ICMB 10-Q Quarterly Report Sept. 30, 2017 | Alphaminr
Investcorp Credit Management BDC, Inc.
ALPHAMINR

ICMB 10-Q Quarter ended Sept. 30, 2017

Balance Sheet
Cash Flow
Income Statement
INVESTCORP CREDIT MANAGEMENT BDC, INC.
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10-Q 1 fp0027973_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 814-01054
CM FINANCE INC
(Exact Name of Registrant as Specified in Its Charter)
Maryland
46-2883380
(State or other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
601 Lexington Avenue
26th Floor
New York, NY 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 257-5199
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]    No  [   ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [   ]    No  [   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[   ]
Accelerated filer
[X]
Non-accelerated filer
[   ]  (do not check if a smaller reporting company)
Smaller reporting company
[   ]
Emerging growth company [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     [   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [   ]    No  [X]
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of November 7, 2017 was 13,690,480.
CM FINANCE INC
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2
Item 3.
Item 4.
Item 5.
Item 6.
2
CM Finance Inc and subsidiaries
Consolidated Statements of Assets and Liabilities
Assets
September 30, 2017
(Unaudited)
June 30, 2017
Non-controlled, non-affiliated investments, at fair value (amortized cost of $280,174,244 and $270,467,740, respectively)
$
271,862,946
$
254,907,171
Derivatives, at fair value (cost $0 and $0, respectively)
6,550,448
5,830,501
Cash
14,537,986
10,646,697
Cash, restricted
16,143,582
22,616,177
Interest receivable
1,702,662
1,627,774
Other receivables
219,914
-
Deferred offering costs
37,395
186,513
Prepaid expenses and other assets
140,751
219,045
Total Assets
$
311,195,684
$
296,033,878
Liabilities
Notes payable:
Term loan
$
102,000,000
$
102,000,000
Revolving credit facility
27,260,000
—
Deferred debt issuance costs
(1,487,038
)
(578,074
)
Notes payable, net
127,772,962
101,421,926
Base management fees payable
1,153,880
1,132,391
Income-based incentive fees payable
240,538
274,073
Derivatives, at fair value (cost $0 and $0, respectively)
6,550,448
5,830,501
Distribution payable
3,422,431
3,422,307
Payable for investments purchased
—
12,490,000
Deferred financing costs payable
1,654,667
620,500
Interest payable
232,555
205,027
Directors’ fees payable
97,043
100,000
Accrued expenses and other liabilities
397,949
589,041
Total Liabilities
141,522,473
126,085,766
Commitments and Contingencies (Note 6)
Net Assets
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,690,480 and 13,689,221 shares issued and outstanding, respectively)
13,689
13,689
Additional paid-in capital
199,077,936
199,066,123
Accumulated net realized loss
(18,612,517
)
(11,231,827
)
Distributions in excess of net investment income
(2,745,559
)
(2,339,304
)
Net unrealized depreciation on investments
(8,060,338
)
(15,560,569
)
Total Net Assets
169,673,211
169,948,112
Total Liabilities and Net Assets
$
311,195,684
$
296,033,878
Net Asset Value Per Share
$
12.39
$
12.41
See notes to unaudited consolidated financial statements.
3
CM Finance Inc and subsidiaries
Consolidated Statements of Operations (Unaudited)
For the three months ended
September 30,
Investment Income:
2017
2016
From non-controlled, non-affiliated investments:
Interest income
$
6,426,053
$
7,368,382
Payment in-kind interest income
292,478
—
Other fee Income
9,879
216,467
Total investment income
6,728,410
7,584,849
Expenses:
Base management fees
1,153,880
1,211,535
Interest expense
1,437,829
991,390
Professional fees
209,041
194,589
Offering expense
186,513
—
Allocation of administrative costs from advisor
127,229
268,242
Amortization of deferred debt issuance costs
125,202
364,196
Directors’ fees
99,667
100,000
Custodian and administrator fees
91,996
108,689
Insurance expense
85,225
92,560
Other expenses
195,652
282,845
Total expenses
3,712,234
3,614,046
Net expenses
3,712,234
3,614,046
Net investment income
3,016,176
3,970,803
N ET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments
(7,380,690
)
(8,028,289
)
Net change in unrealized depreciation in value on investments
7,500,231
8,362,443
Net realized and unrealized gain on investments
119,541
334,154
N ET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
3,135,717
$
4,304,957
Basic and diluted:
Net investment income per share
$
0.22
$
0.29
Net increase in net assets resulting from operations per share
$
0.23
$
0.31
Weighted average shares of common stock outstanding
13,689,885
13,680,817
Distributions paid per common share
$
0.2500
$
0.3516

See notes to unaudited consolidated financial statements.
4
CM Finance Inc and subsidiaries
Consolidated Statements of Changes in Net Assets (Unaudited)
For the three months ended
September 30,
2017
2016
Net assets at beginning of period
$
169,948,112
$
162,749,883
Increase (decrease) in net assets resulting from operations
Operations:
Net investment income
3,016,176
3,970,803
Net realized gain (loss) on investments
(7,380,690
)
(8,028,289
)
Net change in unrealized appreciation (depreciation) on investments
7,500,231
8,362,443
Net increase in net assets resulting from operations
3,135,717
4,304,957
Stockholder distributions
Distributions from net investment income
(3,422,431
)
(4,810,208
)
Net decrease in net assets resulting from stockholder distributions
(3,422,431
)
(4,810,208
)
Capital transactions
Reinvestments of stockholder distributions
11,813
10,884
Net increase in net assets resulting from capital transactions
11,813
10,884
Total increase (decrease) in net assets
(274,901
)
(494,367
)
Net assets at end of period (including distributions in excess of net investment income of $(2,745,559) and $(2,575,414), respectively)
$
169,673,211
$
162,255,516
See notes to unaudited consolidated financial statements.
5
CM Finance Inc and subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended
September 30,
2017
2016
Cash Flows from Operating Activities
Net increase (decrease) in net assets resulting from operations
$
3,135,717
$
4,304,957
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Origination and purchases of investments
(46,766,366
)
(24,280,175
)
Payment in-kind interest
(292,478
)
—
Sales and repayments of investments
30,845,326
33,220,366
Net realized loss (gain) on investments in securities
7,380,690
8,028,289
Net change in unrealized (appreciation) depreciation on investments
(7,500,231
)
(8,362,443
)
Amortization of discount/premium on investments
(622,715
)
(686,653
)
Amortization of deferred debt issuance costs
125,202
364,196
Net (increase) decrease in operating assets:
Cash, restricted
6,472,595
1,893,477
Interest receivable
(74,888
)
(429,876
)
Other receivables
(219,914
)
—
Prepaid expenses and other assets
78,294
144,469
Net increase (decrease) in operating liabilities:
Payable for investments purchased
(12,490,000
)
871,250
Interest payable
27,528
(5,626
)
Directors’ fees payable
(2,957
)
—
Accrued expenses and other liabilities
(191,093
)
(111,880
)
Base management fees payable
21,490
(46,233
)
Income-based incentive fees payable
(33,535
)
—
Net Cash Provided by (used in) Operating Activities
(20,107,335
)
14,904,118
Cash Flows from Financing Activities
Deferred offering costs
149,118
Distributions to shareholders
(3,410,493
)
(4,798,894
)
Proceeds from borrowing on revolving credit facility
27,260,000
—
Repayments of borrowing on revolving credit facility
—
(15,978,329
)
Net Cash Provided by (used in) Financing Activities
23,988,624
(20,777,223
)
Net Change in Cash
3,891,289
(5,873,105
)
Cash
Beginning of period
10,646,697
18,433,066
End of period
$
14,537,986
$
12,559,961
Supplemental and non-cash financing cash flow information:
Cash paid for interest
$
1,410,301
$
997,016
Issuance of shares pursuant to Dividend Reinvestment Plan
11,813
10,884
See notes to unaudited consolidated financial statements.
6
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments
(Unaudited)
September 30, 2017
Investments (1)
Industry
Interest Rate
Base Floor Rate
Maturity Date
Principal Amount/
Shares (2)
Amortized Cost
Fair Value
% of Net Assets
Non-Controlled/Non-Affiliates
Senior Secured First Lien Debt Investments
AAR Intermediate Holdings, LLC - Revolver (3)
Oilfield Services
3M L + 5.00%
1.00%
9/30/2021
$
990,099
$
—
$
—
0.00%
AAR Intermediate Holdings, LLC - Term A
Oilfield Services
3M L+5.00%
1.00%
9/30/2021
4,950,495
4,950,495
4,950,495
2.92%
AAR Intermediate Holdings, LLC - Term B
Oilfield Services
3M L+8.00%
1.00%
9/30/2021
10,403,012
4,628,906
6,761,958
3.99%
American Gaming Systems Inc. (4)
Entertainment and Leisure
1M L+5.50%
1.00%
2/15/2024
17,955,000
17,913,393
17,955,000
10.58%
CareerBuilder, LLC (5)
Business Services
3M L+6.75%
1.00%
7/27/2023
18,000,000
17,472,076
17,460,000
10.29%
Dayton Superior Corporation (4)
Construction & Building
3M L+8.00%
1.00%
11/15/2021
9,925,000
9,671,591
9,329,500
5.50%
FPC Holdings, Inc. (4)
Trucking and Leasing
3M L+4.00%
1.25%
11/19/2019
9,586,590
8,678,616
9,442,791
5.56%
Immucor, Inc. (4)
Healthcare-Products/Services
1M L+5.00%
1.00%
6/15/2021
7,481,250
7,409,395
7,481,250
4.41%
Liberty Oilfield Services, LLC (5)
Oilfield Services
3M L+7.625%
1.00%
9/19/2022
10,000,000
9,801,082
9,800,000
5.78%
Medical Solutions L.L.C. (4)
Healthcare-Products/Services
3M L+4.25%
1.00%
6/14/2024
3,990,000
3,970,732
3,990,000
2.35%
Montreign Operating Company, LLC (4)
Entertainment and Leisure
1M L+8.25%
1.00%
1/24/2023
13,232,821
13,285,381
13,232,821
7.80%
PR Wireless, Inc. (5)
Telecommunications
3M L+9.00%
1.00%
6/29/2020
16,447,500
15,556,909
15,460,650
9.11%
Premiere Global Services, Inc. (4)(6)
Business Services
2M L+6.50%
1.00%
12/8/2021
11,203,974
10,559,498
11,091,934
6.54%
Redbox Automated Retail, LLC (4)
Retail
1M L+7.50%
1.00%
9/27/2021
7,000,000
6,822,772
7,000,000
4.12%
U.S. Well Services, LLC
Oilfield Services
1M L+11.00%
1.00%
2/2/2022
4,050,773
4,050,773
4,050,773
2.39%
U.S. Well Services, LLC - Revolver (3)
Oilfield Services
2M L+6.00%
1.00%
2/2/2022
920,856
620,850
620,850
0.36%
Total Senior Secured First Lien Debt Investments
146,137,370
135,392,469
138,628,022
81.70%
Senior Secured Second Lien Debt Investments
AP NMT Acquisition BV (4)(7)(8)
Media
3M L+9.00%
1.00%
8/13/2022
20,000,000
19,053,779
17,200,000
10.14%
Bird Electric Enterprises, LLC - Revolver (3)
Utilities
3M L + 5.00%
—
6/14/2022
1,000,000
—
—
0.00%
Caelus Energy Alaska 03, LLC (4)
Oil and Gas
3M L+7.50%
1.25%
4/15/2020
26,000,000
24,449,009
22,880,000
13.48%
Intermedia Holdings, Inc. (4)
Business Services
3M L+9.50%
1.00%
2/1/2025
5,000,000
4,905,370
4,900,000
2.89%
International Wire Goup, Inc. (5)
Metals and Mining
Fixed 10.75%
—
8/1/2021
11,254,000
11,073,449
10,466,220
6.17%
Lionbridge Technologies, Inc. (4)
Business Services
1M L+9.75%
1.00%
2/28/2025
12,000,000
11,774,554
11,760,000
6.93%
Montrose Environmental Group, Inc.
Environmental Services
1M L+9.50%
1.00%
9/30/2020
20,000,000
19,600,621
19,600,000
11.55%
Premiere Global Services, Inc. (4)
Business Services
3M L+9.50%
1.00%
6/6/2022
15,000,000
14,632,517
14,700,000
8.66%
TouchTunes Interactive Networks, Inc. (5)
Entertainment
and Leisure
3M L+8.25%
1.00%
5/27/2022
7,000,000
6,974,010
7,000,000
4.13%
Trident USA Health Services, LLC (4)
Healthcare-Products/Services
3M L+9.50%
1.25%
7/31/2020
21,878,286
21,836,452
12,689,406
7.48%
Total Senior Secured Second Lien Debt Investments
139,132,286
134,299,761
121,195,626
71.43%
See notes to unaudited consolidated financial statements.
7
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments
(Unaudited)
September 30, 2017
Investments (1)
Industry
Interest
Rate
Base
Floor
Rate
Maturity Date
Principal Amount/
Shares (2)
Amortized Cost
Fair Value
% of Net Assets
Equity, Warrants and Other Investments
AAR Intermediate Holdings, LLC
(Equity Interest) (9)(10)
Oilfield Services
$
11,880
$
—
$
1
0.00%
Bird Electric Enterprises, LLC, Class C
Preferred Units (11)
Utilities
10
7,518,750
7,518,750
4.43%
Endeavour International Holding B.V., $3.01
strike (Warrants) (7)(9)
Oil and Gas
4/30/2018
160,000
368,000
1
0.00%
PR Wireless, Inc., $0.01 strike (Warrants) (9)
Telecommunications
6/24/2027
201
1,374,009
—
0.00%
U.S. Well Services, LLC (9) (12)
Oilfield Services
Class A Units
2,519,434
1,221,256
4,207,455
2.48%
Oilfield Services
Class B Units
920,856
-
313,091
0.19%
Total Equity, Warrants and Other Investments
3,612,381
10,482,015
12,039,298
7.10%
Total Non-Controlled/Non-Affiliates
$
288,882,037
$280,174,244
271,862,946
160.23%
Liabilities in excess of other assets
(102,189,734)
(60.23)%
Net Assets
$
169,673,211
100.00%
Industry
Interest
Rate
Maturity
Date
Notional
Amount
Amortized
Cost
Fair
Value
% of
Net
Assets
Derivatives
Assets
Embedded derivative—Notes Payable (13)
Diversified Financial Services
12/5/2019 $
102,000,000
$
—
$
6,550,448
3.87%
Total Assets
102,000,000
—
6,550,448
3.87%
Liabilities
Total Return Swap (9)(13)
Diversified Financial Services
1M L + 2.75%
12/5/2019
102,000,000
—
(6,550,448)
(3.87)%
Total Liabilities
102,000,000
—
(6,550,448)
(3.87)%
Total Derivatives
$
204,000,000
$
—
$
—
—
(1)
All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the board of directors.
(2)
Principal amount includes capitalized PIK interest.
(3)
Refer to Note 6 for more detail on the unfunded commitments.
(4)
A portion or all is held by the Company indirectly through CM Finance SPV, Ltd. and pledged as collateral for the Total Return Swaps.
(5)
A portion or all is held by the Company indirectly through CM Finance SPV, LLC and pledged as collateral for the revolving credit facility held through Citibank, N.A.
(6)
Security, or a portion thereof, unsettled as of September 30, 2017.
(7)
The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 5.53% of total assets.
(8)
A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company.
(9)
Securities are non-income producing.
(10)
CM Finance Inc's investment in AAR Intermediate Holdings, LLC (Equity Interest) is held through its wholly owned subsidiary, CM Portfolio Companies, LLC.
(11)
CM Finance Inc’s investment in Bird Electric Enterprises, LLC, Class C Preferred Units is held through its wholly owned subsidiary, Bird Electric Blocker, LLC.
(12)
CM Finance Inc’s investments in U.S. Well Services, LLC Class A and Class B Units are held through its wholly owned subsidiary, U.S. Well Services Blocker, LLC.
(13)
Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives—Notes Payable.
1M L – 1 month LIBOR (1.23% as of September 30, 2017)
3M L – 3 month LIBOR (1.33% as of September 30, 2017)
PIK – Payment-In-Kind
See notes to unaudited consolidated financial statements.
8
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments
June 30, 2017
Investments (1)
Industry
Interest Rate
Base
Floor
Rate
Maturity
Date
Principal
Amount/
Shares (2)
Amortized
Cost
Fair Value
% of
Net
Assets
Non-Controlled/Non-Affiliates
Senior Secured First Lien Debt Investments
AAR Intermediate Holdings, LLC - Revolver (3)
Oilfield Services
3M L + 5.00%
1.00%
9/30/2021
$
198,020
$
198,020
$
198,020
0.12%
AAR Intermediate Holdings, LLC - Term A
Oilfield Services
3M L + 5.00%
1.00%
9/30/2021
4,950,495
4,950,495
4,950,495
2.91%
AAR Intermediate Holdings, LLC - Term B
Oilfield Services
3M L + 4.00% PIK
1.00%
9/30/2021
10,398,827
4,624,720
6,759,238
3.98%
American Gaming Systems, Inc. (4)
Entertainment and Leisure
3M L + 5.50%
1.00%
2/15/2024
18,000,000
17,955,003
17,955,000
10.56%
Dayton Superior Corporation (4)
Construction & Building
3M L + 8.00%
1.00%
11/15/2021
9,950,000
9,686,413
9,950,000
5.85%
FPC Holdings, Inc. (4)
Trucking and Leasing
3M L + 4.00%
1.25%
11/19/2019
9,586,590
8,588,755
9,203,126
5.41%
Immucor, Inc. (4)(5)
Healthcare-Products/Services
3M L + 5.00%
1.00%
6/15/2021
7,500,000
7,425,000
7,425,000
4.37%
Medical Solutions L.L.C. (4)
Healthcare-Products/Services
3M L + 4.25%
1.00%
6/14/2024
4,000,000
3,980,000
3,980,000
2.34%
Melissa & Doug, LLC (5)
Consumer Products
3M L + 4.50%
1.00%
6/19/2024
1,000,000
995,000
995,000
0.59%
Montreign Operating Company, LLC (4)(5)
Entertainment and Leisure
1M L + 8.25%
1.00%
1/24/2023
13,232,821
13,287,467
13,232,821
7.79%
PR Wireless, Inc. (6)
Telecommunications
3M L + 9.00%
1.00%
6/29/2020
16,490,000
15,522,048
15,500,600
9.12%
Premiere Global Services, Inc. (4)
Business Services
3M L + 6.50%
1.00%
12/8/2021
11,355,789
10,668,572
11,242,231
6.61%
Redbox Automated Retail, LLC (4)
Retail
3M L + 7.50%
1.00%
9/27/2021
7,437,500
7,241,540
7,437,500
4.38%
U.S. Well Services, LLC
Oilfield Services
1M L + 11.00%
1.00%
2/2/2022
3,969,450
3,969,450
3,969,450
2.34%
U.S. Well Services, LLC - Revolver (3)
Oilfield Services
1M L + 6.00%
1.00%
2/2/2022
507,514
507,514
507,514
0.30%
YRC Worldwide, Inc. (4)(7)
Trucking and Leasing
1M L + 7.50%
1.00%
2/13/2019
13,937,359
13,901,008
13,797,986
8.12%
Total Senior Secured First Lien Debt Investments
132,514,365
123,501,005
127,103,981
74.79%
Senior Secured Second Lien Debt Investments
AP NMT Acquisition BV (4)(7)(8)
Media
3M L + 9.00%
1.00%
8/13/2022
20,000,000
19,020,080
15,400,000
9.06%
Bird Electric Enterprises, LLC (9)(10)
Utilities
3M L + 14.00%,
3.00% PIK
1.00%
10/9/2020
15,037,500
14,809,248
7,518,750
4.43%
Caelus Energy Alaska 03, LLC (4)
Oil and Gas
3M L + 7.50%
1.25%
4/15/2020
26,000,000
24,147,353
22,100,000
13.00%
Intermedia Holdings, Inc. (4)
Business Services
3M L + 9.50%
1.00%
2/1/2025
5,000,000
4,903,645
4,900,000
2.88%
International Wire Group, Inc. (6)
Metals and Mining
10.75%
—
8/1/2021
11,254,000
11,064,076
11,057,055
6.51%
Lionbridge Technologies, Inc. (4)
Business Services
3M L + 9.75%
1.00%
2/28/2025
12,000,000
11,768,297
11,760,000
6.92%
Premiere Global Services, Inc. (4)
Business Services
3M L + 9.50%
1.00%
6/6/2022
15,000,000
14,622,459
14,700,000
8.65%
TNS, Inc. (6)
Telecommunications
1M L + 8.00%
1.00%
8/14/2020
15,092,924
15,095,599
15,092,924
8.88%
TouchTunes Interactive Networks, Inc.
Entertainment and Leisure
3M L + 8.25%
1.00%
5/27/2022
7,000,000
6,973,432
7,000,000
4.12%
Trident USA Health Services, LLC (4)
Healthcare-Products/Services
3M L + 9.50%
1.25%
7/31/2020
21,878,286
21,807,281
17,065,063
10.04%
Total Senior Secured Second Lien Debt Investments
148,262,710
144,211,470
126,593,792
74.49%
See notes to unaudited consolidated financial statements.
9
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments (continued)
June 30, 2017
Investments (1)
Industry
Maturity
Date
Principal
Amount/
Shares (2)
Amortized
Cost
Fair Value
% of
Net
Assets
Equity, Warrants and Other Investments (11)
AAR Intermediate Holdings, LLC (Equity Interest)
Oilfield Services
$
11,880
$
—
$
1
—
Endeavour International Holding B.V., $3.01 strike (Warrants) (7)
Oil and Gas
4/30/2018
160,000
160,000
80
—
PR Wireless, Inc., $0.01 strike (Warrants)
Telecommunications
6/24/2027
201
1,374,009
—
—
U.S. Well Services, LLC
Oilfield Services
Class A Units
2,519,434
1,221,256
1,129,744
0.66
%
Class B Units
920,856
—
79,573
0.05
%
Total Equity, Warrants and Other Investments
3,612,371
2,755,265
1,209,398
0.71
%
Total Non-Controlled/Non-Affiliates
$
284,389,446
$
270,467,740
$
254,907,171
149.99
%
Liabilities in excess of other assets
(84,959,059
)
(49.99
%)
Net Assets
$
169,948,112
100.00
%
Industry
Interest
Rate
Maturity
Date
Notional
Amount
Amortized
Cost
Fair
Value
% of
Net
Assets
Derivatives
Assets
Embedded derivative - Notes Payable (12)
Diversified Financial Services
12/5/2019 $
102,000,000
—
$
5,830,501
3.43
%
Total Assets
102,000,000
—
5,830,501
3.43
%
Liabilities
Total Return Swap (11)(12)
Diversified Financial Services
1M L + 2.75%
12/5/2019
102,000,000
—
(5,830,501
)
(3.43
%)
Total Liabilities
102,000,000
—
(5,830,501
)
(3.43
%)
Total Derivatives
$
204,000,000
$
—
$
—
—
(1)
All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the board of directors.
(2)
Principal amount includes capitalized PIK interest.
(3)
Refer to Note 6 for more detail on the unfunded commitment.
(4)
Held by the Company indirectly through CM Finance SPV, Ltd. and pledged as collateral for the Total Return Swaps.
(5)
Security, or a portion thereof, unsettled as of June 30, 2017.
(6)
Held by the Company indirectly through CM Finance SPV, LLC and pledged as collateral for the revolving credit facility held through Citibank, N.A.
(7)
The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 9.86% of total assets.
(8)
A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company.
(9)
Classified as non-accrual asset.
(10)
Includes 2.00% default rate.
(11)
Securities are non-income producing.
(12)
Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives—Notes Payable.
1M L -
1 month LIBOR (1.22% as of June 30, 2017)
3M L -
3 month LIBOR (1.30% as of June 30, 2017)
PIK -
Payment-In-Kind
See notes to unaudited consolidated financial statements.
10
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 1. Organization
CM Finance Inc (“CMFN” or the “Company”), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”) for U.S. federal income tax purposes. The Company is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946 Financial Services – Investment Companies.
On February 11, 2014, the Company completed its initial public offering (the “Offering”), selling 7,666,666 shares of its common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to the Offering, CM Finance LLC was merged with and into the Company (the “Merger”). In connection with the Merger, the Company issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of funds managed by Cyrus Capital Partners, L.P. (the “Original Investors” or the “Cyrus Funds”). The Company had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became the books and records of the Company, as the surviving entity. Immediately after the Merger, the Company issued 2,181,818 shares of its common stock to Stifel Venture Corp. in exchange for $32.7 million in cash. The Company used all of the proceeds of the sale of shares to Stifel Venture Corp. to repurchase 2,181,818 shares of common stock from the Original Investors. Immediately after the completion of the Offering, the Company had 13,666,666 shares outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with the Merger.
Upon its election to be regulated as a BDC on February 5, 2014, the Company entered into an investment advisory agreement (the “Advisory Agreement”) and an administrative agreement with CM Investment Partners LLC (the “Adviser”) as its investment adviser and administrator, respectively.
The Company’s primary investment objective is to maximize total return to shareholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund organic growth, acquisitions, market or product expansion, refinancings, and/or recapitalizations. The Company invests primarily in middle-market companies in the form of unitranche loans and standalone first and second lien loans. The Company may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
As a BDC, the Company is required to comply with certain regulatory requirements. For instance, as a BDC, the Company must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant Securities and Exchange Commission (“SEC”) rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.
The Company consolidates the operations of its wholly owned subsidiaries, CM Finance SPV, Ltd. (“SPV”) and CM Finance SPV, LLC (“LLC”), which are special purpose vehicles used to finance certain investments.
The Company has formed certain additional taxable subsidiaries (collectively, with CM Portfolio Companies LLC, the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. At September 30, 2017, the Company had three Taxable Subsidiaries: CM Portfolio Companies, LLC, U.S. Well Services Blocker, LLC, and Bird Electric Blocker, LLC. These Taxable Subsidiaries allow The Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.
11
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company.
a. Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and all values are stated in U.S. dollars, unless noted otherwise. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by U.S. GAAP. These adjustments are normal and recurring in nature.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing the Company’s consolidated financial statements are reasonable and prudent. Actual results could differ materially from these estimates. All material inter-company balances and transactions have been eliminated.
b. Revenue Recognition, Security Transactions, and Realized/Unrealized Gains or Losses
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other fee income.

The Company may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected.

Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. PIK interest is not accrued if we do not expect the issuer to be able to pay all principal and interest when due.
Dividend income is recorded on the ex-dividend date.
Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and unamortized fees and discounts are recorded as interest income and are non-recurring in nature. During the three months ended September 30, 2017 and September 30, 2016, $0 and $288,951 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively.
Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other fee income.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using the specific identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Unaudited Consolidated Statements of Operations.
Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although management may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.
The Company may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company earned PIK interest of $292,478 and $0 during the three months ended September 30, 2017 and September 30, 2016, respectively.
12
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 2. Significant Accounting Policies (Continued)
c. Paid In Capital
The Company records the proceeds from the sale of its common stock to common stock and additional paid-in capital, after all commissions and marketing support fees.
d. Net Increase in Net Assets Resulting from Operations Per Share
Net increase in net assets resulting from operations per share are calculated based upon the weighted average number of shares of common stock outstanding during the reporting period.
e. Distributions
Dividends and distributions to common shareholders are recorded on the ex-dividend date. The amount to be paid out as a dividend or distribution is determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed annually, although the Company may decide to retain such capital gains for investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions the Company declares in cash on behalf of the Company’s shareholders, unless a shareholder elects to receive cash. As a result, if the Company’s board of directors authorizes, and the Company declares, a cash distribution, then the Company’s shareholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution.
f. Cash and Restricted Cash
Cash and restricted cash represent cash held in money market accounts. The Company deposits its cash in financial institutions and, at times, such balance may be in excess of the Federal Deposit Insurance Corporation insurance limits. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote. Amounts included in restricted cash have restrictions on the uses of the cash held by SPV and LLC based on the terms of the Notes Payable. For more information on the Notes Payable, see Note 5.
g. Deferred Offering Costs
Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock and bonds, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. Offering costs are charged to paid-in-capital upon sale of the shares in an offering. Offering costs that have not yet been charged to paid-in capital are written off when it is no longer probable that the shares to which the offering costs relate will be issued in the future.
h. Investment Transactions and Expenses
Purchases of loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are known or estimable, which in many cases may not be until settlement.
Expenses are accrued as incurred.
Deferred debt issuance costs, incurred in connection with the Company’s Notes Payable, are amortized using the straight line method over the life of the notes.
Offering costs were charged to paid-in capital upon sale of shares in the Offering.
i. Investment Valuation
The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its investments and financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
13
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 2. Significant Accounting Policies (Continued)
Fair value is defined as the price that would be received upon a sale of an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Securities that are traded on securities exchanges (including such securities traded in the afterhour’s market) are valued on the basis of the closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last “bid” and “ask” prices for such options, are valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last “bid” and “ask” prices are valued at the average of the last “bid” and “ask” prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. The Company did not hold any Level 1 investments as of September 30, 2017 or June 30, 2017.
Investments that are not traded on securities exchanges but are traded on the over-the-counter (“OTC”) markets (such as term loans, notes and warrants) are valued using various techniques, which may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (when observable) and fundamental data relating to the issuer. These investments are categorized in Level 2 of the fair value hierarchy, or in instances when lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
The embedded derivative in the Term Notes (as defined in Note 5) payable from SPV to UBS AG, London Branch (together with its affiliates “UBS”) and Total Return Swaps (the “TRS”) referencing the terms of the Term Notes payable and Revolving Notes (as defined in Note 5) are valued based on the change in fair value and the underlying accrued interest of the portfolio of assets held in SPV less the accrued interest payable on the financing due to the TRS counterparty, UBS. Consideration has been given to counterparty risk. The Company has assessed the unsecured risk of the counterparty, UBS, in the form of credit ratings and the trading levels of that risk and has determined that the counterparty risk is minimal. The Company also notes that counterparty risk is further mitigated by the monthly settlement of both the interest portion of the embedded derivative referencing the Term Notes payable and the TRS. If the Company were to determine that counterparty risk were material, an adjustment to the fair value of the TRS would be made. The embedded derivative in the Term Notes payable and the TRS have been categorized in Level 3 of the fair value hierarchy. See Note 4 and Note 5 for more detail.
Investments for which market quotations are not readily available or may be considered unreliable are fair valued, in good faith, using a method determined to be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest rate yield curves, credit spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method of the Company may change as changes in the underlying company dictates, such as moving from the Cost Approach to Market Approach when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these circumstances, the fair values for the aforementioned investments may differ significantly from values that would have been used had a ready and liquid market for such investments existed or from the amounts that might ultimately be realized, and such differences could be material.
The Company’s valuation policies and procedures are developed by the Adviser, which is also responsible for ensuring that the valuation policies and procedures are consistently applied across all investments of the Company, and approved by the Company’s board of directors. The valuations are continuously monitored and the valuation process for Level 3 investments is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment. These investment professionals prepare the preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable securities from the same company or that of comparable companies as well as any other relevant factors including recent purchases and sales that may have occurred preceding month-end.
14
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 2. Significant Accounting Policies (Continued)
Valuation models are typically calibrated upon initial funding, and are re-calibrated as necessary upon subsequent material events (including, but not limited to additional financing activity, changes in comparable companies, and recent trades). The preliminary valuation conclusions are then documented and discussed with senior management of the Adviser. On a periodic basis and at least once annually, independent valuation firm(s) engaged by the Company conduct independent appraisals and review the Adviser’s preliminary valuations and make their own independent assessment. The Valuation Committee of the Company’s board of directors then reviews the preliminary valuations of the Adviser and that of the independent valuation firms. The Valuation Committee discusses the valuations and makes a recommendation to the Company’s board of directors regarding the fair value of each investment in good faith based on the input of the Adviser and the independent valuation firms. Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third party independent valuation firms, the board of directors of the Company determines, in good faith, the fair value of each investment.
For more information on the classification of the Company’s investments by major categories, see Note 4.
The fair value of the Company’s assets and liabilities that qualify as financial instruments under U.S. GAAP approximates the carrying amounts presented in the Unaudited Consolidated Statements of Assets and Liabilities.
j. Income Taxes
The Company has elected to be treated, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To qualify and maintain qualification as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to shareholders, for each taxable year, at least 90% of the Company’s “investment company taxable income,’’ which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues to satisfy the annual distribution requirement, the Company will not have to pay corporate level federal income taxes on any income that the Company distributes to its shareholders. The Company intends to make distributions in an amount sufficient to maintain its RIC status each year and to avoid paying any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute to its shareholders at least 98% of net ordinary income, 98.2% of capital gains, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes.
Book and tax basis differences that are permanent differences are reclassified among the Company’s capital accounts, as appropriate at year-end. Additionally, the tax character of distributions is determined in accordance with the Code, which differs from U.S. GAAP. During the three months ended September 30, 2017 and September 30, 2016, the Company recorded distributions of $3.4 million and $4.8 million, respectively. The tax character of a portion of these distributions may be return of capital.
U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The Company’s policy is to recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision.
The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for any tax year since inception. Each of the tax years since inception remains subject to examination by taxing authorities. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.

Permanent differences between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the year ended June 30, 2017, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax treatment of paydown gains and losses, and income/(loss) from wholly owned subsidiaries as follows:

As of
June 30, 2017
Additional paid-in capital
$
(742,700
)
Distributions in excess of net investment income
165,192
Accumulated net realized gain (loss)
577,508

The tax character of all distributions paid by the Company during the year ended June 30, 2017 was ordinary income.
At June 30, 2017, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statement of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of dividends payable and non-deductible incentive fee income unvested, as follows:
As of
June 30, 2017
Undistributed net investment income
$
1,314,066
Accumulated capital gains (losses)
—
Capital loss carryover
(11,231,827
)
Unrealized appreciation (depreciation)
(17,062,588
)
Distributions payable
(3,422,307
)
Components of tax distributable earnings at year end
$
(30,402,656
)
In addition, as of June 30, 2017, CM Portfolio Companies LLC recorded a deferred tax asset and a corresponding valuation allowance of approximately $557,059.
k. Capital Gains Incentive Fee
Under U.S. GAAP, the Company calculates the capital gains incentive fee payable to the Adviser as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from the incentive fee that is ultimately realized and the differences could be material.
The cost basis used to compute gains and losses for the purpose of determining incentive fees is the fair value of the Company’s investments on February 5, 2014, at the time the Company priced the Offering.
15
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 2. Significant Accounting Policies (Continued)
As of September 30, 2017 and June 30, 2017, there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement.
Note 3. New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. Management is currently evaluating the impact ASU 2016-15 will have on the Company’s consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). In 2016, the FASB issued additional guidance which clarified, amended, and technically corrected prior guidance. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred the effective period to annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.
Note 4. Investments
The Company’s investments, at any time, may include securities and other financial instruments, including, without limitation, corporate and government bonds, convertible securities, collateralized loan obligations, term loans, trade claims, equity securities, privately negotiated securities, direct placements, working interests, warrants and investment derivatives (such as credit default swaps, recovery swaps, total return swaps, options, forward contracts, and futures) (all of the foregoing collectively referred to in these financial statements as “investments”).
a. Certain Risk Factors
In the ordinary course of business, the Company manages a variety of risks including market risk, liquidity risk and credit risk. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying exposures and activities across a variety of instruments, markets and counterparties.
Market risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and other movements and volatility in security prices or commodities. In particular, the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or bankruptcy proceedings), which involves significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Credit risk is the potential loss the Company may incur from a failure of an issuer to make payments according to the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The Company’s exposure to credit risk on its investments is limited to the fair value of the investments. The Company’s TRS contract is executed pursuant to an International Swaps and Derivatives Association (“ISDA”) master agreement (the “ISDA Agreement”) that the Company currently has in place with UBS. At September 30, 2017 and June 30, 2017, the Company had all of its counterparty credit risk associated with non-performance for swaps with UBS. With regard to derivatives, the Company attempts to limit its credit risk by considering its counterparty’s (or its guarantor’s) credit rating. The Company’s policy is to not hold counterparty collateral on ISDA Agreements, but would do so if the exposure were material.
b. Investments
Investment purchases, sales and principal payments/paydowns are summarized below for the three months ended September 30, 2017 and September 30, 2016, respectively. These purchase and sale amounts exclude derivative instruments.

Three Months Ended September 30,
2017
2016
Investment purchases, at cost (including PIK interest)
$
47,058,844
$
24,280,175
Investment sales and repayments
30,845,326
33,220,366
16
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
The composition of the Company’s investments as of September 30, 2017, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:

Investment at
Amortized Cost
Percentage
Investments at
Fair Value
Percentage
Senior Secured First Lien Debt Investments
$
135,392,468
48.32
%
$
138,628,022
50.99
%
Senior Secured Second Lien Debt Investments
134,299,761
47.94
121,195,626
44.58
Equity, Warrants and Other Investments
10,482,015
3.74
12,039,298
4.43
Embedded derivative— Notes Payable
—
—
6,550,448
2.41
Total Return Swap
—
—
(6,550,448
)
(2.41
)
Total
$
280,174,244
100.00
%
$
271,862,946
100.00
%
The composition of the Company’s investments as of June 30, 2017, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:
Investment at
Amortized Cost
Percentage
Investments at
Fair Value
Percentage
Senior Secured First Lien Debt Investments
$
123,501,005
45.66
%
$
127,103,981
49.86
%
Senior Secured Second Lien Debt Investments
144,211,470
53.32
126,593,792
49.66
Equity, Warrants and Other Investments
2,755,265
1.02
1,209,398
0.48
Embedded derivative - Notes Payable
—
— 5,830,501
2.29
Total Return Swap
—
— (5,830,501 )
(2.29
)
Total
$
270,467,740
100.00 % $ 254,907,171
100.00
%
The following table shows the portfolio composition by industry grouping at fair value at September 30, 2017:
Investments at
Fair Value
Percentage of
Total Portfolio
Business Services
$
59,911,934
22.04
%
Entertainment and Leisure
38,187,821
14.05
Oilfield Services
30,704,623
11.29
Healthcare-Products/Services
24,160,656
8.89
Oil and Gas
22,880,001
8.42
Environmental Services
19,600,000
7.21
Media
17,200,000
6.33
Telecommunications
15,460,650
5.69
Metals and Mining
10,466,220
3.85
Trucking and Leasing
9,442,791
3.47
Construction & Building
9,329,500
3.43
Utilities
7,518,750
2.77
Retail
7,000,000
2.56
Total
$
271,861,946
100.00
%
17
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
The following table shows the portfolio composition by industry grouping at fair value at June 30, 2017:
Investments at
Fair Value
Percentage of
Total Portfolio
Business Services $ 42,602,231 16.71 %
Entertainment and Leisure
38,187,821
14.98
Telecommunications
30,593,524
12.00
Healthcare-Products/Services
28,470,063
11.17
Trucking and Leasing
23,001,112
9.02
Oil and Gas
22,100,080
8.67
Oilfield Services
17,594,035
6.90
Media
15,400,000
6.04
Metals and Mining
11,057,055
4.34
Construction & Building
9,950,000
3.91
Utilities
7,518,750
2.95
Retail
7,437,500
2.92
Consumer Products
995,000
0.39
Total
$
254,907,171
100.00
%
The following table shows the portfolio composition by geographic grouping at fair value at September 30, 2017:
Fair Value
Percentage of Total Investments
U.S. West
$
75,940,704
27.93
%
U.S. Southeast
48,733,834
17.92
U.S. Northeast
42,459,041
15.62
U.S. Midwest
38,250,000
14.07
U.S. Southwest
36,589,961
13.46
Europe
17,200,000
6.33
U.S. Mid-Atlantic
12,689,406
4.67
Total
$
271,862,946
100.00
%
The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2017:
Fair Value
Percentage Total Portfolio
U.S. West
$
56,376,504
22.12
%
U.S. Southeast
48,867,831
19.17
U.S. Northeast
44,044,876
17.28
U.S. Southwest
32,844,487
12.88
U.S. Mid-Atlantic
32,157,987
12.62
U.S. Midwest
25,215,486
9.89
Europe
15,400,000
6.04
Total
$
254,907,171
100.00
%

18
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
The Company’s primary investment objective is to maximize total return to shareholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund organic growth, acquisitions, market product expansion, refinancings and/or recapitalizations. During the three months ended September 30, 2017, the Company made investments in three new portfolio companies of approximately $46.9 million to which it was not previously contractually committed to provide financial support. During the three months ended September 30, 2017, the Company did not make investments in companies to which it was previously committed to provide financial support. The details of the Company’s investments have been disclosed on the Unaudited Consolidated Schedule of Investments.
c. Derivatives
Derivative contracts include total return swaps and embedded derivatives in Notes Payable. The Company enters into derivative contracts as part of its investment strategies.
In connection with the TRS transactions the Company entered into an ISDA Agreement with UBS. The ISDA Agreement includes provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Agreement, the Company typically may offset with the counterparty certain derivative payable and/or receivable with collateral held and/or posted and create one single net payment (close-out netting) in the event of default or termination.
The Company’s ISDA Agreement may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Company decline below specific levels (“net asset contingent features”). If these levels are triggered, the Company’s counterparty has the right to terminate such transaction and require the Company to pay or receive a settlement amount in connection with the terminated transaction.
The Company has determined that the Term Notes payable from SPV to UBS related to the Term Financing (discussed further in Note 5) contains an embedded derivative. SPV is obligated to pay UBS the net appreciation (depreciation) of the SPV Assets, as defined below, as well as pay any income generated by the SPV Assets until maturity. Therefore, amounts required for the future satisfaction of the note may be greater or less than the amount recorded. Realized and change in unrealized gains and losses on the embedded derivative is included in the net realized gain or loss on derivatives, and net change in unrealized appreciation (depreciation) on derivative in the Unaudited Consolidated Statements of Operations.
The following table reflects the fair value and notional amount or number of contracts of the Company’s derivative contracts, none of which were designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at September 30, 2017.
Assets
Liabilities
Notional
Contracts
Credit Risk:
Total Return Swaps
$
—
$
6,550,448
$
102,000,000
1
Embedded derivatives
Notes Payable
6,550,448
— 102,000,000
1
Gross fair value of derivative contracts
$
6,550,448
$
6,550,448
Counterparty netting
—
—
Net fair value of derivative contracts
$
6,550,448
$
6,550,448
Collateral not offset
—
—
Net amount
$
6,550,448
$
6,550,448
19
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
The following table reflects the fair value and notional amount or number of contracts of the Company’s derivative contracts, none of which were designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at June 30, 2017.
Assets
Liabilities
Notional
Contracts
Credit Risk:
Total Return Swaps
$
—
$
5,830,501
$
102,000,000
1
Embedded derivatives
Notes Payable
5,830,501
— 102,000,000
1
Gross fair value of derivative contracts
$
5,830,501
$
5,830,501
Counterparty netting
—
—
Net fair value of derivative contracts
$
5,830,501
$
5,830,501
Collateral not offset
—
—
Net amount
$
5,830,501
$
5,830,501
The following table reflects the amount of gains (losses) on derivatives included in the Unaudited Consolidated Statements of Operations for the three months ended September 30, 2017 and September 30, 2016, respectively. None of the derivatives were designated as hedging instruments under U.S. GAAP.
Included in net change in unrealized appreciation (depreciation) on
investments and derivatives
For the three months ended September 30,
2017
2016
Total Return Swaps
$
719,947
$
212,527
Embedded derivatives
Notes Payable
(719,947
)
(212,527
)
Total
$
—
$
—
d. Fair Value Measurements
ASC 820 defines fair value as 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. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency. The valuation hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assets and liabilities measured at fair value have been classified in the following three categories:
Level 1 – valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
20
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
Estimates of fair value for cash and restricted cash are measured using observable, quoted market prices, or Level 1 inputs. All other fair value significant estimates are measured using unobservable inputs, or Level 3 inputs.
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of September 30, 2017:
Level 1
Level 2
Level 3
Total
Assets
Investments
Senior Secured First Lien Debt Investments
$
—
$
—
$
138,628,022
$
138,628,022
Senior Secured Second Lien Debt Investments
—
—
121,195,626
121,195,626
Equity, Warrants and Other Investments
—
—
12,039,298
12,039,298
Total Investments
—
—
271,862,946
271,862,946
Derivatives
Embedded Derivative Notes Payable
—
—
6,550,448
6,550,448
Total Derivatives
—
—
6,550,448
6,550,448
Total Assets
$
—
$
—
$
278,413,394
$
278,413,394
Liabilities
Derivatives
Total Return Swaps
$
—
$
—
$
6,550,448
$
6,550,448
Total Derivatives
—
—
6,550,448
6,550,448
Total Liabilities
$
—
$
—
$
6,550,448
$
6,550,448
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of June 30, 2017:
Level 1
Level 2
Level 3
Total
Assets
Investments
Senior Secured First Lien Debt Investments
$
—
$ —
$
127,103,981
$
127,103,981
Senior Secured Second Lien Debt Investments
—
—
126,593,792
126,593,792
Equity, Warrants and Other Investments
—
—
1,209,398
1,209,398
Total Investments
—
—
254,907,171
254,907,171
Derivatives
Embedded derivative Notes Payable
—
—
5,830,501
5,830,501
Total Derivatives
—
—
5,830,501
5,830,501
Total Assets
$
—
$ —
$
260,737,672
$
260,737,672
Liabilities
Derivatives
Total Return Swaps
$
—
$ —
$
5,830,501
$
5,830,501
Total Derivatives
—
—
5,830,501
5,830,501
Total Liabilities
$
—
$ —
$
5,830,501
$
5,830,501
21
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended September 30, 2017:
Senior Secured
First Lien
Debt Investments
Senior Secured
Second Lien
Debt Investments
Equity, Warrants
and Other
Investments
Total
Investments
Balance as of June 30, 2017
$
127,103,981
$
126,593,792
$
1,209,398
$
254,907,171
Purchases (including PIK interest)
27,458,844
19,600,000
-
47,058,844
Sales
(15,752,403
)
(15,092,924
)
-
(30,845,327
)
Amortization
258,578
364,138
-
622,716
Net realized gains (losses)
(69,580
)
(7,311,110
)
-
(7,380,690
)
Transfers in
- - 7,518,750 7,518,750
Transfers out
- (7,518,750 ) - (7,518,750 )
Net change in unrealized (depreciation) appreciation
(371,398
)
4,560,480
3,311,150
7,500,232
Balance as of September 30, 2017
$
138,628,022
$
121,195,626
$
12,039,298
$
271,862,946
Change in unrealized gains (losses) relating to assets and liabilities still held as of September 30, 2017
$
(470,447
)
$
(2,753,277
)
$
3,311,150
$
87,426
Total Return Swaps
Embedded derivatives-
Notes Payable
Total Derivatives
Balance as of June 30, 2017
$
(5,830,501
)
$
5,830,501
$
—
Net change in unrealized (depreciation) appreciation
(719,947
)
719,947
—
Balance as of September 30, 2017
$
(6,550,448
)
$
6,550,448
$
—
Change in unrealized gains (losses) relating to assets and liabilities still held as of September 30, 2017
$
(719,947
)
$
719,947
$
—
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended September 30, 2016:
Senior Secured
First Lien
Debt Investments
Senior Secured
Second Lien
Debt Investments
Equity, Warrants
and Other
Investments
Total
Investments
Balance as of June 30, 2016
$
157,088,252
$
114,871,040
$
154,872
$
272,114,164
Purchases (including PIK interest)
24,280,175
—
—
24,280,175
Sales
(15,220,366
)
(18,000,000
)
—
(33,220,366
)
Amortization
531,692
154,961
—
686,653
Net realized gains (losses)
(6,777,231
)
—
(1,251,058
)
(8,028,289
)
Transfers in
—
—
—
—
Transfers out
—
—
—
—
Net change in unrealized (depreciation) appreciation
6,901,065
210,168
1,251,210
8,362,443
Balance as of September 30, 2016
$
166,803,587
$
97,236,169
$
155,024
$
264,194,780
Change in unrealized gains (losses) relating to assets and liabilities still held as of September 30, 2016
$
175,079
$
199,006
$
152
374,237

22
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
Total
Return
Swaps
Embedded
derivatives -
Notes
Payable
Total
Derivatives
Balance as of June 30, 2016
$
(9,071,659
)
$
9,071,659
$
—
Net change in unrealized (depreciation) appreciation
212,527
(212,527
)
—
Balance as of September 30, 2016
$
(8,859,132
)
$
8,859,132
$
—
Change in unrealized gains (losses) relating to assets and liabilities still held as of September 30, 2016
$
212,527
$
(212,527
)
$
—
Transfers into Level 3 during or at the end of the reporting period are reported under Level 1 or Level 2 as of the beginning of the period. Transfers out of Level 3 during or at the end of the reporting period are reported under Level 3 as of the beginning of the period. Changes in unrealized gains (losses) relating to Level 3 instruments are included in net change in unrealized (depreciation) appreciation on investments and derivatives on the Unaudited Consolidated Statements of Operations.
During the three months ended September 30, 2017 and September 30, 2016, the Company did not transfer any investments among Levels 1, 2 and 3.
The following tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 investments as of September 30, 2017 and June 30, 2017. These ranges represent the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not representative of the inputs that could have been used in the valuation of any one investment. For example, the highest market yield presented in the table for senior secured notes is appropriate for valuing a specific investment but may not be appropriate for valuing any other investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 investments.
Fair Value as of September 30,
2017
Valuation
Methodology
Unobservable
Input(s)
Weighted Average
Range
Senior Secured First Lien Debt Investments
$
98,135,201
Yield Analysis
Market Yields
9.7
%
4.3% - 18.4
%
Senior Secured First Lien Debt Investments
13,232,821
Yield Analysis
Market Comparable
101.0
%
100.8% - 101.3
%
Senior Secured First Lien Debt Investments
27,260,000
Recent Purchase
Recent Purchase
N/A
N/A
Senior Secured Second Lien Debt Investments
101,595,626
Yield Analysis
Market Yields
17.9
%
8.4% - 68.9
%
Senior Secured Second Lien Debt Investments
19,600,000
Recent Purchase
Recent Purchase
N/A
N/A
Equity, Warrants and Other Investments
12,039,298
EV Multiple
EBITDA multiple
9.74
x
1.15x - 14.90
x
Total Return Swaps
(6,550,448
)
Intrinsic Value
Intrinsic Value
N/A
N/A
Embedded Derivatives - Notes Payable
6,550,448
Intrinsic Value
Intrinsic Value
N/A
N/A
Fair Value as of
June 30, 2017
Valuation
Methodology
Unobservable
Input(s)
Weighted
Average
Range
Senior Secured First Lien Debt Investments
$
83,516,160
Yield Analysis
Market Yields
9.7
%
5.2%-17.8
%
Senior Secured First Lien Debt Investments
43,587,821
Recent Purchase
Recent Purchase
N/A
N/A
Senior Secured Second Lien Debt Investments
108,536,737
Yield Analysis
Market Yields
14.6
%
7.4%-33.8
%
Senior Secured Second Lien Debt Investments
18,057,055
Recent Purchase
Recent Purchase
N/A
N/A
Equity, Warrants and Other Investments
1,209,398
EV Multiple
Revenue
2.0
x
2.0
x
Total Return Swaps
(5,830,501
)
Intrinsic Value
Intrinsic Value
N/A
N/A
Embedded derivatives—Note Payable
5,830,501
Intrinsic Value
Intrinsic Value
N/A
N/A

23
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 4. Investments (Continued)
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair value measurements.
Note 5. Notes Payable
On November 9, 2016, the Company entered into the $50.0 million Senior Secured Revolving Credit Facility (the “Citi Revolving Financing”) with Citibank, N.A. (“Citibank”) which is secured by collateral consisting primarily of commercial loans and corporate bonds. The Citi Revolving Financing will expire on May 1, 2019. There were no upfront costs paid in the establishment of the Citi Revolving Financing.
Borrowings under the Citi Revolving Financing will generally bear interest at a rate per annum equal to London Interbank Offered Rate (“LIBOR”)  plus 4.85%. Default interest rate will be equal to the interest rate then in effect plus 2.00%. The Citi Revolving Financing requires the payment of an unused fee of 2.85% annually for any undrawn amounts below 75% of the Citi Revolving Financing, and 0.75% annually for any undrawn amounts above 75% of the Citi Revolving Financing. Borrowings under the Citi Revolving Financing are based on a borrowing base. The Citi Revolving Financing generally requires payment of interest on a quarterly basis. All outstanding principal is due upon maturity. The Citi Revolving Financing also requires mandatory prepayment of interest and principal upon certain events. As of September 30, 2017, there were $27.3 million in borrowings outstanding under the Citi Revolving Financing.
On May 23, 2013, as amended on June 6, 2013, December 4, 2013, September 26, 2014, July 20, 2015, August 14, 2015 and February 28, 2017, the Company, through SPV, entered into a $102.0 million financing transaction (the “Term Financing”) due December 5, 2019 with UBS. The Term Financing is collateralized by the portion of the Company’s assets held by SPV (the “SPV Assets”) and pledged as collateral as noted in the Consolidated Schedule of Investments. The Company pays interest on the face amount of the Term Financing at a rate of one month LIBOR plus a spread of 2.75% per annum (the “Financing Rate”). For the period December 6, 2018 through December 5, 2019 the Company will pay interest on the face amount of the Term Financing at a rate of one month LIBOR plus a spread of 2.55% per annum. Prior to September 26, 2014, the Company paid interest on the Term Financing at a rate of one month LIBOR plus a spread of 2.85% per annum. There were no upfront costs paid in the establishment of the Term Financing.
On December 4, 2013, as amended on September 26, 2014 and July 17, 2015, the Company, through SPV, entered into a $50.0 million revolving financing (the “UBS Revolving Financing” and together with the Term Financing, the “UBS Financing Facility”), which expired in accordance with its terms on December 5, 2016. From December 4, 2013 through September 24, 2014 the UBS Revolving Financing bore an interest at a fixed rate of 2.10% per annum on drawn amounts and 0.50% per annum on any undrawn portion. From September 26, 2014 through December 5, 2016, the UBS Revolving Financing bore an interest rate at a fixed rate of 2.00% on drawn amounts and 0.50% per annum on any undrawn portion. As of September 30, 2017 and June 30, 2017, there were no borrowings outstanding on the UBS Revolving Financing.
This financing transaction with UBS was initially executed in four steps:
First, the Company organized SPV, a consolidated wholly owned bankruptcy remote special purpose vehicle in the Cayman Islands to purchase the SPV Assets through (i) the issuance and sale of notes secured by the SPV Assets (the “Term Notes”) to UBS and the Company and (ii) the transfer of cash to the Company. UBS purchased Term Notes with a face value of $76.5 million, which represent 51% of the Term Notes issued and outstanding, for $76.5 million in cash. The Company purchased Term Notes with a face value of $73.5 million (which are eliminated in consolidation), which represent 49% of the Term Notes issued and outstanding. Under the terms of the indenture under which the Term Notes were issued (the “Indenture”), the holders of the Term Notes are entitled to (i) periodic interest payments equal to their pro rata portion of the interest collected on the assets held by SPV and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the Term Notes”). This represents the embedded derivative in the Term Notes payable from SPV to UBS. On September 26, 2014, the Company increased the size of the Term Facility to $102.0 million. In connection with the upsize, UBS purchased additional Term Notes with a face value of $25.5 million for $25.5 million in cash. The Company also purchased additional Term Notes with a face value of $24.5 million.
Second, the Company and UBS entered into a TRS transaction whereby the Company will receive the Total Return of the Term Notes purchased by UBS and pay the Financing Rate.
Third, SPV issued and sold an additional $50.0 million notes (the “Revolving Notes”) together with the Term Notes, the “Notes”, secured by the SPV Assets to UBS. Cash is only exchanged when the Revolving Notes are drawn. Under the terms of the Indenture under which the Revolving Notes were issued (the “Revolver Indenture”), the holders of the Revolving Notes are entitled to (i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the Revolving Notes”).
Fourth, the Company and UBS entered into another TRS transaction whereby the Company will receive the Total Return of the Revolving Notes purchased by UBS and pay the revolver financing rate. On December 5, 2016 the Revolving Notes matured and the corresponding TRS transaction associated with the Revolving Notes unwound in unison.
The fair value of the Company’s Notes Payable is estimated based on the rate at which similar facilities would be priced. At September 30, 2017 and June 30, 2017, the fair value of the Notes Payable was estimated at $129.3 million and $102.0 million, respectively, which the Company concluded was a Level 3 fair value.
Cash, restricted (as shown on the Unaudited Consolidated Statements of Assets and Liabilities) is held by the trustee of the Term Financing and Citi Revolving Financing and is restricted to purchases of investments by SPV and LLC that must meet certain eligibility criteria identified by the Indenture. As of September 30, 2017, SPV and LLC had aggregate assets of $248.9 million, which included $242.3 million of the Company’s portfolio investments at fair value, $1.4 million of accrued interest receivable and $5.2 million in cash held by the trustees of the Term Financing and Citi Revolving Financing Facility. As of June 30, 2017, SPV and LLC had assets of $203.4 million, which included $180.1 million of the Company’s portfolio investments at fair value, $1.0 million of accrued interest receivable and $22.3 million in cash held by the trustee of the UBS Term Financing. For the three months ended September 30, 2017, the weighted average outstanding debt balance and the weighted average stated interest rate under the Citi Revolving Facility was $113.0 million and 6.16%, respectively. For the three months ended September 30, 2016, the weighted average outstanding debt balance and the weighted average stated interest rate under the Term Financing and the Citi Revolving Financing was $123.6 million and 3.18%, respectively.
24
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 6. Indemnification, Guarantees, Commitments and Contingencies
In the normal course of business, the Company enters into contracts that provide a variety of representations and warranties and general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve future claims that may be made against the Company; however, based on the Company’s experience, the risk of loss is remote and no such claims are expected to occur. As such, the Company has not accrued any liability in connection with such indemnifications.
The Company’s Board of Directors declared the following quarterly distributions:
Declared
Ex-Date
Record Date
Pay Date
Amount
Fiscal Quarter
August 24, 2017
September 7, 2017
September 8, 2017
October 5, 2017
$
0.2500
1st 2018
November 7, 2017
December 14, 2017
December 15, 2017
January 4, 2018
$
0.2500
2nd 2018
Loans purchased by the Company may include revolving credit agreements or other financing commitments obligating the Company to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
The following table details the unfunded commitments as of September 30, 2017:
Investments
Unfunded
Commitment
Annual
Non-use
Fee
Expiration Date
AAR Intermediate Holdings, LLC
$
990,099
0.50
9/30/21
Bird Electric Enterprises LLC 1,000,000 6.50 6/14/22
U.S. Well Services, LLC
300,006
0.00
1/31/22
Total Unfunded Commitments
$
2,290,105
The following table details the Company’s unfunded commitments as of June 30, 2017:
Investments
Unfunded
Commitment
Annual
Non-use
Fee
Expiration Date
AAR Intermediate Holdings, LLC
$
792,079
0.50
9/30/21
U.S. Well Services, LLC 413,342 0.00 1/31/22
Total Unfunded Commitments
$
1,205,421
Note 7. Agreements and Related Party Transactions
Related Party Transactions
In connection with the Offering, the Adviser paid $3.45 million or 50.0% of the total underwriting costs, and offering costs in excess of the $1.2 million paid by Company.
25
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 7. Agreements and Related Party Transactions (Continued)
Investment Advisory Agreement
Pursuant to the Advisory Agreement, the Company has agreed to pay to the Adviser a base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and fair value of derivatives associated with the Company’s financing, and an incentive fee consisting of two parts.
The first part of the incentive fee, which is calculated and payable quarterly in arrears, equals 20.0% of the “pre-incentive fee net investment income” (as defined in the agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized), and is subject to a “catch-up” feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 1.75% base management fee.
The second part of the incentive fee is calculated and payable in arrears as of the end of each calendar year and equals 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.
The Adviser agreed to permanently waive all or portions of the incentive fee for the calendar year ended December 31, 2016 to the extent required to support an annualized dividend yield of 9.375% per annum. The Adviser has not contractually agreed to voluntarily waive any fees under the Advisory Agreement for the calendar year ended December 31, 2017 or thereafter.
For the three months ended September 30, 2017, $1,153,880 in base management fees were earned by the Adviser, of which $1,153,880 was payable at September 30, 2017. For the three months ended September 30, 2016, $1,211,535 in base management fees were earned by the Adviser, of which $1,211,535 was payable at September 30, 2016.
For the three months ended September 30, 2017, the Company incurred $0 of incentive fees related to pre-incentive fee net investment income. As of September 30, 2017, $240,538 of incentive fees are currently payable to the Adviser and $221,883 of pre-incentive fees incurred by the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three months ended September 30, 2016, the Company incurred $0 of incentive fees related to pre-incentive fee net investment income. As of September 30, 2016, $7,388 of such incentive fees were payable to the Adviser and $268,152 of pre-incentive fees incurred by the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash.
The capital gains incentive fee consists of fees related to both realized gains, realized capital losses and unrealized capital depreciation. As of September 30, 2017, there was no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of June 30, 2017, there was no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement.
With respect to the incentive fee expense accrual relating to the capital gains incentive fee, U.S. GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Advisory Agreement.
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.
26
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 7. Agreements and Related Party Transactions (Continued)
Prior to the Company’s election to be regulated as a BDC on February 5, 2014, no management or incentive fees were due and payable.
Administration Agreement
The Company entered into an administration agreement with the Adviser pursuant (the “Administration Agreement”) to which the Adviser furnishes the Company with office facilities and equipment and will provide the Company with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under the Administration Agreement, the Adviser performs, or oversees the performance of the Company’s required administrative services, which includes, among other things, being responsible for the financial records which it is required to maintain and preparing reports to its shareholders and reports filed with the SEC. In addition, the Adviser assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports and other materials to its stockholders, and generally oversees the payment of its expenses and the performance of administrative and professional services rendered to it by others. Under the Administration Agreement, the Adviser also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted its offer to provide such assistance. The Adviser has also retained the services of accounting and back office professionals on an as needed basis through a services agreement with the Cyrus Capital Partners, L.P. to assist the Adviser in fulfilling certain of its obligations to the Company under the Administration Agreement. The Company incurred costs of $127,229 under the Administration Agreement for the three months ended September 30, 2017. The Company incurred costs of $268,242 under the administration agreement for the three months ended September 30, 2016.
As of September 30, 2017 and June 30, 2017, the Company recorded $11,959 and $85,000, respectively, in accrued expenses and other liabilities on its Unaudited Consolidated Statements of Assets and Liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement.
License Agreement
The Company has entered into a license agreement with the Adviser under which the Adviser has agreed to grant the Company a non-exclusive, royalty-free license to use the name “CM Finance.” Under this agreement, the Company has a right to use the “CM Finance” name for so long as the Adviser or one of its affiliates remains the Adviser. Other than with respect to this limited license, the Company has no legal right to the “CM Finance” name.
Stifel Arrangement
In December 2013, the Company entered into an arrangement pursuant to which Stifel made a capital contribution to the Company on February 5, 2014 and the Company granted Stifel certain rights, such as a right to nominate for election a member of the Company’s board of directors. Stifel has not exercised its right to nominate for election a member of the Company’s board of directors. Stifel does not have any rights to exercise a controlling influence over the Company’s day-to-day operations or the investment management function of the Adviser.
Five of the investment professionals employed by the Adviser as part of the investment team are also employees of Stifel. Although these investment professionals dedicate substantially all of their time to the business and activities of the Adviser, they are dual employees of both Stifel and the Adviser, and as a result, may continue to engage in investment advisory activities for Stifel. As of September 30, 2017, Stifel Venture Corp. (“Stifel”) owned approximately 16.0% of the Company’s outstanding common stock, and also holds a 20.0% interest in the Adviser.
Note 8. Directors’ Fees
Each of the Company’s four independent directors receives (i) an annual fee of $75,000, and (ii) $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person or telephonically each regular board of directors meeting and each special telephonic meeting. The Company’s independent directors also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee receives an annual fee of $7,500. The chairperson of the valuation committee, the nominating and corporate governance committee and the compensation committee receives an annual fee of $2,500, $2,500 and $2,500, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf of the Company’s directors and officers. Independent directors have the option of having their directors’ fees paid in shares of the Company’s common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. For the three months ended September 30, 2017 and September 30, 2016, the Company recorded directors’ fees of $99,667 and $100,000, respectively, of which $97,043 and $100,000 were payable at September 30, 2017 and September 30, 2016, respectively.
27
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 9. Net Change in Net Assets Resulting from Operations Per Share
Basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations:
Basic and Diluted Net Increase (Decrease) in Net Assets Per Share
Three Months Ended September 30,
2017
2016
Net increase in net assets resulting from operations
$
3,135,717
$
4,304,957
Weighted average shares of common stock outstanding
13,689,885
13,680,817
Basic/diluted net increase in net assets from operations per share
$
0.23
$
0.31
Note 10. Distributions
The following table reflects the cash dividend distributions per share that the Company declared and/or paid to its shareholders since the Offering in February 2014. Shareholders of record as of each respective record date were entitled to receive the distribution:
Declaration Date
Record Date
Payment Date
Amount Per Share
March 14, 2014
March 24, 2014
March 31, 2014
$
0.1812
May 14, 2014
June 16, 2014
July 1, 2014
$
0.3375
September 4, 2014
September 18, 2014
October 1, 2014
$
0.3375
November 6, 2014
December 18, 2014
January 5, 2015
$
0.3375
January 28, 2015
March 18, 2015
April 2, 2015
$
0.3469
May 6, 2015
June 8, 2015
July 5, 2015
$
0.3469
June 10, 2015*
September 1, 2015
September 15, 2015
$
0.4300
June 10, 2015
September 18, 2015
October 2, 2015
$
0.3469
November 3, 2015
December 18, 2015
January 5, 2016
$
0.3469
February 2, 2016
March 18, 2016
April 7, 2016
$
0.3516
April 28, 2016
June 17, 2016
July 7, 2016
$
0.3516
August 25, 2016
September 16, 2016
October 6, 2016
$
0.3516
November 3, 2016
December 16, 2016
January 5, 2017
$
0.3516
November 3, 2016
March 17, 2017
April 6, 2017
$
0.2500
May 2, 2017
June 16, 2017
July 6, 2017
$
0.2500
August 24, 2017
September 8, 2017
October 5, 2017
$
0.2500
November 7, 2017
December 15, 2017
January 4, 2018
$
0.2500

*
Special distribution
28
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 10. Distributions (Continued)
The following table reflects the sources of the cash distributions that the Company has paid on its common stock during the three months ended September 30, 2017 and September 30, 2016:
Three months ended September 30,
2017
2016
Distribution Amount
Percentage
Distribution Amount
Percentage
Ordinary income and short-term capital gains
$
3,422,431
100
%
$
4,810,208
100
%
Long-term capital gains
—
—
—
—
Total
$
3,422,431
100
%
$
4,810,208
100
%
Note 11. Share Transactions
The following table summarizes the total shares issued for the three months ended September 30, 2017 and September 30, 2016.
Three months ended September 30,
2017
2016
Shares
Amount
Shares
Amount
Balance at beginning of period
13,689,221
$
200,568,530
13,679,686
$
200,482,695
Reinvestments of shareholder distributions
1,259
11,813
1,224
10,884
Balance at end of period
13,690,480
$
200,580,343
13,680,910
$
200,493,579
Note 12. Financial Highlights
The following represents the per share data and the ratios to average net assets for CM Finance Inc:
Three months
ended
September 30,
2017
Three months
ended
September 30,
2016
Per Share Data: (1)
Net asset value, beginning of period
$
12.41
$
11.90
Net investment income
0.22
0.29
Net realized and unrealized gains (losses)
0.01
0.02
Net increase in net assets resulting from operations
0.23
0.31
Capital transactions (2)
Dividends from net investment income
(0.25
)
(0.35
)
Distributions from net realized gains
—
—
Net decrease in net assets resulting from capital transactions
(0.25
)
(0.35
)
Net asset value, end of period
$
12.39
$
11.86
Market value per share, end of period
$
9.35
$
9.10
Total return based on market value (3)(4)
(3.95
)%
6.51
%
Shares outstanding at end of period
13,690,480
13,680,910
Ratio/Supplemental Data:
Net assets, at end of period
$
169,673,211
$
162,255,516
Ratio of total expenses to average net assets (5)
8.70
%
8.82
%
Ratio of net expenses to average net assets (5)
8.70
%
8.82
%
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net assets (5)
3.66
%
3.31
%
Ratio of net investment income before fee waiver to average net assets (5)
7.07
%
9.69
%
Ratio of net investment income after fee waiver to average net assets (5)
7.07
%
9.69
%
Total Notes Payable
$
129,260,000
$
116,500,000
Asset Coverage Ratio (6)
2.31
2.39
Portfolio Turnover Rate (4)
12
%
13
%
(1)
The per share data was derived by using the shares outstanding during the period.
(2)
The per share data for dividends and distributions declared reflects the actual amount of the dividends and distributions declared per share during the period.
(3)
Total returns are historical and are calculated by determining the percentage change in the market value with all dividends and distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the company’s dividend reinvestment plan. Total investment return does not reflect sales load.
(4)
Not annualized.
(5)
Annualized.
(6)
Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.
29
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2017
Note 13. Other Fee Income
The other fee income consists of structuring fee income, amendment fee income and royalty income. The following tables summarize the Company’s other fee income for the three months ended September 30, 2017 and September 30, 2016:
Three Months Ended September 30,
2017
2016
Loan Amendment/Consent Fee
$
9,879
$
216,467
Other Fee Income
$
9,879
$
216,467
Note 14. Tax Information
As of September 30, 2017, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
Tax cost
$
280,174,244
Gross unrealized appreciation
7,134,749
Gross unrealized depreciation
(15,446,047
)
Net unrealized investment depreciation
$
(8,311,298
)
As of June 30, 2017, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
Tax cost
$
271,969,759
Gross unrealized appreciation
3,709,069
Gross unrealized depreciation
(20,771,659
)
Net unrealized investment depreciation
$
(17,062,590
)
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
•
our future operating results;
•
our business prospects and the prospects of our portfolio companies;
•
the effect of investments that we expect to make;
•
our contractual arrangements and relationships with Stifel Venture Corp. (“Stifel”) and certain funds managed by Cyrus Capital Partners, L.P. (“Cyrus Capital”);
•
our contractual arrangements and relationships with lenders and other third parties;
•
actual and potential conflicts of interest with CM Investment Partners LLC (the “Adviser”);
•
the dependence of our future success on the general economy, interest rates and the effects of each on the industries in which we invest;
•
the ability of our portfolio companies to achieve their objectives or service their debt obligations to us;
•
the use of borrowed money to finance a portion of our investments;
•
the adequacy of our financing sources and working capital;
•
the timing of cash flows, if any, from the operations of our portfolio companies;
•
the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;
•
the ability of the Adviser to attract and retain highly talented professionals;
•
our ability to qualify and maintain our qualification as a regulated investment company ("RIC") and as a business development company ("BDC");
•
our ability to obtain exemptive relief from the Securities and Exchange Commission ("SEC"); and
•
the effect of changes to tax legislation and our tax position and other legislative and regulatory changes.
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
CM Finance Inc (“CMFN,” the “Company”, “us”, “we” or “our”), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, we have elected to be treated and intend to continue to qualify as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”).
Our primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle market companies to help these companies fund organic growth, acquisitions, market or product expansion, refinancings and/or recapitalizations. We invest primarily in lower middle-market companies in the form of unitranche loans, standalone first and second lien loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
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On February 5, 2014, we priced our initial public offering, selling 7,666,666 shares of our common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to our initial public offering, the merger was consummated, whereby CM Finance LLC merged with and into us (the “Merger”). In connection with the Merger, we issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of certain funds (the “Cyrus Funds”) managed by Cyrus Capital. CM Finance Inc had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became our books and records, as the surviving entity. Immediately after the Merger, we issued 2,181,818 shares of our common stock to Stifel in exchange for $32.7 million in cash. We used all of the proceeds of the sale of shares to Stifel, to repurchase 2,181,818 shares of common stock from the Cyrus Funds. Immediately after the completion of the initial public offering, we had 13,666,666 shares outstanding. We also used a portion of the net proceeds of the initial public offering to repay 100% of the debt issued to the Cyrus Funds in connection with the Merger.
Upon our election to be regulated as a BDC on February 5, 2014, we entered into the investment advisory agreement (the “Advisory Agreement”) and the administration agreement (the “Administration Agreement”) with the Adviser as our investment adviser and administrator, respectively.
We have formed certain additional taxable subsidiaries (collectively, with CM Portfolio Companies LLC, the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. At September 30, 2017, we had three taxable Subsidiaries: CM Portfolio Companies, LLC, U.S. Well Services Blocker, LLC, and Bird Electric Blocker, LLC. These Taxable Subsidiaries allow The Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our consolidated financial statements.
Valuation of portfolio investments
We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker dealers or market makers.
Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by our board of directors. Because a readily available market value for many of the investments in our portfolio is often not available, we value many of our portfolio investments at fair value as determined in good faith by our board of directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may also be deemed not to represent fair value in certain circumstances where we believe that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security causes current market quotations not to reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently, causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid ask spread.
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With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
•
our quarterly valuation process begins with each portfolio company or investment being initially valued by the members of the Adviser’s investment team responsible for the portfolio investment;
•
preliminary valuation conclusions are then documented and discussed by our senior management and the Adviser;
•
on a periodic basis, at least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm engaged by our board of directors;
•
the valuation committee of our board of directors then reviews these preliminary valuations and makes a recommendation to our board of directors regarding the fair value of each investment; and
•
the board of directors then reviews and discusses these preliminary valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the Adviser, the independent valuation firm and the valuation committee.
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.
When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available under the circumstances.
Our investments are categorized based on the types of inputs used in their valuation. The level in the U.S. GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by U.S. GAAP into the three broad levels as follows:
Level 1 – valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.
As of September 30, 2017 and June 30, 2017, all of our investments were classified as Level 3 investments, determined based on valuations by our board of directors.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the consolidated financial statements.
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Revenue recognition
Our revenue recognition policies are as follows:
Net realized gains (losses) on investments: Gains or losses on the sale of investments are calculated using the specific identification method.
Interest Income: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other fee income.
We may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected.
Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. PIK interest is not accrued if we do not expect the issuer to be able to pay all principal and interest when due. As of September 30, 2017, we had one investment on non-accrual status, which represented approximately 2.8% of our portfolio at fair value. As of June 30, 2017, we had one investment on non-accrual status, which represented approximately 3.00% of our portfolio at fair value.
Financing Facility

We have, through SPV, our wholly owned subsidiary, entered into a $102.0 million term secured financing facility (the "Term Financing"), due December 5, 2019 with UBS AG, London Branch (together with its affiliates "UBS"). The Term Financing is collateralized by a portion of the debt investments in our portfolio. We pay interest on the face amount of the Term Financing monthly at a rate of LIBOR plus 2.75% per annum through December 5, 2018. For the period from December 5, 2018 through December 5, 2019, we will pay interest on the face amount of the Term Financing monthly at a rate of LIBOR plus 2.55% per annum. As of September 30, 2017 and June 30, 2017, we had $102.0 million and $102.0 million outstanding under the Term Financing.
On November 9, 2016, we entered into a $50 million senior secured revolving credit facility (the "Citi Revolving Facility") with Citibank, N.A. ("Citibank"), which is secured by collateral consisting primarily of commercial loans and corporate bonds. The Citi Revolving Financing will expire on May 1, 2019. Borrowings under the Citi Revolving Financing generally bear interest at a rate per annum equal to LIBOR plus 4.85% and the default interest rate is equal to the interest rate then in effect plus 2.00%. As of September 30, 2017 and June 30, 2017, $27.3 and $0.0 million was outstanding on the Revolving Financing, respectively. We refer to the Term Financing and the Citi Revolving Financing together as the “Financing Facilities.”
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount we have available to invest as well as the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. In each case, the company must be organized in the United States. As of September 30, 2017, approximately 5.53% of our total assets were non-qualifying assets.
To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level taxes on any income we distribute to our shareholders.
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Revenues
We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from royalty income, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK interest. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.
Expenses
Our primary operating expenses include the payment of a base management fee and, depending on our operating results, incentive fees, expenses reimbursable by us under the Advisory Agreement, and administration fees and our allocable portion of overhead under the Administration Agreement. The base management fee and incentive compensation remunerates the Adviser for work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:
•
our organization and our offering;
•
valuing our assets and calculating our net asset value per share (including the cost and expenses of any independent valuation firm(s));
•
fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;
•
interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts;
•
offerings of our common stock and other securities;
•
administration fees and expenses, if any, payable under the Administration Agreement (including our allocable portion of the Adviser’s overhead in performing its obligations under the Administration Agreement, including rent, equipment and the allocable portion of the cost of our chief compliance officer, chief financial officer and his staffs’ compensation and compensation-related expenses);
•
transfer agent and custody fees and expenses;
•
federal and state registration fees;
•
costs of registration and listing our shares on any securities exchange;
•
federal, state and local taxes;
•
independent directors’ fees and expenses;
•
costs of preparing and filing reports or other documents required by the SEC or other regulators;
•
costs of any reports, proxy statements or other notices to stockholders including printing costs;
•
costs associated with individual or group stockholders;
•
costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
•
direct costs and expenses of administration and operation, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and
•
all other non-investment advisory expenses incurred by us or the Adviser in connection with administering our business.
Portfolio and investment activity
Portfolio composition
We invest primarily in middle-market companies in the form of unitranche loans, standalone first and second lien and loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
At September 30, 2017, our investment portfolio of $271.9 million (at fair value) consisted of investments in 23 portfolio companies, of which 51.0% were first lien investments, 44.6% were second lien investments, and 4.4% were in equities, warrants and other positions. At September 30, 2017, our average and largest portfolio company investment at fair value was $11.8 million and $25.8 million, respectively.
At June 30, 2017, our investment portfolio of $254.9 million (at fair value) consisted of investments in 23 portfolio companies, of which 49.9% were first lien investments,  49.7% were second lien investments, and 0.4% were in equity and warrant positions. At June 30, 2017, our average and largest portfolio company investment at fair value was $11.1 million and $25.9 million, respectively.
As of September 30, 2017 and June 30, 2017, respectively, our weighted average total yield of debt and income producing securities at amortized cost (which includes interest income and amortization of fees and discounts) was 10.67% and 9.73%, respectively. As of September 30, 2017 and June 20, 2017, respectively, our weighted average yield on all investments at amortized cost (which includes interest income and amortization of fees and discounts) was 10.29% and 9.64%, respectively.
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At September 30, 2017 and June 30, 2017, respectively, the industry composition of our portfolio at fair value was as follows:

Percentage
of Total
Portfolio
at September 30, 2017
Percentage
of Total
Portfolio
at June 30, 2017
Business Services
22.04
%
16.71
%
Entertainment and Leisure
14.05
14.98
Oilfield Services
11.29
6.90
Healthcare-Products/Services
8.89
11.17
Oil and Gas
8.42
8.67
Environmental Services
7.21
—
Media
6.33
6.04
Telecommunications
5.69
12.00
Metals and Mining
3.85
4.34
Trucking and Leasing
3.47
9.02
Construction & Building
3.43
3.91
Utilities
2.77
2.95
Retail
2.56
2.92
Consumer Products
—
0.39
Total
100.00
%
100.00
%
During the three months ended September 30, 2017, we added three new investments totaling approximately $46.9 million. All three of these investments were in new portfolio companies. Of the new investments, 58.2% consisted of first lien investments and 41.8% second lien investments.
At September 30, 2017, 96.0% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 4.0% bore interest at fixed rates. At June 30, 2017, 95.2% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 4.3% bore interest at fixed rates.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2017, we had three investments with an unfunded commitment with aggregate unfunded commitments of $2.3 million, and as of June 30, 2017, we had two such investments with an unfunded commitment with aggregate unfunded commitments of $1.2 million.
Asset Quality
In addition to various risk management and monitoring tools, we use the Adviser’s investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:
Investment Rating 1
Investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.
Investment Rating 2
Investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans will initially be rated 2.
Investment Rating 3
Investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with their financial covenants.
Investment Rating 4
Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in workout. Investments with a rating of 4 will be those for which some loss of return but no loss of principal is expected.
Investment Rating 5
Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in workout. Investments with a rating of 5 will be those for which some loss of return and principal is expected.
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If the Adviser determines that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, the Adviser will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and suggesting recommended actions. While the investment rating system identifies the relative risk for each investment, the rating alone does not dictate the scope and/or frequency of any monitoring that will be performed. The frequency of the Adviser’s monitoring of an investment will be determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the investment.
The following table shows the investment rankings of the debt investments in our portfolio:
As of September 30, 2017
As of June 30, 2017
Fair Value
% of
Portfolio
Number of
Investments
Fair Value
% of
Portfolio
Number of
Investments
1
$
—
—
%
—
$
—
—
%
—
2
230,750,166
84.9
18
212,729,243
83.5
18
3
14,142,664
5.2
2
27,899,860
10.9
3
4
19,451,364
7.2
1
6,759,238
2.7
1
5
7,518,752
2.7
2
7,518,830
2.9
2
Total
$
271,862,946
100.0
%
23
$
254,907,171
100.0
%
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Results of Operations
Comparison of the three months ended September 30, 2017 and September 30, 2016
Investment income
Investment income, attributable primarily to interest and fees on our debt investments, for the three months ended September 30, 2017 decreased to $6.7 million from $7.6 million for the three months ended September 30, 2016, primarily due to the repayment of portfolio companies with higher yields and a higher percentage of uninvested cash during the quarter ended September 30, 2017.
Expenses
Total expenses for the three months ended September 30, 2017 increased to $3.7 million, compared to $3.6 million for the three months ended September 30, 2016, primarily due to an increase in interest expenses related to borrowings.
Net investment income
Net investment income decreased to $3.0 million for the three months ended September 30, 2017 from $4.0 million for the three months ended September 30, 2016, primarily due to a decrease in investment income primarily due to the repayment of portfolio companies with higher yields, a higher percentage of uninvested cash and an increase in interest expense related to borrowings.
Net realized gain or loss
During the three months ended September 30, 2017, we had a realized loss of $7.4 million, primarily due to the restructuring of Bird Electric Enterprises, LLC.
The net realized loss on investments totaled $8.0 million for the three months ended September 30, 2016, primarily due to the restructuring of AAR Intermediate Holdings, LLC.
Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized appreciation of $7.5 million for the three months ended September 30, 2017, primarily due to the restructuring of Bird Electric Enterprises, LLC and an increase in valuations of certain investments.
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During the three months ended September 30, 2016, we recorded a net change in unrealized depreciation of $8.4 primarily due to the restructuring of AAR Intermediate Holdings, LLC and an increase in valuations of certain investments.
Liquidity and capital resources
Cash flows
For the three months ended September 30, 2017, our unrestricted cash balance increased by $3.9 million. During that period, we used $20.1 million in cash from operating activities, primarily due to payments for the purchase of investments in portfolio companies of $47.0 million, offset by sales of investments of $30.8 million in portfolio companies. During the same period, cash increased by $24.0 million from financing activities, consisting primarily of $3.4 million of distributions paid to our stockholders and $27.3 million of borrowings from the Citi Revolving Facility.
Capital Resources
As of September 30, 2017, we had $14.5 million of cash as well as $16.1 million in restricted cash and $22.7 million of capacity under the Citi Revolving Financing. We intend to generate additional cash primarily from future offerings of securities, future borrowings under the Citi Revolving Financing as well as cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary liquidity needs include interest and principal repayments on our Financing Facilities, our unfunded loan commitments (if any), investments in portfolio companies, dividend distributions to our stockholders and operating expenses.
As discussed below in further detail, we have elected to be treated as a RIC under the Code. To maintain our RIC status, we generally must distribute substantially all of our net taxable income to stockholders in the form of dividends. Our net taxable income does not necessarily equal our net income as calculated in accordance with U.S. GAAP.
Regulated Investment Company Status and Distributions
We have elected to be treated as a RIC under Subchapter M of the Code. If we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To qualify for RIC tax treatment, we must, among other things, distribute to our stockholders, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). We will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Financing Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in Financing Facilities. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
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In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each shareholder elects to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each shareholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any shareholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.
Investment Advisory Agreement
Pursuant to the Advisory Agreement, we have agreed to pay to the Adviser a base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and “fair value of derivatives associated with our financing”, and an incentive fee consisting of two parts.
The first part of the incentive fee, which is calculated and payable quarterly in arrears, equals 20.0% of the “pre-incentive fee net investment income” (as defined in the Advisory Agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized), and is subject to a “catch-up” feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee.
The second part of the incentive fee is calculated and payable in arrears as of the end of each calendar year and equals 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.
The Adviser agreed to permanently waive all or portions of the incentive fee for the calendar year ended December 31, 2016 to the extent required to support an annualized dividend yield of 9.375% per annum. The Adviser has not contractually agreed to voluntarily waive any fees under the Advisory Agreement for the calendar year ended December 31, 2017 or thereafter.
For the three months ended September 30, 2017 and September 30, 2016, $1,153,880 and $1,211,535 in base management fees were earned by the Adviser, respectively, of which $1,153,880  and $1,211,535 were payable at September 30, 2017 and September 30, 2016, respectively.
For the three months ended September 30, 2017, we incurred no incentive fees related to pre-incentive fee net investment income. As of September 30, 2017, $240,538 of previous incentive fees are currently payable to the Adviser, which consist of $221,883 of pre-incentive fees incurred by us that were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three months ended September 30, 2016, the Company incurred $0 of incentive fees related to pre-incentive fee net investment income. As of September 30, 2016, $7,388 of previous incentive fees are currently payable to the Adviser, which consist of $268,152 of pre-incentive fees incurred by us that were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash.
The capital gains incentive fee consists of fees related to both realized gains, realized capital losses and unrealized capital depreciation. As of September 30, 2017, there was no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of September 30, 2016, there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement.
With respect to the incentive fee expense accrual relating to the unrealized capital gains incentive fee, U.S. GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Advisory Agreement.
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The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.
Prior to our election to be regulated as a BDC on February 5, 2014, no management or incentive fees were due and payable.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of September 30, 2017, our off-balance sheet arrangements consisted of $2.3 million in unfunded commitments to three of our portfolio companies.
Recent Developments
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.

Subsequent to the three months ended September 30, 2017 through November 7, 2017 the Company invested $8.0 million in new and existing portfolio companies and received repayment or sales proceeds of $7.0 million.
On November 7, 2017, the Board of Directors of the Company declared a distribution for the quarter ended December 31, 2017 of $0.25 per share payable on January 4, 2018 to shareholders of record as of December 15, 2017.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are subject to financial market risks, including changes in interest rates. At September 30, 2017, 91.7% of our debt investments bore interest based on floating rates, such as LIBOR, the Euro Interbank Offered Rate, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.
Generally, we believe higher yielding assets such as those in our investment portfolio do not necessarily follow a linear interest rate relationship and are less sensitive in price to interest rate changes than many other debt investments. Our investments in fixed rate assets are generally exposed to changes in value due to interest rate fluctuations, and our floating rate assets are generally exposed to cash flow variability from fluctuation in rates. Consequently, our net interest income (interest income less interest expense) is exposed to risks related to interest rate fluctuations. Based on our current portfolio with certain interest rate floors and our financing at September 30, 2017, a 1.00% increase in interest rates would increase our net interest income by approximately 6.8% and a 2.00% increase in interest rates would increase our net interest income by approximately 13.5%. Variable-rate instruments subject to a floor generally reset periodically to the applicable floor and, in the case of investments in our portfolio, quarterly to a floor based on LIBOR, only if the floor exceeds the index. Under these loans, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor.
Although management believes that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit markets, the size, credit quality or composition of the assets in our portfolio and other business developments, including borrowing, that could affect the net increase in net assets resulting from operations or net income. It also does not adjust for the effect of the time lag between a change in the relevant interest rate index and the rate adjustment under the applicable loan. Accordingly, we can offer no assurances that actual results would not differ materially from the statement above.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2017, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings.
(b) Changes in Internal Control Over Financial Reporting
Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
During the three months ended September 30, 2017, there have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
10.1 Amendment Agreement, dated as of September 1, 2017, by and among CM Finance SPV LTD., U.S. Bank National Association, CM Investment Partners LLC and CM Finance Inc*
*
Filed herewith

(1)
Incorporated by reference to Registrant’s Registration Statement on Form N-2 (File No. 333-192370), filed on November 15, 2013.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 7, 2017
CM FINANCE INC
By:
/s/ Michael C. Mauer
Michael C. Mauer
Chief Executive Officer
By:
/s/ Rocco DelGuercio
Rocco DelGuercio
Chief Financial Officer
TABLE OF CONTENTS
Note 1. OrganizationNote 2. Significant Accounting PoliciesNote 2. Significant Accounting Policies (continued)Note 3. New Accounting PronouncementsNote 4. InvestmentsNote 4. Investments (continued)Note 5. Notes PayableNote 6. Indemnification, Guarantees, Commitments and ContingenciesNote 7. Agreements and Related Party TransactionsNote 7. Agreements and Related Party Transactions (continued)Note 8. Directors FeesNote 9. Net Change in Net Assets Resulting From Operations Per ShareNote 10. DistributionsNote 10. Distributions (continued)Note 11. Share TransactionsNote 12. Financial HighlightsNote 13. Other Fee IncomeNote 14. Tax InformationItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

3.1 Amended and Restated Articles of Incorporation(1) 3.2 Bylaws(1) 10.1 Amendment Agreement, dated as of September 1, 2017, by and among CM Finance SPV LTD., U.S. Bank National Association, CM Investment Partners LLC and CM Finance Inc* 31.1 Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2 Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*