Form 10-Q/A Investcorp Credit Management Bdc, Inc.

[Amend] Quarterly report [Sections 13 or 15(d)]

Published: 2019-03-08 17:12:34
Submitted: 2019-03-08
Period Ending In: 2018-12-31
d720892d10qa.htm CM FINANCE INC


ENT> 10-Q/A 1 d720892d10qa.htm CM FINANCE INC

CM FINANCE INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q/A

(Amendment No. 1)

(Mark One)

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

For the quarterly period ended December 31, 2018

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.)

65 East 55th Street

15th 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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically 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  
Non-accelerated filer
     Smaller reporting company  
     Emerging growth company  

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  ☒

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of February 5, 2019 was 13,613,707.


EXPLANATORY NOTE

This Amendment No. 1 on

Form 10-Q/A
(“Amendment No. 1”) amends CM Finance Inc’s (the “Company”) Quarterly Report on
Form 10-Q
for the fiscal quarter ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”) on February 6, 2019 (the “Original Filing”), solely to include the Company’s consolidated schedule of investments as of June 30, 2018 that was inadvertently omitted from the Original Filing due to an error in the edgarization process.

As required by

Rule 12b-15
under the Securities Exchange Act of 1934, as amended, Amendment No. 1 includes new certifications from the Company’s principal executive officer and principal financial officer dated as of the date of filing of this Amendment No. 1.

This Amendment No. 1 consists solely of the preceding cover page, this explanatory note, Part I., Item 1., “Financial Statements,” in its entirety, Part II., Item 6., “Exhibits,” in its entirety, the signature page, and the new certifications from the Company’s Principal Executive Officer and Principal Financial Officer.

Amendment No. 1 speaks as of the date of the Original Filing, does not reflect events that may have occurred after the date of the Original Filing and does not modify or update in any way the disclosures made in the Original Filing, except as described above. Amendment No. 1 should be read in conjunction with the Original Filing and with the Company’s subsequent filings with the SEC.

 

         Page  

PART I. FINANCIAL INFORMATION

 

Item 1.  

Financial Statements

  
 

Consolidated Statements of Assets and Liabilities as of December  31, 2018 (unaudited) and June 30, 2018

     3  
 

Consolidated Statements of Operations for the three and six months ended December 31, 2018 (unaudited) and December 30, 2017 (unaudited)

     4  
 

Consolidated Statements of Changes in Net Assets for the six months ended December 31, 2018 (unaudited) and December 31, 2017 (unaudited)

     5  
 

Consolidated Statements of Cash Flows for the six months ended December 31, 2018 (unaudited) and December 31, 2017 (unaudited)

     6  
 

Consolidated Schedule of Investments as of December  31, 2018 (unaudited) and June 30, 2018

     7  
 

Notes to Unaudited Consolidated Financial Statements

     14  


CM Finance Inc and Subsidiaries

Consolidated Statements of Assets and Liabilities

 

 

     December 31, 2018     June 30, 2018  

Assets

 

Non-controlled,
non-affiliated
investments, at fair value (amortized cost of $307,290,045 and $ 302,647,282, respectively)

   $ 283,335,302     $ 293,592,013  

Derivatives, at fair value (cost of $0 and $0, respectively)

     94,380       229,918  

Cash

     6,197,259       5,620,441  

Cash, restricted

     5,981,651       2,706,273  

Receivable for investments sold

     397,146       7,751,875  

Interest receivable

     3,282,163       4,011,450  

Deferred offering costs

     121,922       121,922  

Other receivables

     2,515,625       245,550  

Prepaid expenses and other assets

     58,954       255,139  
  

 

 

   

 

 

 

Total Assets

   $ 301,984,402     $ 314,534,581  
  

 

 

   

 

 

 

Liabilities

    

Notes payable:

    

Term loan

   $ 102,000,000     $ 102,000,000  

Revolving credit facility

     —         17,823,000  

2023 Notes payable

     34,500,000       —    

Deferred debt issuance costs

     (2,494,517     (1,953,771
  

 

 

   

 

 

 

Notes payable, net

     134,005,483       117,869,229  

Payable for investments purchased

     2,985,000       12,569,450  

Dividend payable

     3,410,713       3,417,848  

Deferred financing costs payable

     1,037,000       2,071,167  

Income-based incentive fees payable

     1,566,513       2,294,678  

Base management fees payable

     1,405,297       1,319,853  

Accrued provision for taxes

     —         2,579,337  

Derivatives, at fair value (cost $0 and $0, respectively)

     94,380       229,918  

Interest payable

     845,566       303,153  

Directors’ fees payable

     93,448       99,296  

Accrued expenses and other liabilities

     104,694       257,986  
  

 

 

   

 

 

 

Total Liabilities

     145,548,094       143,011,915  

Commitments and Contingencies (Note 6)

    

Net Assets

    

Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,613,116 and 13,649,504 shares issued and outstanding, respectively)

     13,613       13,649  

Additional

paid-in
capital

     198,392,175       198,700,999  

Accumulated net realized loss

     (21,270,472     (21,087,280

Undistributed net investment income

     3,255,732       2,950,567  

Net unrealized depreciation on investments

     (23,954,740     (9,055,269
  

 

 

   

 

 

 

Total Net Assets

     156,436,308       171,522,666  
  

 

 

   

 

 

 

Total Liabilities and Net Assets

   $ 301,984,402     $ 314,534,581  
  

 

 

   

 

 

 

Net Asset Value Per Share

   $ 11.49     $ 12.57  

See notes to unaudited consolidated financial statements.

 

3


CM Finance Inc and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

 

     For the three months ended
December 31,
     For the six months ended
December 31,
 
     2018     2017      2018     2017  

Investment Income:

 

      

Interest income

   $ 8,481,251     $ 7,538,152      $ 16,136,091     $ 13,964,204  

Payment

in-kind
interest income

     540,308       722,039        953,928       1,014,517  

Dividend income

     —         —          31,275       —    

Payment

in-kind
dividend income

     —         189,583        —         189,583  

Other fee income

     277,365       —          432,520       9,879  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total investment income

     9,298,924       8,449,774        17,553,814       15,178,183  

Expenses:

         

Interest expense

     2,156,537       1,601,261        4,421,394       3,039,090  

Base management fees

     1,405,297       1,161,353        2,757,152       2,315,233  

Income-based incentive fees

     753,721       921,782        874,042       906,758  

Provision for tax expense

     12,946       —          12,946       —    

Professional fees

     233,528       236,024        466,328       445,064  

Allocation of administrative costs from advisor

     341,633       184,561        679,696       311,790  

Amortization of deferred debt issuance costs

     195,377       179,514        390,754       304,716  

Insurance expense

     84,440       85,225        168,880       205,439  

Directors’ fees

     101,250       99,000        202,500       198,667  

Custodian and administrator fees

     7,500       113,443        15,000       170,451  

Offering expense

     51,750       —          103,500       186,513  

Other expenses

     236,033       180,482        355,214       391,158  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses

     5,580,012       4,762,645        10,447,406       8,474,879  

Waiver of income-based incentive fees

     —         —          (22,000     —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Net expenses

     5,580,012       4,762,645        10,425,406       8,474,879  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net investment income

     3,718,912       3,687,129        7,128,408       6,703,304  

Net realized and unrealized gain/(loss) on investments:

         

Net realized gain (loss) from investments

     75,000       —          (183,192     (7,380,690

Net change in unrealized appreciation (depreciation) in value of investments

     (13,176,208     1,172,018        (14,899,471     8,672,249  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total realized and unrealized gain (loss) on investments

     (13,101,208     1,172,018        (15,082,663     1,291,559  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ (9,382,296   $ 4,859,147      $ (7,954,255   $ 7,994,863  
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic and diluted:

         

Net investment income per share

   $ 0.27     $ 0.27      $ 0.52     $ 0.49  

Earnings per share

   $ (0.69   $ 0.35      $ (0.58   $ 0.58  

Weighted average shares of common stock outstanding

     13,638,869       13,690,480        13,644,483       13,690,182  

Distributions paid per common share

   $ 0.25     $ 0.25      $ 0.50     $ 0.50  

See notes to unaudited consolidated financial statements.

 

4


CM Finance Inc and Subsidiaries

Consolidated Statements of Changes in Net Assets (Unaudited)

 

 

     For the six months ended December 31,  
     2018     2017  

Net assets at beginning of year

   $ 171,522,666     $ 169,948,112  

Increase (decrease) in net assets resulting from operations:

    

Net investment income

     7,128,408       6,703,304  

Net realized loss on investments

     (183,192     (7,380,690

Net change in unrealized appreciation (depreciation) on investments

     (14,899,471     8,672,249  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     (7,954,255     7,994,863  

Stockholder distributions:

    

Distributions from net investment income

     (6,823,243     (6,845,051

Net decrease in net assets resulting from stockholder distributions

     (6,823,243     (6,845,051

Capital transactions:

    

Reinvestments of stockholder distributions

     49,713       11,813  

Repurchase of common stock

     (358,573     —    
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital transactions

     (308,860     11,813  
  

 

 

   

 

 

 

Net increase (decrease) in net assets

     (15,086,358     1,161,625  
  

 

 

   

 

 

 

Net assets at end of period (including undistributed (distributions in excess of) net investment income of $3,255,732, and $(2,481,050), respectively)

   $ 156,436,308     $ 171,109,737  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

5


CM Finance Inc and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     For the six months ended December 31,  
     2018     2017  

Cash Flows from Operating Activities

    

Net increase (decrease) in net assets resulting from operations

   $ (7,954,255   $ 7,994,863  

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Origination and purchase of investments

     (104,067,555     (81,850,777

Payment

in-kind
interest

     (953,928     (1,014,517

Payment

in-kind
dividends

     —         (189,583

Sales and repayments of investments

     101,767,898       54,842,377  

Net realized loss on investments

     183,192       7,380,690  

Net change in unrealized (appreciation) depreciation on investments

     14,899,471       (8,672,249

Amortization of discount/premium on investments

     (1,572,367     (2,119,937

Amortization of deferred debt issuance costs

     390,754       304,716  

Net (increase) decrease in operating assets:

    

Interest receivable

     729,287       (2,713,068

Dividends receivable

     —         (189,583

Receivable for investments sold

     7,354,729       —    

Other receivables

     (2,270,075     (179,819

Prepaid expenses and other assets

     196,185       170,451  

Net increase (decrease) in operating liabilities:

    

Payable for investments purchased

     (9,584,450     (12,490,000

Interest payable

     542,413       78,340  

Accrued provision for income taxes

     (2,579,337     —    

Directors fees payable

     (5,848     (3,254

Accrued expenses and other liabilities

     (153,292     (66,375

Base management fees payable

     85,444       1,182,842  

Income-based incentive fees payable

     (728,165     888,247  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (3,719,899     (36,646,636

Cash Flows from Financing Activities:

    

Payment for deferred financing costs

     (1,965,667     (620,500

Deferred offering costs

     —         128,169  

Distributions to stockholders

     (6,780,665     (6,832,923

Repurchase of common stock

     (358,573     —    

Proceeds from 2023 Notes

     34,500,000       —    

Proceeds from borrowing on revolving credit facility

     19,105,470       45,090,000  

Repayments of borrowing on revolving credit facility

     (36,928,470     (27,260,000
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     7,572,095       10,504,746  
  

 

 

   

 

 

 

Net change in cash

     3,852,196       (26,141,890

Cash

    

Cash and restricted cash at beginning of period

     8,326,714       33,262,874  
  

 

 

   

 

 

 

Cash and restricted cash at end of period

   $ 12,178,910     $ 7,120,984  
  

 

 

   

 

 

 

Supplemental and

non-cash
financing cash flow information:

    

Cash paid for interest

   $ 3,878,981     $ 2,960,751  

Cash paid for taxes

   $ 2,592,283     $ —    

Issuance of shares pursuant to Dividend Reinvestment Plan

     49,713       11,813  

Non-cash
purchase of investments

   $       $ —    

Non-cash
sale of investments

   $       $ —    

See notes to unaudited consolidated financial statements.

 

6


CM Finance Inc and Subsidiaries

Consolidated Schedule of Investments

(Unaudited)

December 31, 2018

 

Investments(1)(2)

  Industry  

Interest Rate

  Initial
Acquisition
Date
    Maturity
Date
    Principal
Amount/
Shares(3)
    Amortized
Cost
    Fair Value     % of
Net Assets
 

Non-Controlled/Non-Affiliates

               

Senior Secured First Lien Debt Investments

           

1888 Industrial Services, LLC - Term A(4)

  Energy Equipment &
Services
  3M L+5.00% (1.00% Floor)     9/30/2016       9/30/2021     $ 4,950,495     $ 4,950,495     $ 4,950,495       3.16

1888 Industrial Services,
LLC - Term B(3)(4)

  Energy Equipment &
Services
  3M L+8.00% PIK (1.00% Floor)     9/30/2016       9/30/2021       12,304,681       6,530,574       9,228,511       5.90

1888 Industrial Services,
LLC - Revolver (4)(5)

  Energy Equipment &
Services
  3M L+5.00% (1.00% Floor)     10/11/2016       9/30/2021       2,376,238       1,485,149       1,485,149       0.95

4L Technologies Inc(6)

  Technology
Hardware, Storage &
Peripherals
  3M L+4.50% (1.00% Floor)     8/21/2018       5/8/2020       8,959,162       8,836,110       8,815,815       5.64

Bioplan USA, Inc.

  Containers &
Packaging
  3M L+4.75% (1.00% Floor)     8/9/2018       9/23/2021       7,352,731       7,080,193       6,985,095       4.47

CareerBuilder, LLC(6)(7)

  Professional
Services
  3M L+6.75% (1.00% Floor)     7/27/2017       7/27/2023       13,537,179       13,268,520       13,537,179       8.65

Cook & Boardman Group LLC(6)

  Distributors   2M L+5.75% (1.00% Floor)     10/12/2018       10/17/2025       10,000,000       9,901,920       9,900,000       6.33

Deluxe Toronto Ltd.(6)

  Media   3M L+5.50% (1.00% Floor)     6/29/2018       12/7/2020       4,974,874       4,931,329       4,974,874       3.18

Exela Intermedia LLC

  IT Services   3M L+6.50% (1.00% Floor)     6/5/2018       7/12/2023       5,429,936       5,483,082       5,429,936       3.47

Exela Intermedia LLC

  IT Services   Fixed 10.00%     6/19/2018       7/15/2023       5,500,000       5,663,681       5,500,000       3.52

Fusion Connect Inc.

  Internet Software &
Services
  3M L+7.50% (1.00% Floor)     7/11/2018       5/4/2023       11,517,092       11,124,874       10,941,238       6.99

GEE Group, Inc.(6)(8)

  Professional
Services
  2M L+18.00% (1.00% Floor)     3/26/2018       3/31/2021       11,612,863       11,612,863       11,612,863       7.42

Infrastructure & Energy Alternatives,
Inc.(6)

  Construction &
Engineering
  3M L+6.25%     11/14/2018       11/4/2024       12,500,000       12,067,552       12,062,500       7.71

Immucor, Inc.(6)

  Health Care
Equipment &
Supplies
  3M L+5.00% (1.00% Floor)     6/27/2017       6/15/2021       7,387,500       7,338,613       7,461,375       4.77

Liberty Oilfield Services LLC(6)(9)

  Energy Equipment &
Services
  1M L+7.625% (1.00% Floor)     9/19/2017       9/19/2022       6,383,750       6,285,315       6,383,750       4.08

Montreign Operating Company, LLC(6)

  Hotels,
Restaurants &
Leisure
  1M L+8.25% (1.00% Floor)     12/16/2016       1/24/2023       13,133,574       13,211,906       12,214,224       7.81

PR Wireless LLC(5)

  Wireless
Telecommunication
Services
  3M L+5.25% (1.00% Floor)     11/15/2017       6/27/2020       2,305,453       1,012,919       1,012,919       0.65

See notes to unaudited consolidated financial statements.

 

7


CM Finance Inc and Subsidiaries

Consolidated Schedule of Investments (continued)

(Unaudited)

December 31, 2018

 

Investments(1)(2)

   Industry    Interest Rate     Initial
Acquisition
Date
     Maturity
Date
     Principal
Amount/
Shares(3)
     Amortized
Cost
     Fair Value      % of
Net Assets
 

Senior Secured First Lien Debt Investments, continued

                

Premiere Global Services, Inc.(6)(9)

   Diversified
Telecommunication
Services
    
3M L+6.50%
(1.00% Floor)
 
 
    5/6/2016        12/8/2021        10,444,897        9,820,433        9,191,509        5.88

ProFrac Services, LLC(6)

   Energy
Equipment &
Services
    
3M L+5.75%
(1.00% Floor)
 
 
    9/7/2018        9/7/2023        7,481,250        7,411,970        7,406,438        4.73

Qualtek USA LLC(6)

   Construction &
Engineering
    
3M L+5.75%
(1.00% Floor)
 
 
    7/15/2018        7/18/2018        9,975,000        9,802,189        9,825,375        6.28

RPX Corporation(6)

   Professional
Services
     3M L+6.00%       6/8/2018        6/7/2024        9,625,000        9,532,223        9,528,750        6.09

Techniplas LLC

   Auto Components      Fixed 10.00%       6/10/2018        5/1/2020        9,500,000        9,040,285        9,072,500        5.80

Specialty Building Products Holdings LLC

   Construction
Materials
     3M L+5.75%       9/25/2018        9/21/2025        10,000,000        9,853,681        9,850,000        6.30

Zinc Acquisition Holdings, LP(6)

   Chemicals     
3M L+10.00%
(1.00% Floor)
 
 
    10/9/2017        9/30/2024        4,709,302        4,668,075        4,709,302        3.01
             

 

 

    

 

 

    

 

 

    

 

 

 

Total Senior Secured First Lien Debt Investments

        201,960,977        190,913,951        192,079,797        122.79

Senior Secured Second Lien Debt Investments

                

AP NMT Acquisition BV(6)(9)(10)

   Media     
3M L+9.00%
(1.00% Floor)
 
 
    8/12/2014        8/22/2022        20,000,000        19,248,493        19,200,000        12.28

Caelus Energy Alaska 03, LLC(6)

   Oil, Gas &
Consumable Fuels
    
3M L+7.50%
(1.25% Floor)
 
 
    4/17/2014        4/15/2020        24,266,667        23,525,773        24,024,000        15.36

Lionbridge Technologies, Inc.(3)(6)

   Commercial
Services &
Supplies
    
3M L+9.75%
(1.00% Floor)
 
 
    2/6/2017        2/28/2025        12,000,000        11,800,627        12,000,000        7.67

Premiere Global Services, Inc.(6)

   Diversified
Telecommunication
Services
    
3M L+5.00%
(1.00% Floor)
 
 
    11/30/2016        6/6/2022        15,000,000        14,665,954        12,750,000        8.15

Sears Holding Company
Delayed Draw(5)

   Retail      1M L+10.00%       6/9/2018        7/15/2019        10,000,000        2,083,721        2,078,571        1.33

TouchTunes Interactive Networks, Inc.(6)

   Media     
1M L+8.25%
(1.00% Floor)
 
 
    5/4/2017        5/27/2022        12,000,000        11,986,143        12,000,000        7.67

Trident USA Health Services,
LLC - Tranche A(3)

   Health Care
Providers &
Services
    
3M L+10.00%
PIK (1.25% Floor)
 
 
    11/29/2017        7/31/2020        2,673,422        2,494,097               0.00

Trident USA Health Services,
LLC - Tranche B(3)

   Health Care
Providers &
Services
    
3M L+10.00%
PIK (1.25% Floor)
 
 
    11/29/2017        7/31/2020        21,443,958        20,021,280               0.00

ZeroChaos Parent, LLC(6)

   Professional
Services
    
3M L+8.25%
(1.00% Floor)
 
 
    11/21/2017        10/31/2023        8,000,000        7,880,872        7,860,000        5.02
             

 

 

    

 

 

    

 

 

    

 

 

 

Total Senior Secured Second Lien Debt Investments

          
 
117,526,904
 
  
 
113,706,960
 
  
 
89,912,571
 
  
 
57.48

See notes to unaudited consolidated financial statements.

 

8


CM Finance Inc and Subsidiaries

Consolidated Schedule of Investments (continued)

(Unaudited)

December 31, 2018

 

Investments(1)(2)

  Industry     Interest Rate     Initial
Acquisition
Date
    Maturity
Date
    Principal
Amount/
Shares(3)
    Amortized
Cost
    Fair Value     % of
Net Assets
 

Unsecured Debt Investments

           

Trident USA Health Services, LLC - Holdco A Note

   

Health Care
Providers &
Services
 
 
 
        7/31/2020       2,426,201       —         —         0.00
         

 

 

   

 

 

   

 

 

   

 

 

 

Total Unsecured Debt Investments

            2,426,201       —         —         0.00

Equity, Warrants and Other Investments

               

1888 Industrial Services, LLC (Equity Interest) (4)(11)

   

Energy
Equipment &
Services
 
 
 
          11,880       —         119       0.00

PR Wireless, Inc., $0.01 strike (Warrants)(11)

   

Wireless
Telecommunication
Services
 
 
 
        6/27/2024       201       1,374,009       —         0.00

U.S. Well Services, LLC (Equity Interest)

   

Energy
Equipment &
Services
 
 
 
          77,212       772,125       501,878       0.32

Zinc Acquisition Holdings, LP (Common Stock)(12)

    Chemicals             523       523,000       840,937       0.54
         

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity, Warrants and Other Investments

            89,816       2,669,134       1,342,934       0.86
         

 

 

   

 

 

   

 

 

   

 

 

 

Total

Non-Controlled/Non-Affiliates

 

  $ 329,861,041     $ 307,290,045     $ 283,335,302       181.12
         

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities in excess other assets

 

    (126,898,994     -81.12
             

 

 

   

 

 

 

Net Assets

              $ 156,436,308       100.00
             

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

9


CM Finance Inc and Subsidiaries

Consolidated Schedule of Investments (continued)

(Unaudited)

December 31, 2018

 

    

Industry

   Interest
Rate
   

Maturity Date

   Notional
Amount
     Amortized
Cost
     Fair Value     % of
Net Assets
 

Derivatives

         

Assets

                  

Embedded derivative - Notes payable (11)(13)

   Diversified Financial Services      12/5/2020    $ 102,000,000      $ —        $ (170,584     -0.11

Embedded derivative - Notes payable (11)(13)

   Diversified Financial Services      12/5/2019      50,000,000        —          76,204       0.05
          

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

             152,000,000        —          (94,380     -0.06
          

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

                  

Total Return Swap(11)(13)

   Diversified Financial Services      1M L+2.75   12/5/2020      102,000,000        —          170,584       0.11

Embedded derivative - Notes payable (11)(13)

   Diversified Financial Services      12/5/2019      50,000,000        —          (76,204     -0.05
          

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities

             152,000,000        —          94,380       0.06
          

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

           $ 304,000,000      $  —        $ —         0.00
          

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

The Company’s investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933.

(2) 

All investments are

non-controlled
and
non-affiliated
issuers. All investments are valued in good faith by the board of directors.

(3) 

Principal amount includes capitalized PIK interest.

(4) 

Effective 10/1/17, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC.

(5) 

Refer to Note 6 for more detail on the unfunded commitments.

(6) 

A portion or all is held by the Company indirectly through CM Finance SPV Ltd. and pledged as collateral for the Total Return Swaps and pledged as collateral for the revolving credit facility held through UBS AG, London Branch.

(7) 

Security, or a portion thereof, unsettled as of December 31, 2018.

(8) 

First Lien Unitranche Last Out Investment, which accounts for 4.10% of our investment portfolio at fair value.

(9) 

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 10.31% of total assets.

(10) 

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.

(11) 

Securities are

non-income
producing.

(12) 

CM Finance Inc’s investments in Zinc Acquisition Holdings, LP are held through its wholly owned subsidiary, Zinc Borrower 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 (2.52% as of December 31, 2018)
2M L –    2 month LIBOR (2.62% as of December 31, 2018)
3M L –    3 month LIBOR (2.80% as of December 31, 2018)
PIK –   
Payment-In-Kind

See notes to unaudited consolidated financial statements.

 

10


CM Finance Inc and subsidiaries

Consolidated Schedule of Investments

June 30, 2018

 

Investments(1)(2)

 

             Industry            

 

    Interest Rate    

 

Initial
Acquisition
    Date    

   

Maturity
    Date    

   

Principal
Amount/

     Shares(3)    

   

Amortized
        Cost         

   

  Fair Value  

   

% of

Net
Assets

 

Non-Controlled/Non-Affiliates

               

Senior Secured First Lien Debt Investments

               

1888 Industrial Services, LLC – Revolver(4)(5)

  Energy Equipment & Services   3M L+5.00% (1.00% Floor)     10/11/2016       09/30/2021     $ 2,376,238     $ 1,683,168     $ 1,683,168       0.98

1888 Industrial Services, LLC – Term A(4)

  Energy Equipment & Services   3M L+5.00% (1.00% Floor)     9/30/2016       09/30/2021       4,950,495       4,950,495       4,950,495       2.89

1888 Industrial Services, LLC – Term B(3)(4)

  Energy Equipment & Services   3M L+8.00% PIK (1.00% Floor)     9/30/2016       09/30/2021       11,687,047       5,912,941       8,765,286       5.11

American Gaming Systems Inc.(6)

  Hotel, Restaurants & Leisure   3M L+4.25% (1.00% Floor)     2/9/2018       02/15/2024       20,400,451       20,400,451       20,400,451       11.89

CareerBuilder, LLC(6)

  Professional Services   3M L+6.75% (1.00% Floor)     7/27/2017       07/27/2023       10,994,114       10,705,928       10,994,114       6.41

Deluxe Toronto Ltd.(6)

  Media   3M L+5.50% (1.00% Floor)     6/29/2018       12/07/2020       5,000,000       4,950,000       4,950,000       2.89

Exela Intermedia LLC(7)

  IT Services   3M L+6.50% (1.00% Floor)     6/5/2018       07/12/2023       5,468,354       5,524,248       5,524,678       3.22

Exela Intermedia LLC(7)

  IT Services   Fixed 10.00%     6/19/2018       07/15/2023       5,500,000       5,685,426       5,685,900       3.32

FPC Holdings, Inc.(6)

  Distributors   3M L+4.50% (1.25% Floor)     3/28/2018       11/18/2022       12,468,750       12,104,452       12,468,750       7.27

GEE Group, Inc.(6)(8)

  Professional Services   2M L+13.75% (1.00% Floor)     3/26/2018       03/31/2021       12,286,453       12,286,453       12,286,453       7.16

Hostway Corp(6)

  IT Services   3M L+5.75%     4/19/2018       12/13/2019       12,060,739       11,817,448       11,799,021       6.88

Immucor, Inc.(6)

  Healthcare Equipment & Services   3M L+5.00% (1.00% Floor)     6/27/2017       06/15/2021       7,425,000       7,366,701       7,499,250       4.37

Liberty Oilfield Services LLC(6)(9)

  Energy Equipment & Services   1M L+7.625% (1.00% Floor)     9/19/2017       09/19/2022       6,458,750       6,347,581       6,458,750       3.77

Montreign Operating Company, LLC(6)

  Hotel, Restaurants & Leisure   1M L+8.25% (1.00% Floor)     12/16/2016       01/24/2023       13,199,738       13,246,185       12,935,744       7.54

Premiere Global Services, Inc.(6)(9)

  Diversified Telecommunication Services   3M L+6.50% (1.00% Floor)     5/6/2016       12/08/2021       10,748,527       10,225,894       10,533,557       6.14

PR Wireless LLC(5)

  Wireless Telecommunication Services   3M L+5.25% (1.00% Floor)     11/15/2017       06/27/2020       2,308,097       461,619       461,619       0.27

RPX Corporation

  Professional Services   3M L+6.00%     6/8/2018       6/8/2024       10,000,000       9,900,190       9,900,000       5.77

U.S. Well Services, LLC(3)(7)(9)

  Energy Equipment & Services   1M L+9.00% (1.00% Floor)     2/1/2017       02/02/2022       9,633,228       9,684,648       9,633,228       5.62

U.S. Well Services, LLC – Revolver(5)

  Energy Equipment & Services   2M L+6.00% (1.00% Floor)     2/1/2017       02/02/2022       920,856       705,852       705,852       0.41

Zinc Acquisition Holdings, LP(6)

  Chemicals   3M L+10.00% (1.00% Floor)     10/9/2017       09/29/2024       7,500,000       7,430,251       7,500,000       4.37
         

 

 

   

 

 

   

 

 

   

 

 

 

Total Senior Secured First Lien Debt Investments

            171,386,837       161,389,931       165,136,316       96.28
         

 

 

   

 

 

   

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

11


CM Finance Inc and subsidiaries

Consolidated Schedule of Investments – (continued)

June 30, 2018

 

Investments(1)(2)

 

             Industry            

 

    Interest Rate    

 

Initial
Acquisition
    Date    

   

Maturity
    Date    

   

Principal
Amount/

     Shares(3)    

   

Amortized
        Cost         

   

  Fair Value  

   

% of

Net
Assets

 

Senior Secured Second Lien Debt Investments

               

AP NMT Acquisition BV(6)(9)(10)

  Media   3M L+9.00% (1.00% Floor)     8/12/2014       08/13/2022     $ 20,000,000     $ 19,166,531     $ 20,000,000       11.66

Caelus Energy Alaska 03, LLC(6)

  Oil, Gas & Consumable Fuels   3M L+7.50% (1.25% Floor)     4/17/2014       04/15/2020       26,000,000       24,848,113       24,180,000       14.10

Intermedia Holdings, Inc.(6)

  IT Services   3M L+9.50% (1.00% Floor)     1/3/2017       02/01/2025       5,000,000       4,911,867       5,000,000       2.91

International Wire Group, Inc.

  Electronic Equipment   Fixed 10.75%     4/27/2017       08/01/2021       7,000,000       6,915,565       6,580,000       3.84

Lionbridge Technologies, Inc.(3)

  Commercial Services & Supplies   1M L+9.75% (1.00% Floor)     2/6/2017       02/28/2025       12,000,000       11,789,661       12,000,000       7.00

Montrose Environmental Group, Inc.

  Commercial Services & Supplies   3M L+9.50%     9/29/2017       09/30/2020       20,000,000       19,688,421       19,600,000       11.43

Premiere Global Services, Inc.(6)

  Diversified Telecommunication Services   3M L+9.50% (1.00% Floor)     11/30/2016       06/06/2022       15,000,000       14,679,729       14,400,000       8.39

TouchTunes Interactive Networks, Inc.(6)

  Media   1M L+8.25% (1.00% Floor)     5/4/2017       05/27/2022       7,000,000       6,977,435       7,000,000       4.08

Trident USA Health Services, LLC – Tranche A(3)

  Healthcare Providers & Services   3M L+10.00% PIK (1.25% Floor)     11/29/2017       07/31/2020       2,612,643       2,493,712       377,266       0.22

Trident USA Health Services, LLC – Tranche B(3)

  Healthcare Providers & Services   3M L+10.00% PIK (1.25% Floor)     11/29/2017       07/31/2020       20,956,435       20,018,194       10,203,688       5.95

ZeroChaos Parent, LLC(6)

  Professional Services   3M L+8.25% (1.00% Floor)     11/21/2017       10/31/2023       8,000,000       7,871,114       7,860,000       4.58
         

 

 

   

 

 

   

 

 

   

 

 

 

Total Senior Secured Second Lien Debt Investments

            143,569,078       139,360,342       127,200,954       74.16
         

 

 

   

 

 

   

 

 

   

 

 

 

Unsecured Debt Investments

               

Trident USA Health Services, LLC – Holdco A Note

  Healthcare Providers & Services         07/31/2020       2,426,201             731,742       0.43
         

 

 

   

 

 

   

 

 

   

 

 

 

Total Unsecured Debt Investments

            2,426,201             731,742       0.43
         

 

 

   

 

 

   

 

 

   

 

 

 

Equity, Warrants and Other Investments

               

1888 Industrial Services, LLC (Equity Interest)(4)(11)(12)

  Energy Equipment & Services           11,880             1       0.00

PR Wireless, Inc., $0.01 strike (Warrants)(11)

  Telecommunication Services         6/27/2027       201       1,374,009             0.00

Zinc Acquisition Holdings, LP (Common Stock)(13)

  Chemicals           523       523,000       523,000       0.30
         

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity, Warrants and Other Investments

            12,604       1,897,009       523,001       0.30
         

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Controlled/Non-Affiliates

          $ 317,394,720     $ 302,647,282     $ 293,592,013       171.17
         

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities in excess other assets

                (122,069,347     (71.17 %) 
             

 

 

   

 

 

 

Net Assets

              $ 171,522,666       100.00
             

 

 

   

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

12


CM Finance Inc and subsidiaries

Consolidated Schedule of Investments – (continued)

June 30, 2018

 

 

     Industry      Interest
Rate
    Maturity
Date
     Notional
Amount
     Amortized
Cost
     Fair
Value
    % of
Net
Assets
 

Derivatives

                  

Assets

                  

Embedded derivative – Notes payable (11)(14)

     Diversified Financial Services          12/5/2020      $ 102,000,000      $      $ 157,223       0.09

Embedded derivative – Notes payable (11)(14)

     Diversified Financial Services          12/5/2019        50,000,000               72,695       0.04
          

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

             152,000,000               229,918       0.13
          

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

                  

Total Return Swap(11)(14)

     Diversified Financial Services       
1M
L+2.75%
 
 
    12/5/2020        102,000,000               (157,223     (0.09 %) 

Embedded derivative – Notes payable (11)(14)

     Diversified Financial Services          12/5/2019        50,000,000               (72,695     (0.04 %) 
          

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities

             152,000,000               (229,918     (0.13 %) 
          

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

           $ 304,000,000      $      $       0.00
          

 

 

    

 

 

    

 

 

   

 

 

 

 

(1)

The Company’s investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933.

 

(2)

All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the board of directors.

 

(3)

Principal amount includes capitalized PIK interest.

 

(4)

Effective 10/1/17, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC.

 

(5)

Refer to Note 6 for more detail on the unfunded commitments.

 

(6)

A portion or all is held by the Company indirectly through CM Finance SPV Ltd. and pledged as collateral for the Total Return Swaps and pledged as collateral for the revolving credit facility held through UBS AG, London Branch .

 

(7)

Security, or a portion thereof, unsettled as of June 30, 2018.

 

(8)

First Lien Unitranche Last Out Investment, which accounts for 4.18% of our investment portfolio at fair value.

 

(9)

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 15.88% of total assets.

 

(10)

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.

 

(11)

Securities are non-income producing.

 

(12)

CM Finance Inc’s investment in 1888 Industrial Services, LLC (Equity Interest) is held through its wholly owned subsidiary, CM Portfolio Companies LLC.

 

(13)

CM Finance Inc’s investments in Zinc Acquisition Holdings, LP are held through its wholly owned subsidiary, Zinc Borrower Blocker, LLC.

 

(14)

Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives—Notes Payable.

 

1M L — 1 month LIBOR (2.09% as of June 30, 2018)

 

3M L — 3 month LIBOR (2.34% as of June 30, 2018)

 

PIK — Payment-In-Kind

 

See notes to unaudited consolidated financial statements.

 

13


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

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. (“Stifel”) in exchange for $32.7 million in cash. The Company used all of the proceeds of the sale of shares to Stifel 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 administration 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 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 acquisitions, growth or refinancing. The Company invests primarily in middle-market companies in the form of unitranche loans, standalone first and second lien and mezzanine 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.

 

14


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 1. Organization – (continued)

 

From time-to-time, the Company may form taxable subsidiaries which are taxed as corporations for federal income tax purposes (the “Taxable Subsidiaries”). At December 31, 2018, the Company had one Taxable Subsidiary: Zinc Borrower Blocker, LLC; at June 30, 2018, the Company had four Taxable Subsidiaries: CM Portfolio Companies LLC, U.S. Well Services Blocker, LLC, Bird Electric Blocker, LLC, and Zinc Borrower Blocker, LLC. The Taxable Subsidiaries allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.

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.

As permitted under Regulation

S-X
and ASC Topic 946, the Company will generally not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries, CM Finance SPV Ltd. (“SPV”) and CM Finance SPV LLC (“LLC”), which are special purpose vehicles used to finance certain investments, and Zinc Borrower Blocker, LLC in its consolidated financial statements. All intercompany 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.

 

15


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

 

Note 2. Significant Accounting Policies – (continued)

 

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.

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 and six months ended December 31, 2018, $877,376 and $1,015,923 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively. During the three and six months ended December 30, 2017, $1,218,231 and $1,240,123 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively.

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 $540,308 and $953,928 during the three and six months ended December 31, 2018, respectively. The Company earned PIK interest of $722,039 and $1,014,517 during the three and six months ended December 31, 2017, respectively.

The Company may hold equity investments in its portfolio that contain a PIK dividend provision. PIK dividends, which represents contractual dividend payments added to the investment balance, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company earned no PIK dividends during the three and six months ended December 31, 2018. The Company earned PIK dividends of $189,583 and $189,583 during the three and six months ended December 31, 2017, respectively.

 

16


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

 

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, net of commissions and marketing support fees.

d. Net Increase in Net Assets Resulting from Operations per Share

The net increase in net assets resulting from operations per share is calculated based upon the weighted average number of shares of common stock outstanding during the reporting period.

e. Distributions

Dividends and distributions to common stockholders are recorded on the

ex-dividend
date. The amount to be paid out as a dividend or distribution is determined by the Company’s 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 pays in cash on behalf of the Company’s stockholders, unless a stockholders elects to receive cash. As a result, if the Company’s board of directors declares, and the Company pays, a cash distribution, then the Company’s stockholders 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 consist of bank demand deposits. 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. The Company has 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. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is completed.

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.

 

17


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

 

Note 2. Significant Accounting Policies – (continued)

 

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 the 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.

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 after hour’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 held one Level 1 investment as of December 31, 2018 and held no Level 1 investments as of June 30, 2018.

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.

 

18


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 2. Significant Accounting Policies – (continued)

 

The embedded derivative in the Term Notes and the 2017 Revolving Notes (as defined in Note 5) payable from SPV to UBS AG, London Branch (together with its affiliates, “UBS”) and total return swaps referencing the terms of the Term Notes payable and the total return of the 2017 Revolving Notes referencing the 2017 Revolving Notes (together, the “TRS”) 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 and the 2017 Revolving 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 and the 2017 Revolving 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.

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 firm(s). 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 firm(s). Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third party independent valuation firm(s), the board of directors of the Company determines, in good faith, the fair value of each investment.

 

19


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

    

Note 2. Significant Accounting Policies – (continued)

 

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 stockholders, 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 stockholders. 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 stockholders 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. Additionally, certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state income taxes. The Company did not record a provision for taxes for the three and six months ended December 31, 2018 and for the three and six months ended December 31, 2017 for U.S. federal and state income taxes related to the Taxable Subsidiaries.

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 and six months ended December 31, 2018, the Company recorded distributions of $3.4 million and $6.8, respectively. During the three and six months ended December 31, 2017, the Company recorded distributions of $3.4 million and $6.8 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.

 

20


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

    

Note 2. Significant Accounting Policies – (continued)

 

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, 2018, 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, 2018
 

Additional

paid-in
capital

   $ —  

Distributions in excess of net investment income

     —    

Accumulated net realized gain (loss)

     —    

The tax character of all distributions paid by the Company during the year ended June 30, 2018 was ordinary income.

At June 30, 2018, 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, 2018
 

Undistributed net investment income

   $ 7,140,649  

Accumulated capital gains (losses) and other

     (2,474,763

Capital loss carryover

     (18,612,517

Unrealized appreciation (depreciation)

     (9,055,269

Distributions payable

     (3,417,848
  

 

 

 

Components of tax distributable earnings at year end

   $ (26,419,748
  

 

 

 

For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. These capital losses can be carried forward for an indefinite period, and will retain their character as either short-term or long-term capital losses. As of June 30, 2018, the Company had a net short-term capital loss carryforward of $1,068,849 and a net long-term capital loss carryforward of $17,543,668 available to be carried forward for an indefinite period.

A RIC may elect to defer any capital losses incurred after October 31, 2017 (“post-October”) to the beginning of the following fiscal year. As of June 30, 2018, the Company had a post-October short-term capital loss deferral of $202,160 and a post-October long-term capital loss deferral of $2,272,603. These losses are deemed to arise on July 1, 2018.

In addition, as of June 30, 2018, the wholly-owned taxable subsidiary recorded a deferred tax asset and a corresponding valuation allowance of approximately $172,769.

 

21


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

    

Note 2. Significant Accounting Policies – (continued)

 

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.

As of December 31, 2018 and June 30, 2018, there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement.

l. Share Repurchase Program

On May 2, 2018, the Company’s board of directors authorized a discretionary repurchase program of up to $5.0 million shares of the Company’s common stock, until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of the common stock. Under the discretionary repurchase program, the Company may, but is not obligated to, repurchase the outstanding common stock from time to time in the open market provided that the Company complies with the prohibitions under its insider trading policies and procedures and the applicable provisions the Securities Exchange Act of 1934, as amended. In addition, any repurchases will be conducted in accordance with the 1940 Act. The timing and number of shares to be repurchased will depend on a number of factors, including market conditions and alternative investment opportunities and no assurances can be given that any common stock, or any particular amount, will be purchased. The Company will retire immediately all shares of common stock that are purchased in connection with the share repurchase program. During the three and six months ended December 31, 2018, the Company repurchased 30,999 and 42,214 shares of common stock on the open market for $257,336 and $358,573, respectively (including commissions). Refer to Note 11 for additional information concerning share repurchases.

Note 3. Recent 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 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 will modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact ASU 2018-13 will have on the Company’s consolidated financial statements and disclosures.

 

22


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

    

Note 3. Recent Accounting Pronouncements – (continued)

 

Certain items in the December 31, 2017 consolidated financial statements has been reclassified to conform to the December 31, 2018 presentation with no effect on net income.

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.

 

23


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

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 contracts are 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 December 31, 2018 and June 30, 2018, 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 and six months ended December 31, 2018 and December 31, 2017, respectively. These purchase and sale amounts exclude derivative instruments.

 

     Three months ended December 31,      Six months ended December 31,  
     2018      2017      2018      2017  

Investment purchases, at cost (including PIK interest)

   $ 50,655,913      $ 35,996,034      $ 105,021,483      $ 83,054,878  

Investment sales and repayments

     86,223,802        23,997,051        101,767,898        54,842,377  

The composition of the Company’s investments as of December 31, 2018, 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

   $ 179,301,088        58.35   $ 180,466,937        63.69

Unitranche First Lien Debt Investment

     11,612,863        3.78       11,612,860        4.10  

Senior Secured Second Lien Debt Investment

     113,706,960        37.00       89,912,571        31.74  

Unsecured Debt Investments

     —          0.0       —         

—  

—  

 

 

Equity, Warrants and Other Investments

     2,669,134        0.87       1,342,934        0.47  

Embedded Derivative — Notes Payable

     —          —         (94,380      (0.03

Total Return Swap

     —          —         94,380        0.03  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     $307,290,045        100.00%       $283,335,302        100.00%  

 

24


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

The composition of the Company’s investments as of June 30, 2018, 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

   $ 161,389,931        53.40   $ 165,136,316        56.30

Senior Secured Second Lien Debt Investments

     139,360,342        46.00       127,200,954        43.30  

Unsecured Debt Investments

     —          —         731,742        0.20  

Equity, Warrants and Other Investments

     1,897,009        0.60       523,001        0.20  

Embedded Derivative—Notes Payable

     —          —         229,918        0.08  

Total Return Swap

     —          —         (229,918      (0.08
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 302,647,282        100.00   $ 293,592,013        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company uses Global Industry Classification Standard (“GICS”) codes to identify the industry groupings in its portfolio. The following table shows the portfolio composition by industry grouping at fair value at December 31, 2018:

 

Industry Classification

   Investments at
Fair Value
     Percentage of
Total Portfolio
 

Professional Services

   $ 42,538,788        15.01

Media

     36,174,874        12.77

Energy Equipment & Services

     29,956,343        10.57

Oil, Gas & Consumable Fuels

     24,024,000        8.48

Diversified Telecommunication Services

     21,941,509        7.74

Construction and Engineering

     21,887,875        7.73

Hotels, Restaurants & Leisure

     12,214,224        4.31

Commercial Services & Supplies

     12,000,000        4.24

Internet Software & Services

     10,941,238        3.86

IT Services

     10,929,936        3.86

Distributors

     9,900,000        3.49

Construction Materials

     9,850,000        3.48

Auto Components

     9,072,500        3.20

Technology Hardware, Storage and Peripherals

     8,815,816        3.11

Health Care Equipment & Supplies

     7,461,375        2.63

Containers & Packaging

     6,985,095        2.47

Chemicals

     5,550,239        1.96

Retail

     2,078,571        0.73

Wireless Telecommunication Services

     1,012,919        0.36
  

 

 

    

 

 

 

Total

   $ 283,335,302        100.00
  

 

 

    

 

 

 

 

25


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2018:

 

Industry Classification

   Investments at
Fair Value
     Percentage of
Total Portfolio
 

Professional Services

   $ 41,040,567        13.98

Hotels, Restaurants & Leisure

     33,336,195        11.36  

Energy Equipment & Services

     32,196,779        10.97  

Media

     31,950,000        10.88  

Commercial Services & Supplies

     31,600,000        10.76  

IT Services

     28,009,599        9.54  

Diversified Telecommunication Services

     24,933,557        8.49  

Oil, Gas & Consumable Fuels

     24,180,000        8.24  

Distributors

     12,468,750        4.25  

Healthcare Providers & Services

     11,312,696        3.85  

Chemicals

     8,023,000        2.73  

Healthcare Equipment & Supplies

     7,499,250        2.55  

Electronic Equipment

     6,580,000        2.24  

Wireless Telecommunication Services

     461,620        0.16  
  

 

 

    

 

 

 

Total

   $ 293,592,013        100.00
  

 

 

    

 

 

 

The following table shows the portfolio composition by geographic grouping at fair value at December 31, 2018:

 

     Fair Value      Percentage of
Total Portfolio
 

U.S. Northeast

   $ 82,755,868        29.21

U.S. Southeast

     57,428,903        20.27

U.S. Midwest

     51,950,315        18.34

U.S. West

     49,217,026        17.37

International

     24,174,874        8.53

U.S.

Mid-Atlantic

     9,900,000        3.49

U.S. Southwest

     7,908,316        2.79
  

 

 

    

 

 

 

Total

   $ 283,335,302        100.00
  

 

 

    

 

 

 

 

26


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2018:

 

     Fair Value      Percentage of
Total Portfolio
 

U.S. West

   $ 74,078,950        25.23

U.S. Northeast

     57,586,322        19.62  

U.S. Southeast

     53,203,880        18.12  

U.S. Southwest

     43,208,281        14.72  

U.S. Midwest

     29,251,885        9.96  

International

     24,950,000        8.50  

U.S.

Mid-Atlantic

     11,312,695        3.85  
  

 

 

    

 

 

 

Total

   $ 293,592,013        100.00
  

 

 

    

 

 

 

The Company’s 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 acquisitions, growth or refinancing. During the six months ended December 31, 2018, the Company made investments in four new portfolio companies of approximately $33.1 million to which it was not previously contractually committed to provide financial support. During the six months ended December 31, 2018, the Company made investments of $17.1 million in companies to which it was previously committed to provide financial support through the terms of the revolvers. 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 may enter into derivative contracts as part of its investment strategies.

The Company and UBS entered into two TRS transactions whereby the Company will receive the total return of the Term Notes and the Revolving Notes (as defined in Note 5) purchased by UBS and pay the Financing Rate and the Revolver Financing Rate (both as defined in Note 5). Therefore, amounts required for the future satisfaction of the swaps may be greater or less than the amount recorded. Realized and change in unrealized gains and losses on total return swaps, if any, are included in the net realized gain or loss on derivative, and net change in unrealized appreciation (depreciation) on derivative in the Consolidated Statements of Operations.

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.

 

27


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

The Company’s ISDA Agreement may contain provisions for early termination of

over-the-counter
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 December 31, 2018.

 

     Assets      Liabilities      Notional      Contracts  

Credit Risk:

 

Total Return Swaps

   $ —      $  (94,380)      $ 152,000,000        2  

Embedded Derivatives:

           

Notes Payable

     (94,380      —          152,000,000        2  
  

 

 

    

 

 

       

Gross fair value of derivative contracts

     (94,380      (94,380      

Counterparty netting

     —          —          
  

 

 

    

 

 

       

Net fair value of derivative contracts

     (94,380      (94,380      

Collateral not offset

     —          —          
  

 

 

    

 

 

       

Net amount

   $  (94,380    $ (94,380      
  

 

 

    

 

 

       

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, 2018.

 

     Assets      Liabilities      Notional      Contracts  

Credit Risk:

 

Total Return Swaps

   $ —      $ 229,918      $ 152,000,000        2  

Embedded Derivatives:

           

Notes Payable

     229,918        —          152,000,000        2  
  

 

 

    

 

 

       

Gross fair value of derivative contracts

     229,918        229,918        

Counterparty netting

     —          —          
  

 

 

    

 

 

       

Net fair value of derivative contracts

     229,918        229,918        

Collateral not offset

     —          —          
  

 

 

    

 

 

       

Net amount

   $ 229,918      $ 229,918        
  

 

 

    

 

 

       

 

28


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

The following table reflects the amount of gains (losses) on derivatives included in the Unaudited Consolidated Statements of Operations for the three and six months ended December 31, 2018 and December 31, 2017, 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 December 31,      For the six months ended December 31,  
     2018      2017      2018      2017  

Total Return Swaps

   $ (972,380    $ 5,934,561      $  (324,298    $ 5,214,614  

Embedded Derivatives - Notes Payable

     972,380        (5,934,561      324,298        (5,214,614
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

29


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

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.

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 December 31, 2018:

 

     Level 1      Level 2      Level 3      Total  

Assets

           

Investments

           

Senior Secured First Lien Debt Investments

   $ —        $ —        $ 192,079,797      $ 192,079,797  

Senior Secured Second Lien Debt Investments

     —          —          89,912,571        89,912,571  

Unsecured Debt Investment

     —          —          —          —    

Equity, Warrants and Other Investments

     501,878        —          841,056        1,342,934  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

     501,878        —        $ 282,833,424      $ 283,335,302  

Derivatives

           

Embedded Derivatives - Notes Payable

     —          —          94,380        94,380  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives

           94,380        94,380  

Total Assets

   $ 501,878      $ —        $ 282,927,804      $ 283,429,682  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives

           

Total Return Swaps

   $ —        $ —        $ (94,380    $ (94,380
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives

     —          —          (94,380      (94,380
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —        $ —        $ (94,380    $ (94,380
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

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, 2018:

 

     Level 1      Level 2      Level 3      Total  

Assets

           

Investments

           

Senior Secured First Lien Debt Investments

   $ —        $ —        $ 165,136,316      $ 165,136,316  

Senior Secured Second Lien Debt Investments

     —          —          127,200,954        127,200,954  

Unsecured Debt Investment

     —          —          523,001        523,001  

Equity, Warrants and Other Investments

     —          —          731,742        731,742  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

     —          —          293,592,013        293,592,013  

Derivatives

           

Embedded Derivatives - Notes Payable

     —          —          229,918        229,918  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives

     —          —          229,918        229,918  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ —        $ —        $ 293,821,931      $ 293,821,931  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives

           

Total Return Swaps

   $ —        $ —        $ (229,918    $ (229,918
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives

     —          —          (229,918      (229,918
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —        $ —        $ (229,918    $ (229,918
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended December 31, 2018:

 

     Senior Secured
First Lien
Debt Investments
    Senior Secured
Second Lien
Debt Investments
    Unsecured
Debt
Investment
    Equity, Warrants
and Other
Investments
     Total
Investments
 

Balance as of June 30, 2018

   $ 165,136,316     $ 127,200,954     $ 731,742     $ 523,001      $ 293,592,013  

Purchases (including PIK interest)

     97,164,542       7,084,821       —         —          104,249,363  

Sales

     (68,419,564     (33,348,333     —         —          (101,767,898

Amortization

     685,295       887,902       —         —          1,572,366  

Net realized gains (losses)

     93,750       (276,942     —         —          (183,192

Transfers in

     —         —         —         —          —    

Transfers out

     —         —         —         —          —    

Net change in unrealized (depreciation) appreciation

     (2,580,542     (11,635,000     (731,742     318,055        (14,623,772
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance as of December 31, 2018

   $ 192,079,797     $ 89,912,571     $ —       $ 841,056      $ 282,833,424  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2018

   $ (2,286,087   $ (11,970,853   $ (731,742   $ 47,813      $ (14,940,869
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

31


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

     Total
Return
Swaps
     Embedded
Derivatives -
Notes
Payable
     Total
Derivatives
 

Balance as of June 30, 2018

   $ (229,918    $ 229,918      $ —    

Net change in unrealized (depreciation) appreciation

     324,298        (324,298      —    
  

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2018

   $ 94,380      $ (94,380    $ —    
  

 

 

    

 

 

    

 

 

 

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2018

   $ 5,924,881      $ (5,924,881    $ —    
  

 

 

    

 

 

    

 

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended December 31, 2017:

 

     Senior Secured
First Lien
Debt Investments
     Senior Secured
Second Lien
Debt Investments
     Unsecured
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)

     55,071,877        27,460,000        —          523,000      83,054,877  

Sales

     (39,749,453      (15,092,924      —          —          (54,842,377

Amortization

     1,520,813        599,125        —          —          2,119,938  

Net realized gains (losses)

     (69,579      (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

     (295,722      3,851,876        823,695        4,292,400        8,672,249  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2017

   $ 143,581,917      $ 128,582,008      $  823,695      $ 13,543,548      $ 286,531,168  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2017

   $ (99,761    $ (8,230,453    $ 823,695      $ 4,292,399      $ (3,214,120
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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

     5,214,614        (5,214,614      —    
  

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2017

   $ (615,887    $ 615,887      $ —    
  

 

 

    

 

 

    

 

 

 

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2017

   $ 5,214,614      $ 5,214,614      $ —    
  

 

 

    

 

 

    

 

 

 

 

32


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

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 and six months ended December 31, 2018 and December 31, 2017, 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 December 31, 2018 and June 30, 2018. 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
December 31, 2018
     Valuation
Methodology
   Unobservable
Input(s)
   Weighted
Average
    Range

Senior Secured First Lien Debt Investments

   $ 109,814,636      Yield Analysis    Market Yields      9.9  
6.2% - 20.4%

Unitranche First Lien Debt Investments

     11,612,863      Discounted Cash Flow    Discount Rate      14.4  
11.9% - 16.9%

Senior Secured First Lien Debt Investments

     12,843,773      Discounted Cash Flow    Discount Rate      8.4  
7.4% - 20.4%

Senior Secured First Lien Debt Investments

     12,214,224      Broker Quoted    Market Comparable      94.3  
93.5% - 95.1%

Senior Secured First Lien Debt Investments

     40,885,000      Recent Purchase    Recent Purchase      N/A     N/A

Senior Secured First Lien Debt Investments

     4,709,302      Repayment Price    Repayment Price      N/A     N/A

Senior Secured Second Lien Debt Investments

     67,974,000      Yield Analysis    Market Yield      12.3  
9.7% - 85.8%

Senior Secure Second Lien Debt Investments

     19,860,000      Discounted Cash Flow    Discount Rate      11.9  
9.4% - 85.8%

Senior Secure Second Lien Debt Investments

     2,078,571      Recent Purchase    Recent Purchase      N/A     N/A

Equity, Warrants, and Other Investments

     841,056      EV Multiple    EBITDA Multiple      0.0x    
0.0x - 0.0x

Equity, Warrants, and Other Investments

     501,878      Market Price    Market Price      0.00x    
0.00x - 0.00x

Total Return Swaps

     94,380      Intrinsic Value    Intrinsic Value      N/A     N/A

Embedded Derivatives - Notes Payable

     94,380      Intrinsic Value    Intrinsic Value      N/A     N/A

 

33


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 4. Investments – (continued)

 

     Fair Value as of
June 30, 2018
    Valuation
Methodology
   Unobservable
Input(s)
   Weighted
Average
    Range

Senior Secured First Lien Debt Investments

   $ 40,599,649     Yield Analysis    Market Yields      10.3  
6.7% - 16.4%

Unitranche First Lien Debt Investments

     12,286,453     Discounted Cash Flow    Discount Rate      17.2  
15.7% - 18.7%

Senior Secured First Lien Debt Investments

     65,321,315     Discounted Cash Flow    Discount Rate      8.2  
5.7% - 11.7%

Senior Secured First Lien Debt Investments

     12,935,744     Broker Quoted    Market Comparable      98.0  
97.0% - 99.0%

Senior Secured First Lien Debt Investments

     37,859,599     Recent Purchase    Recent Purchase      N/A     N/A

Senior Secured Second Lien Debt Investments

     53,340,953     Yield Analysis    Market Yields      18.8  
10.7% - 43.5%

Senior Secured Second Lien Debt Investments

     69,993,557     Discounted Cash Flow    Discount Rate      11.6  
7.6% - 16.2%

Equity, Warrants, and Other Investments

     1,254,743     EV Multiple    EBITDA Multiple      0.0x    
0.0x - 0.0x

Total Return Swaps

     (229,918   Intrinsic Value    Intrinsic Value      N/A     N/A

Embedded Derivatives - Notes Payable

     229,918     Intrinsic Value    Intrinsic Value      N/A     N/A

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 May 23, 2013, as amended on June 6, 2013, December 4, 2013, September 26, 2014, July 20, 2015, August 14, 2015, February 28, 2017 and November 20, 2017, the Company, through SPV, entered into a $102.0 million financing transaction (the “Term Financing”) due December 5, 2020 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. Borrowings under the Term Financing bear interest (i) at a rate per annum equal to

one-month
London Interbank Offered Rate (“LIBOR”) plus 2.75% through December 4, 2018, and (ii) at a rate per annum equal to
one-month
LIBOR plus 2.55% from December 5, 2018 through December 5, 2020 (the “Term Financing Rate”). The Company also incurs an annual fee of approximately 1% of the outstanding borrowings under the Term Financing. As of December 31, 2018 and June 30, 2018, there were $102.0 million and $102.0 million borrowings outstanding under the Term Financing, respectively.

 

34


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 5. Notes Payable – (continued)

 

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 “2013 UBS Revolving Financing”), which expired in accordance with its terms on December 5, 2016. As of December 31, 2018 and June 30, 2018, there were no borrowings outstanding under the 2013 UBS Revolving Financing. From December 4, 2013 through September 24, 2014, the 2013 UBS Revolving Financing bore 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 2013 UBS Revolving Financing bore interest at a fixed rate of 2.00% on drawn amounts and 0.50% per annum on any undrawn portion.

The initial financing transaction with UBS 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 would 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 “2013 Revolving Notes”) secured by the SPV Assets to UBS. Cash was only exchanged when the 2013 Revolving Notes were drawn. Under the terms of the Indenture under which the 2013 Revolving Notes were issued (the “2013 Revolver Indenture”), the holders of the 2013 Revolving Notes were 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 2013 Revolving Notes”).

Fourth, the Company and UBS entered into another TRS transaction whereby the Company would receive the Total Return of the Revolving Notes purchased by UBS and pay the revolver financing rate. On December 5, 2016, the 2013 Revolving Notes matured and the corresponding TRS transaction associated with the 2013 Revolving Notes unwound in unison. On November 20, 2017, the Company and UBS entered into another TRS transaction whereby the Company will receive the total return of the $50 million notes (the “2017 Revolving Notes) purchased by UBS and pay the Revolver Financing Rate (defined below).

 

35


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 5. Notes Payable – (continued)

 

On November 20, 2017, the Company entered into a $50 million revolving financing facility (the “2017 UBS Revolving Financing”) with UBS. Borrowings under the 2017 UBS Revolving Financing generally bear interest at a rate per annum equal to

one-month
LIBOR plus 3.55% (the “Revolver Financing Rate”). The Company pays a fee on any undrawn amounts of 2.50% per annum; provided that if 50% or less of the 2017 UBS Revolving Financing is drawn, the fee will be 2.75% per annum. Any amounts borrowed under the 2017 UBS Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on December 5, 2019. As of December 31, 2018, there were no borrowings outstanding under the 2017 UBS Revolving Financing. As of June 30, 2018, there were $17.8 million in borrowings outstanding under the 2017 UBS Revolving Financing.

As of December 31, 2017, SPV issued and sold an additional $50.0 million notes (the “2017 Revolving Notes”) secured by the SPV Assets to UBS. Cash is only exchanged when the 2017 Revolving Notes are drawn. Under the terms of the Indenture under which the 2017 Revolving Notes were issued (the “2017 Revolver Indenture”), the holders of the 2017 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 2017 Revolving Notes”).

The fair value of the Company’s Notes Payable is estimated based on the rate at which similar facilities would be priced. At December 31, 2018 and June 30, 2018, the fair value of the Notes Payable was estimated at $102.0 million and $119.8 million, respectively, which the Company concluded was a Level 3 fair value.

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 was secured by collateral consisting primarily of commercial loans and corporate bonds. There were no upfront costs paid in the establishment of the Citi Revolving Financing.

Borrowings under the Citi Revolving Financing generally bore interest at a rate per annum equal to LIBOR plus 4.85%. The default interest rate was equal to the interest rate then in effect plus 2.00%. The Citi Revolving Financing required 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 were based on a borrowing base. The Citi Revolving Financing generally required payment of interest on a quarterly basis and all outstanding principal was due upon maturity. The Citi Revolving Financing also required mandatory prepayment of interest and principal upon certain events.

The Company has repaid in full all indebtedness, liabilities and other obligations under, and terminated, its Citi Revolving Financing on December 8, 2017. In accordance with the termination of the Citi Revolving Financing, all liens on collateral securing the Citi Revolving Financing were released.

On July 2, 2018, the Company closed the public offering of $30 million in aggregate principal amount of 6.125% notes due 2023 (the “Notes”). On July 12, 2018, the underwriters exercised their over-allotment option to purchase an additional $4.5 million in aggregate principal amount of the Notes. The total net proceeds to the Company from the Notes, including the exercise of the underwriters’ over-allotment option, after deducting underwriting discounts and commissions of approximately $1.0 million and estimated offering expenses of approximately $230,000, were approximately $33.2 million.

 

36


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 5. Notes Payable – (continued)

 

The Notes will mature on July 1, 2023 and bear interest at a rate of 6.125%. The Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by the Company. Because the Notes are not secured by any of the Company’s assets, they are effectively subordinated to all of the Company’s existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness. The Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles, including, without limitation, borrowings under the Term Financing and the 2017 UBS Revolving Financing. The Notes are obligations exclusively of the Company and not of any of the Company’s subsidiaries. None of the Company’s subsidiaries is a guarantor of the Notes and the Notes will not be required to be guaranteed by any subsidiary the Company may acquire or create in the future.

The Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after July 1, 2020. Interest on the Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year. The Notes are listed on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “CMFNL.” The Company may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder.

As of December 31, 2018, the outstanding principal balance of the Notes was approximately $34.5 million and had an estimated fair value of $34.1 million based on the closing price as of December 31, 2018 as traded on NASDAQ.

Cash, restricted (as shown on the Unaudited Consolidated Statements of Assets and Liabilities) is held by the trustee of the Term Financing and the 2017 UBS Revolving Financing, and the Citi Revolving Financing up until its expiration, and is restricted to purchases of investments by SPV and LLC that must meet certain eligibility criteria identified by the Indenture. As of December 31, 2018, SPV and LLC had aggregate assets of $202.6 million, which included $197.2 million of the Company’s portfolio investments at fair value, $1.8 million of accrued interest receivable and $3.6 million in cash held by the trustees of the Term Financing and the 2017 UBS Revolving Financing (together, the “UBS Financing Facility”, and with the Citi Revolving Financing, the “Financing Facilities”). As of June 30, 2018, SPV and LLC had aggregate assets of $234.5 million, which included $232.8 million of the Company’s portfolio investments at fair value, $0.7 million of accrued interest receivable and $1.0 million in cash held by the trustee of the Term Financing. For the three and six months ended December 31, 2018, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $112.9 million and 5.07%, respectively and $108.8 million and 5.12%, respectively. For the three and six months ended December 31, 2017, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $122.3 million and 4.35%, respectively and $118.6 million and 4.28%, respectively.

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.

 

37


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 6. Indemnification, Guarantees, Commitments and Contingencies – (continued)

 

The Company’s Board of Directors declared the following quarterly distributions:

 

Declared

  
Ex-Date
   Record Date    Pay Date    Amount    Fiscal Quarter
August 23, 2018    September 17, 2018    September 18, 2018    October 5, 2018    $0.2500    1st 2019
November 6, 2018    December 13, 2018    December 14, 2018    January 3, 2019    $0.2500    2nd 2019

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 December 31, 2018:

 

Investments

   Unfunded
Commitment
     Fair
Value
     Annual
Non-use

Fee
     Expiration
Date
 

1888 Industrial Services, LLC

   $ 891,089      $ —          7.80        9/30/21  

PR Wireless, Inc.

     1,292,534        —          0.35        6/27/19  

Sears Holding Company Delayed Draw

     7,857,143           0.75        7/31/19  
  

 

 

    

 

 

       

Total Unfunded Commitments

   $ 10,040,766        —          
  

 

 

    

 

 

       

The following table details the unfunded commitments as of June 30, 2018:

 

Investments

   Unfunded
Commitment
     Fair
Value
     Annual
Non-use

Fee
     Expiration
Date
 

1888 Industrial Services, LLC

   $ 693,069      $ —          0.50        9/30/21  

PR Wireless, Inc.

     1,846,478        —          0.35        6/27/19  

U.S. Well Services, LLC

     215,004        —          —          1/31/22  
  

 

 

    

 

 

       

Total Unfunded Commitments

   $ 2,754,551        —          
  

 

 

    

 

 

       

Note 7. Agreements and Related Party Transactions

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.

 

38


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 7. Agreements and Related Party Transactions – (continued)

 

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: (i) all or portions of base management fees through December 31, 2014, to the extent required to support an annualized dividend yield of 9.0% per annum based on the price per share of the Company’s common stock in the Offering of $15.00, and (ii) all or portions of the incentive fee for the years ended December 31, 2014, 2015, and 2016 to the extent required to support an annualized dividend yield of 9.0%, 9.25% and 9.375% per annum, respectively, based on the price per share of the Company’s common stock in the Offering of $15.00. Fees permanently waived by the Adviser are not subject to future repayment of recoupment by the Company.

For the three and six months ended December 31, 2018, $1,405,207 and $2,757,152 in base management fees were earned by the Adviser, of which $1,405,297 was payable at December 31, 2018. For the three and six months ended December 31, 2017, $1,161,353 and $2,315,233 in base management fees were earned by the Adviser, of which $2,315,233 was payable at December 31, 2017.

For the three and six months ended December 31, 2018, the Company incurred $753,721 and $874,042 of incentive fees related to

pre-incentive
fee net investment income, of which $22,000 was waived. As of December 31, 2018, $1,566,513 of such incentive fees are currently payable to the Adviser and $693,771 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 and six months ended December 31, 2017, the Company incurred $921,782 and $906,758, respectively, of incentive fees related to
pre-incentive
fee net investment income. As of December 31, 2017, $1,162,320 of incentive fees were currently payable to the Adviser and $414,939 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. 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. As of December 31, 2018, there was no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of June 30, 2018, there was no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement.

 

39


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 7. Agreements and Related Party Transactions – (continued)

 

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.

Administration Agreement

The Company entered into an administration agreement with the Adviser (the “Administration Agreement”) pursuant 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 stockholders 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 $341,633 and $679,696 under the Administration Agreement for the three and six months ended December 31, 2018. The Company incurred costs of $184,561 and $311,790 under the Administration Agreement for the three and six months ended December 31, 2017, respectively.

As of December 31, 2018 and June 30, 2018, the Company recorded no accrued expenses or 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.

 

40


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 7. Agreements and Related Party Transactions – (continued)

 

Stifel Arrangement

In December 2013, the Company entered into an arrangement pursuant to which Stifel Venture Corp. (“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.

As of December 31, 2018, three of the investment professionals employed by the Adviser as part of its investment team were also employees of Stifel, Nicolaus & Company, Incorporated or its affiliates and were members of the Adviser’s investment committee designated by Stifel. Although these three investment professionals dedicated substantially all of their time to the business and activities of the Adviser, they are dual employees of both Stifel, Nicolaus & Company, Incorporated or its affiliates and the Adviser. In addition, a member of the Adviser’s investment committee is an employee of Stifel, Nicolaus & Company, Incorporated or its affiliates and as a result, may continue to engage in investment advisory activities for Stifel, Nicolaus & Company, Incorporated or its affiliates. As of December 31, 2018, 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 and six months ended December 31, 2018, the Company recorded directors’ fees of $101,250 and $202,500, of which $93,448 were payable at December 31, 2018. For the three and six months ended December 31, 2017, the Company recorded directors’ fees of $99,000 and $198,667, of which $96,746 were payable at December 31, 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 stockholders 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.

 

41


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

Note 9. Net Change in Net Assets Resulting from Operations Per Share – (continued)

 

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 December 31,      Six months ended December 31,  
     2018      2017      2018      2017  

Net increase (decrease) in net assets resulting from operations

   $ (9,382,296    $ 4,859,147      $ (7,954,255    $ 7,994,863  

Weighted average shares of common stock outstanding

     13,638,869        13,690,480        13,644,483        13,690,182  

Basic/diluted net increase (decrease) in net assets from operations per share

   $ (0.69    $ 0.35      $ (0.58    $ 0.58  

Note 10. Distributions

The following table reflects the cash dividend distributions per share that the Company declared and/or paid to its stockholders since the Offering in February 2014. Stockholders 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  

February 6, 2018

   March 16, 2018    April 5, 2018    $ 0.2500  

May 2, 2018

   June 15, 2018    July 5, 2018    $ 0.2500  

August 23, 2018

   September 18, 2018    October 5, 2018    $ 0.2500  

November 6, 2018

   December 14, 2018    January 3, 2019    $ 0.2500  

 

*

Special distribution

 

42


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

    

Note 10. Distributions – (continued)

 

The following table reflects, for U.S. federal income tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the six months ended December 31, 2018 and December 31, 2017:

 

     Six months ended December 31,  
     2018     2017  
     Distribution Amount      Percentage     Distribution Amount      Percentage  

Ordinary income and short-term capital gains

   $ 6,823,243        100   $ 6,845,051        100

Long-term capital gains

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 6,823,243        100   $ 6,845,051        100
  

 

 

    

 

 

   

 

 

    

 

 

 

Note 11. Share Repurchase Program

As described in Note 2, the Company has a share repurchase program under which the Company may repurchase up to $5.0 million shares of its common stock until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of its common stock. During the three and six months ended December 31, 2018, the Company repurchased 30,999 and 42,214 shares of its common stock on the open market for $257,336 and $358,573. The Company’s NAV per share increased by $0.01 for the three and six months ended December 31, 2018 as a result of the share repurchases. The following table summarizes the Company’s share repurchases under the share repurchase program for the six months ended December 31, 2018 and December 31, 2017.

 

     Three months ended
December 31,
     Six months ended
December 31,
 
     2018     2017      2018     2017  

Number of shares repurchased

     30,999       —          42,214       —    

Cost of shares repurchased, including commissions

   $ 257,336       —        $ 358,573       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average price per share

   $ 8.25       —        $ 8.44       —    

Net asset value per share at period end

   $ 11.49       —        $ 11.49       —    

Weighted average discount to period end net asset value

     28.19     —          26.52     —    

Note 12. Share Transactions

The following table summarizes the total shares issued for the six months ended December 31, 2018 and December 31, 2017.

 

     Six months ended December 31,  
     2018      2017  
     Shares      Amount      Shares      Amount  

Balance at beginning of period

     13,649,504      $ 200,203,363        13,689,221      $ 200,568,530  

Reinvestments of stockholder distributions

     5,826        49,707        1,259        11,813  
  

 

 

    

 

 

    

 

 

    

 

 

 

Retirement of repurchased shares

     (42,214      (358,531      —          —    

Balance at end of period

     13,613,116      $ 199,894,539        13,690,480      $ 200,580,343  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

43


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

    

Note 13. Financial Highlights

 

The following represents the per share data and the ratios to average net assets for CM Finance Inc:

 

     For the six months ended
December 31,
 
     2018     2017  

Per Share Data:(1)

    

Net asset value, beginning of period

   $ 12.57     $ 12.41  

Net investment income

     0.52       0.49  

Net realized and unrealized gains (losses)

     (1.11     0.1  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     (0.59     0.59  

Capital transactions(2)

    

Share repurchases

     0.01       —    

Dividends from net investment income

     (0.50     (0.50

Distributions from net realized gains

     —         —    
  

 

 

   

 

 

 

Net decrease in net assets resulting from capital transactions

     (0.49     (0.50

Offering costs

     —         —    

Net asset value, end of period

   $ 11.49     $ 12.50  
  

 

 

   

 

 

 

Market value per share, end of period

   $ 8.60     $ 8.15  

Total return based on market value(3)

     (24.58 )%      (13.65 )% 

Shares outstanding at end of period

     13,613,116       13,690,480  

Ratio/Supplemental Data:

    

Net assets, at end of period

   $ 156,436,308     $ 171,109,737  

Ratio of total expenses to average net assets

     12.72     9.88

Ratio of net expenses to average net assets

     12.69     9.88

Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net assets

     5.86     3.90

Ratio of net investment income before fee waiver to average net assets

     8.65     7.81

Ratio of net investment income after fee waiver to average net assets

     8.68     7.81

Total Notes Payable

     136,500,000       119,830,000  

Asset Coverage Ratio(6)

     2.15       2.46  

Portfolio Turnover Rate

     32     20

 

*

Net asset value at beginning of period reflects the deduction of the sales load of $0.25 per share paid by the stockholder from the $15.00 offering price.

(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 distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the company’s dividend reinvestment plan.

(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.

(7) 

For the period from February 6, 2014 through June 30, 2014.

 

44


CM Finance Inc and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2018

 

Note 14. 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 and six months ended December 31, 2018 and December 31, 2017:

 

     For the three months ended December 31,      For the six months ended December 31,  
     2018      2017      2018      2017  

Loan Amendment/Consent Fee

   $ 277,365      $ —        $ 432,520      $ 9,879  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Fee Income

   $ 277,365      $ —        $ 432,520      $ 9,879  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 15. Tax Information

As of December 31, 2018, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:

 

Tax cost

   $ 307,290,045  
  

 

 

 

Gross unrealized appreciation

     4,357,482  

Gross unrealized depreciation

     (28,312,222
  

 

 

 

Net unrealized investment depreciation

   $ (23,954,740
  

 

 

 

As of June 30, 2018, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:

 

Tax cost

   $ 302,647,282  
  

 

 

 

Gross unrealized appreciation

     6,015,163  

Gross unrealized depreciation

     (15,070,432
  

 

 

 

Net unrealized investment depreciation

   $ (9,055,269
  

 

 

 

Note 16. Subsequent Events

On February 5, 2019, our board of directors declared a distribution for the quarter ended March 31, 2019 of $0.25 per share payable on April 4, 2019 to stockholders of record as of March 15, 2019.

 

45


PART II—OTHER INFORMATION

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:

 

  3.1    Amended and Restated Articles of Incorporation(1)
  3.2    Bylaws(1)
31.1    Chief Executive Officer Certification Pursuant to Exchange Act Rule
13a-14
(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2    Chief Financial Officer Certification Pursuant to Exchange Act Rule
13a-14
(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

*

Filed herewith

(1)

Incorporated by reference to Registrant’s Registration Statement on Form

N-2
(File
No. 333-192370),
filed on November 15, 2013.


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.

Date: March 8, 2019

 

CM FINANCE INC

/s/ Rocco DelGuercio

Rocco DelGuercio

Chief Financial Officer

d720892dex311.htm EX-31.1


> ENT> EX-31.1 2 d720892dex311.htm EX-31.1

EX-31.1

Exhibit 31.1

I, Michael C. Mauer, certify that:

 

  1.

I have reviewed this Quarterly Report on Form 10-Q/A of CM Finance Inc;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

 

  (d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 8, 2019

 

/s/ Michael C. Mauer

Michael C. Mauer

Chief Executive Officer

d720892dex312.htm EX-31.2


> ENT> EX-31.2 3 d720892dex312.htm EX-31.2

EX-31.2

Exhibit 31.2

I, Rocco DelGuercio, certify that:

 

  1.

I have reviewed this Quarterly Report on Form 10-Q/A of CM Finance Inc;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

 

  (d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 8, 2019

 

/s/ Rocco DelGuercio

Rocco DelGuercio
Chief Financial Officer
d720892dex321.htm EX-32.1


> ENT> EX-32.1 4 d720892dex321.htm EX-32.1

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with this Quarterly Report on Form 10-Q/A (the “Report”) of CM Finance Inc (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Michael C. Mauer, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:

 

  (1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

/s/ Michael C. Mauer

Name: Michael C. Mauer
Date: March 8, 2019
d720892dex322.htm EX-32.2


> ENT> EX-32.2 5 d720892dex322.htm EX-32.2

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with this Quarterly Report on Form 10-Q/A (the “Report”) of CM Finance Inc (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Rocco DelGuercio, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:

 

  (1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

/s/ Rocco DelGuercio

Name: Rocco DelGuercio
Date: March 8, 2019
Additional Files
FileSequenceDescriptionTypeSize
0001193125-19-069283.txt   Complete submission text file   871135
$CMFNL

© 2019 SEC.report
SEC CFR Title 17 of the Code of Federal Regulations.