denominated.
Reverse Mortgages
The Fund may invest in securities that reflect an interest in reverse mortgages, including Collateralized Mortgage Obligations (“CMOs”). Investments of this type may be accrual in nature and may be insured by the Government National Mortgage Association. In a reverse mortgage, a lender makes a loan to a homeowner based on the homeowner’s equity in his or her home. While a homeowner must be age 62 or older to qualify for a reverse mortgage, reverse mortgages may have no income restrictions. Repayment of the interest or principal for the loan is generally not required until the homeowner dies, sells the home, or ceases to use the home as his or her primary residence. Reverse mortgages are subject to different risks than traditional mortgages because the repayment for the loans is uncertain and may occur sooner or later than anticipated based on the life-span of the homeowner.
CMOs are typically privately offered and sold, which means that less information about the security may be available as compared to publicly offered securities or exchange listed securities and only certain institutions may buy and sell them. As a result, investments in CMOs may be characterized by the Fund as illiquid securities. The Fund invested in CMOs during the year ended September 30, 2021.
Collateralized Loan Obligations and Collateralized Debt Obligations
The Fund may invest in or gain exposure to Collateralized Loan Obligations (“CLOs”) and Collateralized Debt Obligations (“CDOs”). CLOs and CDOs are created by the grouping of certain private loans and other lender assets/collateral into pools. A sponsoring organization establishes a special purpose vehicle to hold the assets/collateral and issue securities. Interests in these pools are sold as individual securities. Payments of principal and interest are passed through to investors and are typically supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guaranty, or senior/subordination. Payments from the asset pools may be divided into several different tranches of debt securities, offering investors various maturity and credit risk characteristics. Some tranches entitled to receive regular installments of principal and interest, other tranches entitled to receive regular installments of interest, with principal payable at maturity or upon specified call dates, and other tranches only entitled to receive payments of principal and accrued interest at maturity or upon specified call dates. Different tranches of securities will bear different interest rates, which may be fixed or floating.
CLOs and CDOs are typically privately offered and sold, and thus, are not registered under the securities laws, which means less information about the security may be available as compared to publicly offered securities and only certain institutions may buy and sell them. As a result, investments in CLOs and CDOs may be characterized by the Fund as illiquid securities. An active dealer market may exist for CLOs and CDOs that can be resold in Rule 144A transactions, but there can be no assurance that such a market will exist or will be active enough for the Fund to sell such securities. The Fund invested in CLOs and CDOs via dedicated strategy closed end funds during the year ended September 30, 2021.
Syndicated Participations
The Fund may invest in syndicated participations, which are typically loans or advances to corporate entities originated by one or more lenders, and then traded in the secondary market. The primary risk of a syndicated participations is the creditworthiness of the corporate borrower. The market for syndicated participations may not be highly liquid and the Fund may have difficulty selling them. These investments primarily expose the Fund to the credit risk of the underlying borrower, but they also expose the Fund to certain risks associated with the loan agent. Syndicated participations settle on a delayed basis, potentially leading to the sale proceeds of such participation not being available to meet redemptions for a substantial
16
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
2. Significant Accounting Policies (continued)
period of time after the sale of the investment. Certain syndicated participations may not be considered “securities,” and purchasers, such as the Fund, therefore may not be entitled to rely on the protections of federal securities laws, including anti-fraud provisions. The Fund invested in syndicated participations during the year ended September 30, 2021.
Valuation of Investments
The Fund’s Valuation Committee (“Valuation Committee”) oversees the valuation of the Fund’s investments on behalf of the Fund. The Board of Trustees of the Fund (the “Board”) has approved the valuation policies and procedures for the Fund (the “Valuation Procedures”). Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on a day the Fund will calculate its net asset value as of the close of business on each day that the New York Stock Exchange is open for business and at such other times as the Board shall determine (each a “Determination Date” or at approximately 4:00 pm U.S. Eastern Time if a security’s primary exchange is normally open at that time), or, if there is no such reported sale on the Determination Date, the mean between the closing bid and asked prices and if no asked price is available, at the bid price. For securities traded on NASDAQ, the NASDAQ Official Closing Price (which is the last trade price at or before 4:00:02 p.m. U.S. Eastern Time adjusted up to NASDAQ’s best offer price if the last trade price is below such bid and down to NASDAQ’s best offer price if the last trade is above such offer price) will be used.
Fixed income securities with a remaining maturity of 60 days or more for which accurate market quotations are readily available will normally be valued according to dealer supplied mean quotations or mean quotations from a recognized pricing service. The independent pricing agents may employ methodologies that utilize actual market transactions (if the security is actively traded), broker-dealer supplied valuations, or matrix pricing. Matrix pricing determines a security’s value by taking into account such factors as security prices, yields, maturities, call features, ratings and developments relating to comparable securities. Debt obligations with remaining maturities of sixty days or less when originally acquired will be valued at their amortized cost, which approximates fair market value.
CMOs are not traded on a national securities exchange and instead may be valued utilizing a market approach. The market approach is a method of determining the valuation of a security based on the selling pricing of similar securities. The types of factors that may be taken into account in pricing CMOs, such as reverse mortgages, include: the yield and spread of similar CMOs where pricing is available in the market; the riskiness and characteristics of the underlying pool of loans; features of the CMO, including weighted average life, investment size and weighted average spread of the underlying loans.
CLOs are not traded on a national securities exchange and instead are valued utilizing a market approach. The market approach is a method of determining the valuation of a security based on the selling price of similar securities. The types of factors that may be taken into account in pricing CLOs include: the yield of similar CLOs where pricing is available in the market; the riskiness of the underlying pool of loans; features of the CLO, including weighted average life test, liability pricing, management fees, covenant cushions, weighted average spread of underlying loans and net asset value.
Unlike publicly traded common stock which trades on national exchanges, there is no central place or exchange for loans or other non-exchange traded instruments. Due to the lack of centralized information and trading, the valuation of loans and other non-exchange traded instruments carries more risk than that of publicly traded common stock. Uncertainties in the conditions of the financial market, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. In addition, other market participants may value instruments differently than the Fund. As a result, the Fund may be subject to the risk that when a non-exchange traded instrument is sold in the market, the amount received by the Fund is less than the value that such security is carried at on the Fund’s books.
The values of some of the assets in the Fund’s portfolio are not readily determinable. The Adviser values these assets at fair value, as determined in good faith by the Adviser, subject to the oversight of the Board. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, the Adviser’s determinations of fair value may differ from the values that would have been used if a ready market for these assets existed or from the prices at which trades occur. Furthermore, the Adviser may not obtain third-party valuations for all of the Fund’s assets. Changes in the fair value of the Fund’s assets directly impact the Fund’s net income and the Fund’s NAV through recording unrealized appreciation or depreciation of its investments and derivative instruments, and so the Adviser’s determination of fair value has a material impact on the Fund’s net income and the Fund’s NAV.
17
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
2. Significant Accounting Policies (continued)
While in many cases the Adviser‘s determination of the fair value of the Fund’s assets is based on valuations provided by third-party dealers and pricing services, the Adviser can and does value assets based upon its judgment and such valuations may differ from those provided by third-party dealers and pricing services. Valuations of certain assets are often difficult to obtain or are unreliable. In general, dealers and pricing services heavily disclaim their valuations. Additionally, dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another. Higher valuations of the Fund’s assets have the effect of increasing the amount of management fees the Fund pays to the Adviser. Therefore, conflicts of interest exist because the Adviser is involved in the determination of the fair value of the Fund’s assets.
The prices provided by a pricing service or independent dealers or the fair value determinations made by the Valuation Committee of the Board of Trustees may be different from the prices used by other funds or from the prices at which securities are actually bought and sold. The prices of certain securities provided by pricing services may be subject to frequent and significant change and will vary depending on the information that is available. Pricing services that value fixed-income securities generally utilize a range of market-based and security specific inputs and assumptions, as well as considerations about general market conditions, to establish a price. Investments may transact in a negotiated manner via appointment, auction, offer or bid wanted in competition. Transaction price and valuation may vary by position size, asset type, investment holding period constraints and modeled cash flow assumptions. The Fund’s ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third-party service providers. Pricing services generally value debt securities assuming orderly transactions of an institutional size, but such securities may be held, or transactions may be conducted in such securities in smaller sizes. Investment size can influence price in negotiated markets and result in the same security having a wide range of prices. Standalone smaller investment positions often trade at lower prices than larger institutional positions. The Fund’s investments in certain fixed-income instruments purchased in smaller sized transactions may contribute positively to the Fund’s performance. As Fund asset levels increase, similar smaller sized transactions, if any, may not have the same relative impact on the Fund’s performance and are not anticipated to have the same relative impact on the Fund’s future performance.
Repurchase Offers
The Fund is a closed-end investment company structured as an interval fund and, as such, has adopted a fundamental policy to make quarterly repurchase offers, at NAV, of no less than 5% of the Fund’s outstanding Shares on the repurchase request deadline. The Fund will offer to purchase only a small portion of its Shares each quarter, and there is no guarantee that shareholders will be able to sell all of the Shares that they desire to sell in any particular repurchase offer. Under current regulations, such offers must be for not less than 5% nor more than 25% of the Fund’s Shares outstanding on the repurchase request deadline. If shareholders tender for repurchase more than the repurchase offer amount for a given repurchase offer, the Fund will repurchase the shares on a pro rata basis. However, the Fund may accept all shares tendered for repurchase by shareholders who own less than one hundred shares and who tender all of their shares, before prorating other amounts tendered. In addition, the Fund will accept the total number of shares tendered in connection with required minimum distributions from an IRA or other qualified retirement plan. It is the shareholder’s obligation to both notify and provide the Fund supporting documentation of a required minimum distribution from an IRA or other qualified retirement plan.
Derivatives and Hedging Disclosures
GAAP requires enhanced disclosures about the Fund’s derivative and hedging activities, including how such activities are accounted for and their effects on the Fund’s financial position, performance, and cash flows. As of September 30, 2021, the Fund had no open derivative instruments and therefore there was no impact to the Statement of Assets and Liabilities. The limited use of derivatives by the Fund during the year ended September 30, 2021 was related to futures contracts and resulted in a net realized gain of $256,215, which is reflected on the Statement of Operations. During the period the Fund traded futures contracts, the average notional amount was as follows:
Derivatives not designated
as hedging instruments | | | Long Futures
Contracts | |
Commodity risk | Notional Amount | | $ | 281,911 | |
18
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
3. Principal Risks
Non-Diversified Status
The Fund is a “non-diversified” management investment company. Thus, there are no percentage limitations imposed by the Investment Company Act on the Fund’s assets that may be invested, directly or indirectly, in the securities of any one issuer. Consequently, if one or more securities are allocated a relatively large percentage of the Fund’s assets, losses suffered by such securities could result in a higher reduction in the Fund’s capital than if such capital had been more proportionately allocated among a larger number of securities. The Fund may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company.
Limited Liquidity
Shares in the Fund provide limited liquidity since shareholders will not be able to redeem Shares on a daily basis. A shareholder may not be able to tender its Shares in the Fund promptly after it has made a decision to do so. In addition, with very limited exceptions, Shares are not transferable, and liquidity will be provided only through repurchase offers made quarterly by the Fund. Shares in the Fund are therefore suitable only for investors who can bear the risks associated with the limited liquidity of Shares and should be viewed as a long-term investment.
Credit Risk
There is a risk that debt issuers will not make payments, resulting in losses to the Fund. In addition, the credit quality of a debt instrument by the Fund may be lowered if an issuer’s financial condition changes. Lower credit quality may lead to greater volatility in the price of a debt instrument and thereby in shares of the Fund. Lower credit quality also may affect liquidity and make it difficult to sell the debt instrument. Default, or the market’s perception that an issuer is likely to default, could reduce the value of a debt instrument, thereby reducing the value of your investment in Fund shares. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio holdings.
Market and Geopolitical Risk
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region, or financial market. Securities in the Fund’s portfolio may underperform due to inflation (or expectations for inflation), interest rates, global demand for particular products or resources, natural disasters, climate change and climate related events, pandemics, epidemics, terrorism, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years, such as terrorist attacks around the world, natural disasters, social and political discord or debt crises and downgrades, among others, may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is difficult to predict when similar events affecting the U.S. or global financial markets may occur, the effects that such events may have and the duration of those effects. Any such event(s) could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. The current novel coronavirus (COVID-19) global pandemic and the aggressive responses taken by many governments, including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines or similar restrictions, as well as the forced or voluntary closure of, or operational changes to, many retail and other businesses, has had negative impacts, and in many cases severe negative impacts, on markets worldwide. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment. Therefore, the Fund could lose money over short periods due to short-term market movements and over longer periods during more prolonged market downturns. During a general market downturn, multiple asset classes may be negatively affected. Changes in market conditions and interest rates can have the same impact on all types of securities and instruments. In times of severe market disruptions, you could lose your entire investment.
Interest Rate Risk
Typically, a rise in interest rates causes a decline in the value of debt securities and loans, and as a result the value of your investment in the Fund will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of debt securities and loans. In general, the market price of debt securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities. Other risk factors include credit risk (the debtor may default), prepayment risk (the debtor may pay its obligation early, reducing the amount of interest payments) and extension risk (the debtor may pay its obligation later than expected, increasing a securities maturity). These risks could affect the value of a particular investment, possibly causing the Fund’s NAV and total return to be reduced and fluctuate more than other types of investments
19
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
3. Principal Risks (continued)
Asset-Backed and Mortgage-Backed Security Risk
Prepayment risk is associated with mortgage-backed and asset-backed securities including CMOs. If interest rates fall, the underlying debt may be repaid ahead of schedule, reducing the value of the Fund’s investments. If interest rates rise, there may be fewer prepayments, which would cause the average bond maturity to rise, increasing the potential for the Fund to lose money. The value of these securities may be significantly affected by changes in interest rates, the market’s perception of issuers, and the creditworthiness of the parties involved. The ability of the Fund to successfully utilize these instruments may depend on the ability of the Fund’s Adviser to forecast interest rates and other economic factors correctly. These securities may have a structure that makes their reaction to interest rate changes and other factors difficult to predict, making their value highly volatile. Certain mortgage-backed securities may be secured by pools of mortgages on single-family properties, multi-family properties, and/or commercial properties. Similarly, asset-backed securities may be secured by pools of loans, such as student loans, automobile loans and credit card receivables. The credit risk on such securities is affected by homeowners or borrowers defaulting on their loans. The values of assets underlying mortgage-backed and asset-backed securities may decline and, therefore, may not be adequate to cover underlying investors. Mortgage-backed securities and other securities issued by participants in housing and commercial real estate finance, as well as other real estate-related markets experienced extraordinary weakness and volatility in the aftermath of the 2007-2008 financial crisis. Possible legislation in the area of residential mortgages, credit cards and other loans that may collateralize the securities in which the Fund may invest could negatively impact the value of the Fund’s investments. To the extent the Fund focuses its investments in particular types of mortgage-backed or asset-backed securities, the Fund may be more susceptible to risk factors affecting such types of securities. Certain ABS and MBS that the Fund acquires are subordinated in cash flow priority to other more “senior” securities of the same securitization. The exposure to defaults on the underlying mortgages is severely magnified in subordinated securities. Certain subordinated securities (“first loss securities”) absorb all losses from default before any other class of securities is at risk. Such securities therefore are considered to be highly speculative investments.
Syndicated Loans and Participations Risk
The Fund’s investment program may include significant amounts of syndicated loans and participations. These obligations are subject to unique risks, including (i) the possible avoidance of an investment transaction as a “preferential transfer,” “fraudulent conveyance” or “fraudulent transfer,” among other avoidance actions, under relevant bankruptcy, insolvency and/or creditors’ rights laws, (ii) so-called “lender liability” claims by the issuer of the obligations, (iii) environmental liabilities that may arise with respect to collateral securing the obligations, (iv) limitations on the ability of the Fund to directly enforce its rights with respect to participations and (v) the contractual nature of participations where the Fund takes on the credit risk of the agent bank rather than the actual borrower.
The Fund may acquire interests in loans or advances either directly (by way of assignment) or indirectly (by way of participation). The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a contracting party under the loan agreement with respect to the loan; however, its rights can be more restricted than those of the assigning institution. Participations in a portion of a loan or advance typically result in a contractual relationship only with the institution participating out the interest and not with the obligor. The Fund would, in such a case, have the right to receive payments of principal and interest to which it is entitled only from the institution selling the participation, and not directly from the obligor, and only upon receipt by such institution of such payments from the obligor. As the owner of a participation, the Fund generally will have no right to enforce compliance by the obligor with the terms of the agreement or to vote on amendments to the agreement, nor any rights of set-off against the obligor, and the Fund may not directly benefit from collateral supporting the loan in which it has purchased the participation. In addition, in the event of the insolvency of the selling institution, the Fund may be treated as a general creditor of such selling institution, and may not have any exclusive or senior claim with respect to the selling institution’s interest in, or the collateral with respect to, the applicable loan. Consequently, the Fund will assume the credit risk of both the obligor and the institution selling the participation to the Fund. As a result, concentrations of participations from any one selling institution subject the Fund to an additional degree of risk with respect to defaults by such selling institution.
The Fund may be subject to risks associated with syndicated loans and participations. Under the documentation for syndicated loans, a financial institution or other entity typically is designated as the administrative agent and/or collateral agent. This agent is granted a lien on any collateral on behalf of the other lenders and distributes payments on the indebtedness as they are received. The agent is the party responsible for administering and enforcing the loan and generally may take actions only in accordance with the instructions of a majority or two-thirds in commitments and/or principal amount of the associated indebtedness. In most cases for the Fund’s syndicated loan investments, the Fund does not expect to hold a sufficient amount of the indebtedness to be able to compel any actions by the agent. Consequently, the Fund would only be able to direct such
20
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
3. Principal Risks (continued)
actions if instructions from the Fund were made in conjunction with other holders of associated indebtedness that together with the Fund compose the requisite percentage of the related indebtedness then entitled to take action. Conversely, if holders of the required amount of the associated indebtedness other than the Fund desire to take certain actions, such actions may be taken even if the Fund did not support such actions. Furthermore, if a syndicated loan is subordinated to one or more senior loans made to the applicable obligor, the ability of the Fund to exercise such rights may be subordinated to the exercise of such rights by the senior lenders. Whenever the Fund is unable to direct such actions, the parties taking such actions may not have interests that are aligned with us, and the actions taken may not be in the Fund’s best interests. In addition, the Fund’s ability to direct such actions may be limited by the tax rules governing publicly traded partnerships.
If an investment is a syndicated revolving loan or delayed drawdown loan, other lenders may fail to satisfy their full contractual funding commitments for such loan, which could create a breach of contract, result in a lawsuit by the obligor against the lenders and adversely affect the fair market value of the Fund’s investment.
There is a risk that a loan or participation agent may become bankrupt or insolvent. Such an event would delay, and possibly impair, any enforcement actions undertaken by holders of the associated indebtedness, including attempts to realize upon the collateral securing the associated indebtedness and/or direct the agent to take actions against the related obligor or the collateral securing the associated indebtedness and actions to realize on proceeds of payments made by obligors that are in the possession or control of any other financial institution. In addition, the Fund may be unable to remove the agent in circumstances in which removal would be in the Fund’s best interests. Moreover, agented loans typically allow for the agent to resign with certain advance notice, and the Fund may not find a replacement agent on a timely basis, or at all, in order to protect its investment.
LIBOR Risk
Certain of the Fund’s investments, payment obligations and financing terms may be based on floating rates, such as LIBOR, Euro Interbank Offered Rate and other similar types of reference rates (each, a “Reference Rate”). On March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced the timeline for the cessation of all LIBOR benchmarks. All LIBOR benchmarks related to sterling, euro, Swiss franc and Japanese yen and the 1-week and 2-month US dollar settings will permanently cease immediately after December 31, 2021, and the remaining US dollar settings will cease immediately after June 30, 2023. The transition away from Reference Rates may lead to increased volatility and illiquidity in markets that are tied to such Reference Rates and reduced values of Reference Rate-related instruments. This announcement and any additional regulatory or market changes that occur as a result of the transition away from Reference Rates may have an adverse impact on a Fund’s investments, performance, or financial condition.
4. Investment Advisory and Other Agreements
A3 Financial Investments, LLC serves as the Fund’s investment adviser pursuant to a management agreement with the Fund that has an initial two-year term and is subject to annual renewal thereafter by the Fund’s Board of Trustees (the “Board”). The Adviser is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Adviser is entitled to receive a monthly fee at the annual rate of 1.50% of the Fund’s average daily net assets (the “Advisory Fee”).
The Adviser and the Fund have entered into an operating expenses limitation agreement (the “Expense Limitation Agreement”) under which the Adviser has agreed, until at least January 31, 2022, to pay or absorb the ordinary operating expenses of the Fund (excluding (i) interest expenses and dividends on short sales, and any fees and expenses incurred in connection with credit facilities including any commitment fees on borrowings, if any, obtained by the Fund; (ii) transaction costs and other expenses incurred in connection with the acquisition, financing, maintenance, and disposition of the Fund’s investments and prospective investments, including without limitation bank and custody fees, brokerage commissions, legal, data, consulting and due diligence costs, servicing and property management costs, collateral valuations, liquidation and custody costs; (iii) acquired fund fees and expenses; (iv) taxes; and (v) extraordinary expenses including but not limited to litigation costs) to the extent that its management fees plus applicable distribution and shareholder servicing fees and the Fund’s ordinary operating expenses would otherwise exceed, on a year-to-date basis, 1.95% per annum of the Fund’s average daily net assets.
21
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
4. Investment Advisory and Other Agreements (continued)
For the year ended September 30, 2021, the Adviser waived fees and reimbursed expenses totaling $356,998. For a period not to exceed three years from the date on which advisory fees are waived or Fund expenses were absorbed by the Adviser, the Adviser may recoup amounts waived or absorbed, provided it is able to effect such recoupment and remain in compliance with (a) the limitation on Fund expenses in effect at the time of the relevant reduction in advisory fees or payment of the Fund’s expenses, and (b) the limitation on Fund expenses at the time of the recoupment. At September 30, 2021 the amount of these potentially recoverable expenses is $773,985 expiring on the dates below:
August 29, 2022 | | $ | 23,003 | |
September 30, 2023 | | | 393,984 | |
September 30, 2024 | | | 356,998 | |
Total | | $ | 773,985 | |
The Adviser has agreed to reimburse the Fund $66,033 for tax expenses. The amount is reported on the Fund’s Statement of Operations under the caption “Advisor reimbursement of tax expense”. This reimbursement had a positive 0.62% impact on the Fund’s total return for year ended September 30, 2021.
Foreside Financial Services, LLC serves as the Fund’s distributor (the “Distributor”) and Foreside Fund Officer Services, LLC provides Chief Compliance Officer (“CCO”) services to the Fund; UMB Fund Services, Inc. (“UMBFS”) serves as the Fund’s fund accountant, transfer agent and administrator; UMB Bank, n.a., an affiliate of UMBFS, serves as the Fund’s custodian. The Fund’s allocated fees incurred for services provided for the year ended September 30, 2021, are reported on the Statement of Operations.
Certain officers and a Trustee of the Fund are employees of the Adviser or affiliated with the Distributor.
5. Control Ownership
The beneficial ownership, either directly or indirectly, of more than twenty-five percent (25%) of the voting securities creates a presumption of control of the Fund, under Section 2(a)(9) of the 1940 Act. As of September 30, 2021, Anthony R. Bosch, a Trustee of the Fund, had ownership in the Fund in the amount of 27.68%. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by Shareholders of the Fund.
6. Fair Value of Investments
The Fund uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accordingly, the fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| | ● | Level 1 – Valuations based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| | ● | Level 2 – Valuations based on inputs, other than quoted prices included in Level 1, that are observable either directly or indirectly. |
| | ● | Level 3 – Valuations based on inputs that are both significant and unobservable to the overall fair value measurement. |
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The availability of valuation techniques and observable inputs can vary from investment to investment and are affected by a wide variety of factors, including type of investment, whether the investment is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, determining fair value requires more judgment. Because of the inherent uncertainly of valuation, estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Accordingly, the degree of judgment exercised by the Adviser in determining fair value is greatest for investments categorized in Level 3.
22
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
6. Fair Value of Investments (continued)
The Fund’s assets recorded at fair value have been categorized based on a fair value hierarchy as described in the Fund’s significant accounting policies. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2021:
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Investments | | | | | | | | | | | | | | | | |
Closed-end Funds | | $ | 406,993 | | | $ | — | | | $ | — | | | $ | 406,993 | |
Business Development Companies | | | 1,667,673 | | | | — | | | | — | | | | 1,667,673 | |
Preferred Stocks | | | 256,035 | | | | — | | | | — | | | | 256,035 | |
Real Estate Investment Trusts | | | 194,701 | | | | — | | | | — | | | | 194,701 | |
Syndicated Participations | | | — | | | | — | | | | 40,776 | | | | 40,776 | |
U.S. Government and Agencies | | | — | | | | 6,003,423 | | | | — | | | | 6,003,423 | |
Short-Term Investments | | | 2,732,773 | | | | — | | | | — | | | | 2,732,773 | |
Total Investments | | $ | 5,258,175 | | | $ | 6,003,423 | | | $ | 40,776 | | | $ | 11,302,374 | |
All transfers between fair value levels are recognized by the Fund at the end of each reporting period.
The following table presents the changes in assets and transfers in and out which are classified in Level 3 of the fair value hierarchy for the year ended September 30, 2021:
| | Corporate
Bonds | | | Syndicated
Loans and
Participations | |
October 1, 2020 | | $ | 358,871 | | | $ | 254,031 | |
Transfers In | | | — | | | | — | |
Transfers Out | | | — | | | | — | |
Purchases | | | — | | | | 170,358 | |
Sales | | | (366,250 | ) | | | — | |
Principal paydowns | | | — | | | | (318,992 | ) |
Realized gains (losses) | | | 6,250 | | | | 24,804 | |
Change in unrealized appreciation (depreciation)* | | | | | | | (126,591 | ) |
Amortization | | | 1,129 | | | | 37,166 | |
September 30, 2021 | | $ | — | | | $ | 40,776 | |
| * | Includes unrealized depreciation of 158,497 for investments held as of September 30, 2021. |
The following table summarizes the valuation techniques and significant unobservable inputs used for the Fund’s investments that are categorized in Level 3 of the fair value hierarchy as of September 30, 2021.
Investments | | Fair Value | | Valuation
Technique | Unobservable
Inputs | Range of
Inputs |
Syndicated Participations | | $ | 40,776 | | Income Approach | Factor Rate | 1.30 – 1.40 |
7. Capital Stock
The Fund is authorized as a Delaware statutory trust to issue an unlimited number of Shares. The minimum initial investment in the Fund by any investor is $100,000. However, there are no initial or subsequent investment minimums for accounts maintained by financial institutions (such as registered investment advisers and trusts) for the benefit of their clients who purchase shares
23
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
7. Capital Stock (continued)
through investment programs such as (1) fee-based advisory programs; (2) employee benefit plans (e.g., 401(k) or 457(b) retirement plans; (3) mutual fund platforms; and (4) consulting firms. In addition, there is no initial or subsequent investment minimum for Trustees or officers of the Fund, directors, officers and employees of the Adviser or Distributor or any of their affiliates. Minimum investment amounts may be waived in the discretion of the Fund or the Adviser. The Distributor is not required to sell any specific number or dollar amount of the Fund’s shares, but will use commercially reasonable efforts to sell the shares.
A substantial portion of the Fund’s investments will be illiquid. For this reason, the Fund is structured as a closed-end interval fund, which means that the shareholders will not have the right to redeem their Shares on a daily basis. In addition, the Fund does not expect any trading market to develop for the Shares. As a result, if investors decide to invest in the Fund, they will have very limited opportunity to sell their Shares. For each repurchase offer the Board will set an amount between 5% and 25% of the Fund’s Shares based on relevant factors, including the liquidity of the Fund’s positions and the shareholders’ desire for liquidity. A shareholder whose Shares (or a portion thereof) are repurchased by the Fund will not be entitled to a return of any sales charge that was charged in connection with the shareholder’s purchase of the Shares.
Pursuant to Rule 23c-3 under the Investment Company Act, on a quarterly basis, the Fund offers to repurchase at NAV per share determined as of the close of regular trading on the New York Stock Exchange no later than the 14th day after the repurchase offer ends, or the next business day if the 14th day is not a business day. The results of the repurchase offers conducted for the year ended September 30, 2021 are as follows:
Commencement Date | November 13, 2020 | February 12, 2021 |
Repurchase Request | December 17, 2020 | March 17, 2021 |
Repurchase Pricing date | December 31, 2020 | March 31, 2021 |
| | | | | | | | | |
Net Asset Value as of Repurchase Offer Date | | $ | 10.08 | | | $ | 10.01 | |
Amount Repurchased | | $ | 0 | | | $ | 145,129 | |
Percentage of Outstanding Shares Repurchased | | | 0 | % | | | 1.25 | % |
Commencement Date | May 14, 2021 | August 13, 2021 |
Repurchase Request | June 16, 2021 | September 16, 2021 |
Repurchase Pricing date | June 30, 2021 | September 30, 2021 |
| | | | | | | | | |
Net Asset Value as of Repurchase Offer Date | | $ | 9.71 | | | $ | 9.43 | |
Amount Repurchased | | $ | 0 | | | $ | 495,475 | |
Percentage of Outstanding Shares Repurchased | | | 0 | % | | | 4.33 | % |
8. Federal Income Taxes
At September 30, 2021, gross unrealized appreciation and depreciation on investments, based on cost for federal income tax purposes were as follows:
Cost of investments | | $ | 12,939,514 | |
Gross unrealized appreciation | | | 49,662 | |
Gross unrealized depreciation | | | (1,686,802 | ) |
Net unrealized depreciation on investments | | $ | (1,637,140 | ) |
24
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
8. Federal Income Taxes (continued)
GAAP requires that certain components of net assets be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. For the year ended September 30, 2021 permanent differences in book and tax accounting resulting primarily from differing treatments for amortization of organizational costs have been reclassified to paid in capital and total accumulated deficit as follows:
| | Increase (Decrease) | |
| | Paid-in Capital | | | Total Accumulated Deficit | |
| | $ | 40 | | | $ | (40 | ) |
The difference between cost amounts for financial statement and federal income tax purposes is due primarily to timing difference in recognizing certain gains and losses in security transitions.
As of September 30, 2021, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income | | $ | 571,966 | |
Undistributed long-term capital gains | | | 109,691 | |
Accumulated capital and other losses | | | — | |
Organizational costs deferral | | | (613 | ) |
Unrealized depreciation on investments | | | (1,637,140 | ) |
Total accumulated deficit | | $ | (956,096 | ) |
The tax character of distributions paid during the fiscal years ended September 30, 2021 and September 30, 2020 was as follows:
| | 2021 | | | 2020 | |
Distribution paid from: | | | | | | | | |
Ordinary income | | $ | 567,136 | | | $ | 396,121 | |
Net long-term capital gains | | | — | | | | — | |
Total distributions paid | | $ | 567,136 | | | $ | 396,121 | |
The A3 Alternative Income Fund utilized $382,118 of its capial loss carryforwards during the year ended September 30, 2021.
9. Investments in Restricted Securities
Restricted securities include securities that have not been registered under the Securities Act of 1933, as amended, and securities that are subject to restrictions on resale. The Fund may invest in restricted securities that are consistent with the Fund’s investment objectives and investment strategies. Investments in restricted securities are valued at fair value as determined in good faith in accordance with procedures adopted by the Board of Trustees. It is possible that the estimated value may differ significantly from the amount that might ultimately be realized in the near term, and the difference could be material.
25
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
9. Investments in Restricted Securities (continued)
Additional information on each restricted security held by the Fund on September 30, 2021 is as follows:
Security | | Initial
Acquisition Date | | | Amount or
Units | | | Cost | | | Fair
Value | | | % of
Net Assets | |
Global Merchant Cash, Inc., 1.30, 10/15/2021 | | | 5/12/2020 | | | | 29,927 | | | $ | 27,520 | | | $ | 6,042 | | | | 0.06 | % |
Global Merchant Cash, Inc., 1.40, 12/21/2021 | | | 2/28/2020 | | | | 65,100 | | | | 52,080 | | | | 13,020 | | | | 0.12 | % |
Global Merchant Cash, Inc., 1.35, 12/31/2021 | | | 4/13/2020 | | | | 6,230 | | | | 5,731 | | | | 1,994 | | | | 0.02 | % |
Global Merchant Cash, Inc., 1.30, 6/22/2022 | | | 9/25/2020 | | | | 90,309 | | | | 83,085 | | | | 10,521 | | | | 0.10 | % |
Global Merchant Cash, Inc., 1.39, 6/22/2022 | | | 9/25/2020 | | | | 29,967 | | | | 27,531 | | | | 6,036 | | | | 0.06 | % |
Global Merchant Cash, Inc., 1.30, 7/18/2022 | | | 10/22/2020 | | | | 3,615 | | | | 3,326 | | | | 3,163 | | | | 0.03 | % |
10. Investment Transactions
For the year ended September 30, 2021, purchases and sales of investments, excluding short-term investments, were $14,970,716 and $13,525,858, respectively.
11. Indemnifications
In the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund expects the risk of loss to be remote.
12. Change in Independent Public Accountant
On December 18, 2020, the Fund, by action of the Audit Committee of the Board, approved BBD, LLP (“BBD”) to serve as the independent registered public accounting firm to audit the financial statements of the Fund for the fiscal year ending September 30, 2021. Previously, Cohen & Company, Ltd. (“Cohen”) served as the independent registered public accounting firm to the Fund.
Cohen’s report on the financial statements for the Fund for the fiscal year ended September 30, 2020 contained no adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During such fiscal year there were no (i) disagreements with Cohen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Cohen, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the Fund’s financial statements for such years, nor (ii) “reportable events” of the kinds described in Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
During the fiscal year ended September 30, 2020, neither the Fund nor anyone on behalf of the Fund had consulted BBD, LLP on items that concerned (a) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on an Fund’s financial statements, or (b) the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and related instructions) or reportable events (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K). The selection of BBD does not reflect any disagreements or dissatisfaction by the Fund, the Board, or the Audit Committee with the performance of Cohen.
26
A3 Alternative Income Fund, (AAACX)
Notes to Financial Statements
September 30, 2021 (continued)
13. Subsequent Events
In preparing these financial statements, management has evaluated subsequent events through the date of issuance of the financial statements included herein.
The Fund commenced a repurchase offer November 16, 2021 as follows:
Commencement Date | November 16, 2021 |
Repurchase Request | December 17, 2021 |
Repurchase Pricing date | December 31, 2021 |
There have been no other subsequent events that occurred during such period that would require disclosure or would be required to be recognized in the financial statements.
27
A3 Alternative Income Fund, (AAACX)
Other Information
September 30, 2021 (Unaudited)
Proxy Voting
The Fund is required to file Form N-PX, with its complete proxy voting record for the 12 months ended June 30, no later than August 31. The Fund’s Form N-PX filing and a description of the Fund’s proxy voting policies and procedures are available: (i) without charge, upon request, by calling the Fund at (877) 774-7724 or (ii) by visiting the SEC’s website at www.sec.gov.
Availability of Quarterly Portfolio Schedules
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-PORT. The Fund’s Form N-PORT is available, without charge and upon request, on the SEC’s website at www.sec.gov.
Matters Submitted to a Vote of Shareholders
On April 1, 2021, shareholders holding 59.21% of the outstanding shares of the Fund approved a new management agreement between the Fund and A3 Financial Investments, LLC, via written consent.
28
A3 Alternative Income Fund, (AAACX)
Fund Management
September 30, 2021 (Unaudited)
Following is a list of the Trustees and executive officers of the Fund and their principal occupation over the last five years. The Fund’s Statement of Additional Information includes additional information about the Trustees and is available free of charge, upon request, by calling the Fund at (877) 774-7724. Unless otherwise noted, the address of each Trustee and Officer is c/o A3 Financial Investments, LLC, 90 Madison Street, Suite 303, Denver, Colorado 80206.
Independent Trustees
Name, Address
and Year of Birth | Position/
Term of Office* | Principal Occupation During
the Past Five Years | Number of
Portfolios in
Fund Complex**
Overseen by
Trustee | Other Directorships
held by Trustee
During the Past
Five Years |
George Peck
Caulkins, III
Year: 1964 | Trustee, Since 2019 | Caulkins Citrus Co., President (January 1999 to Present); Greendeck Capital, Manager (June 1996 to Present); Breckenridge Holding Co., Board Member (October 2005 to Present); AgPixel Marine Corps Heritage Foundation, Board Member (April 2010 to Present); Graland School Foundation, Board Member (September 2007 to Present); ACE Scholarships, Board Member (June 2004 to Present) | 1 | None |
Thomas E.
“Chip” Clarke
Year: 1963 | Trustee, Since 2019 | Transwestern, President (February 1991 to Present) | 1 | None |
Adam Paul Farver
Year: 1976 | Trustee, Since 2019 | Pella Corporation, Chairman of the Board (May 2015 to Present); Pella Corporation, Director (May 2012 to May 2015); Mettle Ventures, LLC, President (December 2010 to Present); Graland Country Day School, Trustee (September 2017 to Present) | 1 | None |
* | The term of office for each Trustee listed above will continue indefinitely. |
** | The “Fund Complex” consists of the Fund. |
29
A3 Alternative Income Fund, (AAACX)
Fund Management
September 30, 2021 (Unaudited) (continued)
Interested Trustees and Officers
Name, Address
and Year of Birth | Position/
Term of Office* | Principal Occupation During
the Past Five Years | Number of
Portfolios in
Fund Complex**
Overseen by
Trustee | Other Directorships
held by Trustee
During the Past
Five Years |
Anthony Bosch***
Year: 1965 | Trustee, President and Secretary, Since 2019 | A3 Financial Investments, LLC, Co-Founder (January 2019 to Present); SALT Blockchain Asset Management (SBAM), Director Investor Relations (February 2018 to January 2019); Principal, Absolute Investment Advisers LLC, (June 2004 to February 2018); | 1 | None |
Matthew Dupree
Year: 1968 | Treasurer, Since 2021 | CFO, Southern Sky Capital, LLC (November 2017 to December 2019); Vice President, Mettle Ventures (January 2011 to November 2017); President, Hilltop Investment Advisors, September 1996 to present) | N/A | N/A |
Brandon Kipp
Year: 1983 | Chief Compliance Officer, Since 2019 | Director, Foreside Financial Group, LLC (May 2019 to Present); Senior Fund Compliance Officer, Ultimus Fund Solutions, LLC (July 2017 to May 2019); Assistant Vice President and Compliance Manager, UMB Fund Services, Inc. (March 2014 to July 2017). | N/A | N/A |
30
A3 Alternative Income Fund, (AAACX)
Fund Management
September 30, 2021 (Unaudited) (continued)
Name, Address
and Year of Birth | Position/
Term of Office* | Principal Occupation During
the Past Five Years | Number of
Portfolios in
Fund Complex**
Overseen by
Trustee | Other Directorships
held by Trustee
During the Past
Five Years |
Lars O. Soderberg Year: 1959 | Vice President, Since 2019 | Founder, Principal, A3 Financial Investments, LLC (January 2019 to Present); SBAM, Director, Investor Relations, (January 2018 to January 2019); Sales Associate, Aqueduct Capital (November 2015 to September 2016); Chief Marketing Officer, ICAP (Hedge Fund) (July 207 to June 2015). | N/A | N/A |
Christian Aymond Year: 1966 | Vice President, Since 2019 | Principal, A3 Financial Investments, LLC (January 2019 to Present); SBAM, Director, Investor Relations (February 2018 to January 2019); Principal, Absolute Investment Advisors (June 2004 to February 2018). | N/A | N/A |
* | The term of office for each Trustee and officer listed above will continue indefinitely. |
** | The “Fund Complex” consists of the Fund. |
*** | Anthony Bosch is an interested person of the Fund due to his role as a co-founder of A3 Financial Investments, LLC, the adviser to the Fund. |
31
A3 Alternative Income Fund, (AAACX)
Privacy Policy
September 30, 2021 (Unaudited)
August 2020
FACTS | WHAT DOES A3 ALTERNATIVE INCOME FUND DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include: |
● Social Security number ● Assets ● Retirement Assets ● Transaction History ● Checking Account Information | ● Purchase History ● Account Balances ● Account Transactions ● Wire Transfer Instructions |
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information, the information A3 Alternative Income Fund chooses to share and whether you can limit this sharing. |
Reasons we can share your personal information | Does A3 Alternative Income Fund Share? | Can you limit this sharing? |
For our everyday business purposes –
such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No |
For our marketing purposes –
to offer our products and services to you | No | We do not share. |
For joint marketing with other financial companies | No | We do not share. |
For our affiliates’ everyday business purposes –
information about your transactions and experiences | No | We do not share. |
For our affiliates’ everyday business purposes –
information about your creditworthiness | No | We do not share. |
For nonaffiliates to market to you | No | We do not share. |
Questions? | Call (877) 774-7724 |
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A3 Alternative Income Fund, (AAACX)
Privacy Policy
September 30, 2021 (Unaudited) (continued)
Who we are |
Who is providing this notice? | A3 Alternative Income Fund |
What we do |
How does A3 Alternative Income Fund protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. Our service providers are held accountable for adhering to strict policies and procedures to prevent any misuse of your nonpublic personal information. |
How does A3 Alternative Income Fund collect my personal information? | We collect your personal information, for example, when you: ■ open an account ■ provide account information ■ give us your contact information ■ make deposits or withdrawals from your account ■ make a wire transfer ■ tell us where to send money ■ tells us who receives the money ■ show your government-issued ID ■ show your driver’s license |
Why can’t I limit all sharing? | Federal law gives you the right to limit only: ■ sharing for affiliates’ everyday business purposes – information about your creditworthiness ■ affiliates from using your information to market to you ■ sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
Definitions |
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies. ■ A3 Alternative Income Fund does not share with our affiliates for marketing purposes. |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies. ■ A3 Alternative Income Fund does not share with nonaffiliates so they can market to you. |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. ■ A3 Alternative Income Fund does not jointly market. |
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Investment Adviser
A3 Financial Investments, LLC
90 Madison Street, Suite 303
Denver, Colorado 80206
www.a3.financial
Custodian
UMB Bank, n.a.
928 Grand Boulevard, 5th Floor
Kansas City, Missouri 64106
Fund Administrator, Transfer Agent, and Fund Accountant
UMB Fund Services
235 W. Galena Street
Milwaukee, WI 53212-3949
Phone: (414) 299-2200
Distributor
Foreside Financial Services, LLC
Three Canal Plaza, Suite 100
Portland, Maine 04101
www.foreside.com
Independent Registered Public Accounting Firm
BBD, LLP
1835 Market Street, 3rd Floor
Philadelphia, PA 19103
(b) Not applicable.
Item 2. Code of Ethics.
(a) The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party.
(c) There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description.
(d) The registrant has not granted any waivers, during the period covered by this report, including an implicit waiver, from a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item's instructions.
Item 3. Audit Committee Financial Expert.
The Board of Trustees of the Registrant has determined that the Registrant does not have an audit committee financial expert serving on its audit committee. The audit committee is composed of the Registrant’s two independent Trustees, each of whom possesses extensive industry experience, but none of whom has all of the technical attributes identified in Instruction 2(b) to Item 3 of Form N-CSR to qualify as an “audit committee financial expert.” The Board of Trustees believes that the audit committee has sufficient knowledge and experience to meet its obligations as the audit committee of the Registrant. In addition, the Board of Trustees notes that the audit committee has the authority to retain any experts necessary to carry out its duties.
Item 4. Principal Accountant Fees and Services.
Audit Fees
(a) The aggregate fees billed for the fiscal year for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for that fiscal year are $26,000 for 2021 and $30,000 for 2020.
Audit-Related Fees
(b) The aggregate fees billed for the last fiscal year for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item are $0 for 2021 and $0 for 2020. The fees listed in item 4 (b) are related to out-of-pocket expenses in relation to the annual audit of the registrant.
Tax Fees
(c) The aggregate fees billed for the last fiscal year for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $3,500 for 2021 and $5,000 for 2020.
All Other Fees
(d) The aggregate fees billed for the last fiscal year for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2021 and $0 for 2020.
(e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The Registrant's Audit Committee must pre-approve the audit and non-audit services of the Auditors prior to the Auditor's engagement.
(e)(2) The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for the last fiscal year of the registrant was $0 for 2021 and $0 for 2020.
(h) The registrant's audit committee of the board of trustees has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1(a) of this form.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
A3 Alternative Income Fund
Proxy Voting Policy and Procedures
The Fund has adopted a Proxy Voting Policy (the “Proxy Voting Policy”) used to determine how the Fund votes proxies relating to its portfolio securities. Under the Fund’s Proxy Voting Policy, the Fund has, subject to the oversight of the Fund’s Board, delegated to the Investment Adviser the following duties: (1) to make the proxy voting decisions for the Fund, subject to the exceptions described below; and (2) to assist the Fund in disclosing its proxy voting record as required by Rule 30b1-4 under the 1940 Act (the “Proxy Duties”).
The Fund’s CCO shall ensure that the Investment Adviser has adopted a Proxy Voting Policy, which it uses to vote proxies for its clients, including the Fund.
The Fund believes that the voting of proxies is an important part of portfolio management as it represents an opportunity for shareholders to make their voices heard and to influence the direction of a company. The Fund is committed to voting corporate proxies in the manner that best serves the interests of the Fund’s shareholders.
| B. | Delegation to the Investment Advisers |
The Fund believes that the Investment Adviser is in the best position to make individual voting decisions for the Fund consistent with this Proxy Voting Policy. Therefore, subject to the oversight of the Board, the Investment Adviser is hereby delegated the following duties:
| (1) | to make the proxy voting decisions for the Fund, in accordance with the Proxy Voting Policy of the Investment Adviser except as provided herein; and |
| (2) | to assist the Fund in disclosing its proxy voting record as required by Rule 30b1-4 under the 1940 Act, including providing the following information for each matter with respect to which the Fund is entitled to vote: (a) information identifying the matter voted on; (b) whether the matter was proposed by the issuer or by a security holder; (c) whether and how the Fund cast its vote; and (d) whether the Fund cast its vote for or against management. |
| (3) | Annually the Investment Adviser will provide to the Board a proxy voting report showing all proxies for the year. |
The Board, including a majority of the Independent Trustees of the Board, must approve each Proxy Voting and Disclosure Policy of the Investment Adviser (the “Investment Adviser Voting Policy”) as it relates to the Fund. The Board must also approve any material changes to the Investment Adviser Voting Policy no later than six (6) months after adoption by the Investment Adviser.
In cases where a matter with respect to which the Fund was entitled to vote presents a conflict between the interest of the Fund’s shareholders, on the one hand, and those of the Investment Adviser or an affiliated person of the Fund, or its investment adviser, on the other hand, the Fund shall always vote in the best interest of the Fund’s shareholders. For purposes of this Proxy Voting Policy a vote shall be considered in the best interest of the Fund’s shareholders when a vote is cast consistent with the specific voting policy as set forth in the Investment Adviser Voting Policy, provided such specific voting policy was approved by the Board.
| D. | Preparation and Filing of Proxy Voting Record on Form N-PX |
The Fund will annually file its complete proxy voting record with the SEC on Form N-PX.
The Administrator will be responsible for oversight and completion of the filing of the Fund’s reports on Form N-PX with the SEC. The Administrator will file Form N-PX for each twelve- month period ended June 30 and the filing for each year will be made with the SEC on or before August 31 of that year.
Adopted: 7/17/19
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio Manager(s) or Management Team Members
The following biographical information about the members of A3 Financial Investments, LLC (the “Adviser”), who are primarily responsible for the day-to-day portfolio management of the A3 Alternative Income Fund as of December 9, 2021:
John G. Brant, Jr.
Mr. John Brant is president at Branzan Investment Advisors, Inc. (“Branzan”), and has served as portfolio manager of the Fund since August 2021. Mr. John Brant joined Branzan in 2007, and prior to that he served as Senior Vice President at GE Commercial Finance where he focused on the leveraged lending and syndicated loan markets. Prior to his employment with GE Commercial Finance, Mr. John Brant worked in the capital markets group at CoBank. Mr. John Brant has been involved in alternative asset investing since 2005. Mr. John Brant is a CFA Charterholder and has an MBA from the University of Colorado and a Masters in International Management (with Distinction) from Thunderbird.
C. Spencer Brant
Mr. Spencer Brant is a principal at Branzan and has served as portfolio manager of the Fund since August 2021. Mr. Spencer Brant joined Branzan in 2011, and prior to that he managed a start-up investment firm focusing on alternative assets. He has also held positions with GE Commercial Finance and FIMAC Solutions, a consulting firm. Mr. Spencer Brant has been involved in alternative asset investing since 2005. Mr. Spencer Brant is a CFA Charterholder and has an MBA from the London Business School.
(a)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest
As of September 30, 2021, Mr. John Brant and Mr. C. Spencer Brant managed the following other accounts:
| John G. Brant, Jr. | Number of Accounts | Total Assets | Number of Accounts Subject to Performance Fees | Total Assets Subject to Performance Fees
(in millions) |
| Registered Investment Companies | 0 | $0 | 0 | $0 |
| Other Pooled Investment Vehicles | 3 | $83,351,317 | 2 | $79,559,884 |
| Other Accounts | 6 | $38,708,376 | 0 | $0 |
| C. Spencer Brant | Number of Accounts | Total Assets | Number of Accounts Subject to Performance Fees | Total Assets Subject to Performance Fees
(in millions) |
| Registered Investment Companies | 0 | $0 | 0 | $0 |
| Other Pooled Investment Vehicles | 3 | $83,351,317 | 2 | $79,559,884 |
| Other Accounts | 6 | $38,708,376 | 0 | $0 |
Conflicts of Interest
As a general matter, certain conflicts of interest may arise in connection with a portfolio manager’s management of a fund’s investments, on the one hand, and the investments of other accounts for which the portfolio manager is responsible, on the other. For example, it is possible that the various accounts managed could have different investment strategies that, at times, might conflict with one another to the possible detriment of the Fund. Alternatively, to the extent that the same investment opportunities might be desirable for more than one account, possible conflicts could arise in determining how to allocate them. Other potential conflicts might include conflicts created by specific portfolio manager compensation arrangements, and conflicts relating to selection of brokers or dealers to execute Fund portfolio trades and/or specific uses of commissions from Fund portfolio trades (for example, research, or “soft dollars,” if any). Some of these service providers may be affiliated with the Adviser. The Adviser has adopted policies and procedures in a manner reasonably designed to safeguard the Fund from being negatively affected as a result of any such potential conflicts. These policies and procedures generally require that the Adviser distribute investment opportunities among client accounts in a fair and equitable manner (e.g., on a pro rata basis, relative to the size of the order) and seek best execution for securities transactions executed on the Fund’s behalf. Opportunities are generally allocated on the basis of capital available for such investments and other relevant factors particular to the accounts, including, but not limited to, investment restrictions, tax and U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”), considerations and other regulatory considerations, risk parameters, existence of a pre-existing position, desire to avoid creation of odd lot positions, de minimis allocations, and other factors including the appropriate overall composition of each portfolio.
As a closed-end investment company, the Fund may be limited in its ability to invest in any portfolio company in which an affiliates’ other client has an investment. The Fund may also be limited in its ability to co-invest in a portfolio company with the Adviser or one or more of its affiliates. Some of these co-investments would only be permitted pursuant to an exemptive order from the SEC. For additional information about conflicts of interest relevant to the Fund, see “Conflicts of Interest” in the SAI.
(a)(3) Compensation Structure of Portfolio Manager
Compensation of the Portfolio Manager
The portfolio manager is be paid on the success of the Fund including base salary, bonus and company distributions.
(a)(4) Disclosure of Securities Ownership
Portfolio Management Team’s Ownership of Shares
| Name of Portfolio Management Team Member: | Dollar Range of Shares Beneficially Owned by Portfolio Management Team Member: |
| John G. Brant, Jr. | None |
| C. Spencer Brant | None |
(b) Not Applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Directors since the Fund last provided disclosure in response to this item. The submission of shareholder proposals which require a vote of all shareholders will be handled in accordance with Rule 14a-8 of the Securities Exchange Act of 1934 (the “Exchange Act”). No such proposals were received.
Item 11. Controls and Procedures.
| (a) | The registrant’s President (Principal Executive Officer) and Treasurer (Principal Financial Officer) have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report, that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 15d-15(b) under the Exchange Act. |
| (b) | There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the most recent fiscal half-year period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
None.
Item 13. Exhibits.
(a)(1) Code of ethics or any amendments thereto, that is subject to disclosure required by item 2 is attached hereto.
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable.
(a)(4) Change in the registrant’s independent public accountant. Not applicable.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (registrant) | A3 Alternative Income Fund | |
| | | |
| By (Signature and Title)* | /s/Anthony R. Bosch | |
| | Anthony R. Bosch | |
| | (President and Principal Executive Officer) | |
| | | |
| Date | December 9, 2021 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| By (Signature and Title)* | /s/Anthony R. Bosch | |
| | Anthony R. Bosch | |
| | (President and Principal Executive Officer) | |
| | | |
| Date | December 9, 2021 | |
| | | |
| By (Signature and Title)* | /s/Matthew DuPree | |
| | Matthew DuPree | |
| | (Treasurer and Principal Financial Officer) | |
| | | |
| Date | December 9, 2021 | |
