Notes to Consolidated Financial Statements (unaudited)
September 30, 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 Companys 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)
September 30, 2018
Note 1.
Organization (continued)
The Company has formed certain taxable subsidiaries (collectively, the Taxable
Subsidiaries), which are taxed as corporations for federal income tax purposes. At September 30, 2018, the Company had two Taxable Subsidiaries: CM Portfolio Companies LLC and Zinc Borrower Blocker, LLC. These Taxable Subsidiaries allow
the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements 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 Companys 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 Companys 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 CM Portfolio Companies LLC 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)
September 30, 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 managements judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due
principal and interest is paid and, in managements 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 months ended September 30, 2018, $135,585 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income. During the three months ended September 30, 2017, no prepayment
penalties and unamortized discounts upon prepayment were recorded as interest income.
Investment transactions are accounted for on a
trade-date basis. Realized gains or losses on investments are determined by calculating the difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses
previously recognized. Realized gains or losses on the sale of investments are calculated using the specific identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation
(depreciation) on investments in the Unaudited Consolidated Statements of Operations.
Management reviews all loans that become 90 days or
more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reversed when a loan is placed on non-accrual status.
Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon managements judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and
interest is paid and, in managements 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 $413,620 and $292,478 during the three months ended September 30, 2018 and September 30, 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 months ended September 30, 2018 and
September 30, 2017.
16
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 Companys 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 Companys stockholders, unless a shareholder elects to receive cash. As a result, if the Companys board of directors declares, and the Company pays, a cash distribution, then
the Companys stockholders who have not opted out of the Companys dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Companys 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 Companys 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 Companys 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 becomes effective.
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)
September 30, 2018
Note 2.
Significant Accounting Policies (continued)
Deferred debt issuance costs, incurred in connection with the Companys 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 Companys 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 hours market) are valued on the basis
of the closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the
valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last bid and ask prices for such options are
valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last bid and
ask prices are valued at the average of the last bid and ask prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are
categorized in Level 1 of the fair value hierarchy. The Company did not hold any Level 1 investments as of September 30, 2018 or 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. The Company held only
Level 3 investments as of September 30, 2018 and June 30, 2018.
18
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 Companys 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 Companys 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 Advisers preliminary valuations and make their own independent assessment. The Valuation Committee of the Companys 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 Companys 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)
September 30, 2018
Note 2.
Significant Accounting Policies (continued)
For more information on the classification of the Companys investments by major
categories, see Note 4.
The fair value of the Companys 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 Companys investment company
taxable income, which is generally the Companys 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 Companys consolidated subsidiaries are subject to U.S. federal and
state income taxes. The Company did not record a provision for taxes for the three months ended September 30, 2018 and September 30, 2017 for U.S. federal and state income taxes related to Taxable Subsidiaries.
Book and tax basis differences that are permanent differences are reclassified among the Companys capital accounts, as appropriate at
year-end. Additionally, the tax character of distributions is determined in accordance with the Code, which differs from U.S. GAAP. During the three months ended September 30, 2018 and September 30, 2017, the Company recorded distributions
of $3.4 million and $3.4 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 Companys 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 Companys 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)
September 30, 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 Companys 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)
September 30, 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 Companys
investments on February 5, 2014, at the time the Company priced the Offering.
As of September 30, 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 Companys board of directors authorized a discretionary repurchase program of up to $5.0 million shares of the
Companys 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 months ended September 30, 2018, the Company repurchased 11,215 shares of common stock on the open market for $101,195 (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 November 2016, the FASB issued Accounting Standards Update (ASU) 2016-18,
Statement of Cash Flows
(Topic 230):
Restricted Cash
(ASU 2016-18), which requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements
of cash flows. The new guidance is effective for annual and interim periods, beginning after December 15, 2017, and early adoption is permitted and is to be applied on a retrospective basis. Management is currently evaluating the impact ASU
2016-18 will have on the Companys consolidated financial statements and disclosures.
22
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2018
Note 3.
Recent Accounting Pronouncements (continued)
In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows (Topic 230),
Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. Management is currently evaluating the impact ASU
2016-15 will have on the Companys consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). In 2016, the FASB issued additional guidance which clarified, amended, and technically corrected
prior guidance. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred the effective period to annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. Management is currently
evaluating the impact these changes will have on the Companys consolidated financial statements and disclosures.
Note 4. Investments
The Companys 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 Companys 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)
September 30, 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 Companys exposure to credit risk on
its investments is limited to the fair value of the investments. The Companys 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 September 30, 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 counterpartys (or its guarantors) credit rating. The Companys policy is to not hold counterparty collateral on ISDA Agreements, but would do so if the exposure were material.
b. Investments
Investment purchases,
sales and principal payments/paydowns are summarized below for the three months ended September 30, 2018 and September 30, 2017, respectively. These purchase and sale amounts exclude derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Investment purchases, at cost (including PIK interest)
|
|
$
|
54,365,570
|
|
|
$
|
47,058,844
|
|
Investment sales and repayments
|
|
|
15,544,096
|
|
|
|
30,845,326
|
|
The composition of the Companys investments as of September 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
|
|
$
|
199,965,967
|
|
|
|
58.56
|
%
|
|
$
|
203,373,558
|
|
|
|
61.50
|
%
|
Unitranche First Lien Debt Investment
|
|
|
11,879,796
|
|
|
|
3.48
|
|
|
|
11,879,796
|
|
|
|
3.59
|
|
Senior Secured Second Lien Debt Investment
|
|
|
127,735,821
|
|
|
|
37.41
|
|
|
|
114,763,324
|
|
|
|
34.70
|
|
Unsecured Debt Investments
|
|
|
|
|
|
|
|
|
|
|
154,792
|
|
|
|
0.05
|
|
Equity, Warrants and Other Investments
|
|
|
1,897,009
|
|
|
|
0.55
|
|
|
|
523,001
|
|
|
|
0.16
|
|
Embedded Derivative Notes Payable
|
|
|
|
|
|
|
|
|
|
|
878,000
|
|
|
|
0.14
|
|
Total Return Swap
|
|
|
|
|
|
|
|
|
|
|
(878,000
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$341,475,965
|
|
|
|
100.00%
|
|
|
|
$330,694,472
|
|
|
|
100.00%
|
|
24
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2018
Note 4.
Investments (continued)
The composition of the Companys 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 DerivativeNotes 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 September 30, 2018:
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
Energy Equipment & Services
|
|
$
|
40,128,678
|
|
|
|
12.14
|
%
|
Professional Services
|
|
|
39,991,350
|
|
|
|
12.09
|
|
Hotels, Restaurants & Leisure
|
|
|
32,462,259
|
|
|
|
9.82
|
|
Commercial Services & Supplies
|
|
|
32,000,000
|
|
|
|
9.68
|
|
Media
|
|
|
31,937,563
|
|
|
|
9.66
|
|
IT Services
|
|
|
29,422,981
|
|
|
|
8.90
|
|
Oil, Gas & Consumable Fuels
|
|
|
24,700,000
|
|
|
|
7.47
|
|
Diversified Telecommunication Services
|
|
|
24,634,778
|
|
|
|
7.45
|
|
Distributors
|
|
|
12,437,500
|
|
|
|
3.76
|
|
Internet Software & Services
|
|
|
11,402,669
|
|
|
|
3.45
|
|
Construction & Engineering
|
|
|
9,850,000
|
|
|
|
2.98
|
|
Construction Materials
|
|
|
9,850,000
|
|
|
|
2.98
|
|
Healthcare Providers & Services
|
|
|
9,108,115
|
|
|
|
2.75
|
|
Healthcare Equipment & Supplies
|
|
|
7,480,313
|
|
|
|
2.26
|
|
Chemicals
|
|
|
6,627,651
|
|
|
|
2.00
|
|
Technology Hardware, Storage & Peripherals
|
|
|
5,901,398
|
|
|
|
1.78
|
|
Containers & Packaging
|
|
|
2,297,597
|
|
|
|
0.69
|
|
Wireless Telecommunication Services
|
|
|
461,620
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
330,694,472
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
25
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 September 30,
2018:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
U.S. West
|
|
$
|
76,323,613
|
|
|
|
23.08
|
%
|
U.S. Northeast
|
|
|
73,895,472
|
|
|
|
22.34
|
|
U.S. Southeast
|
|
|
60,934,158
|
|
|
|
18.43
|
|
U.S. Southwest
|
|
|
50,557,125
|
|
|
|
15,29
|
|
U.S. Midwest
|
|
|
34,938,426
|
|
|
|
10.57
|
|
International
|
|
|
24,937,563
|
|
|
|
7.54
|
|
U.S. Mid-Atlantic
|
|
|
9,108,115
|
|
|
|
2.75
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
330,694,472
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
26
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 Companys 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 three months ended September 30,
2018, the Company made investments in six new portfolio companies of approximately $47.7 million to which it was not previously contractually committed to provide financial support. During the three months ended September 30, 2018, the Company
made investments of $6.0 million in companies to which it was previously committed to provide financial support through the terms of the revolvers. The details of the Companys 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)
September 30, 2018
Note 4.
Investments (continued)
The Companys 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 Companys 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 Companys derivative contracts, none of
which were designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at September 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
|
Contracts
|
|
Credit Risk:
|
|
Total Return Swaps
|
|
$
|
|
|
|
$
|
878,000
|
|
|
$
|
152,000,000
|
|
|
|
2
|
|
Embedded Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
878,000
|
|
|
|
|
|
|
|
152,000,000
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fair value of derivative contracts
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivative contracts
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
|
|
|
|
|
|
Collateral not offset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
878,000
|
|
|
$
|
878,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the fair value and notional amount or number of contracts of the Companys
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)
September 30, 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 months ended September 30, 2018 and September 30, 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 September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Total Return Swaps
|
|
$
|
648,082
|
|
|
$
|
719,947
|
|
Embedded Derivatives - Notes Payable
|
|
|
(648,082
|
)
|
|
|
(719,947
|
)
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys 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 Companys own data. The Companys 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)
September 30, 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 Companys assets and liabilities measured at fair value as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
215,253,355
|
|
|
$
|
215,253,355
|
|
Senior Secured Second Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
114,763,324
|
|
|
|
114,763,324
|
|
Unsecured Debt Investment
|
|
|
|
|
|
|
|
|
|
|
154,792
|
|
|
|
154,792
|
|
Equity, Warrants and Other Investments
|
|
|
|
|
|
|
|
|
|
|
523,001
|
|
|
|
523,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
|
330,694,472
|
|
|
|
330,694,472
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivatives - Notes Payable
|
|
|
|
|
|
|
|
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
331,172,785
|
|
|
$
|
331,172,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(878,000
|
)
|
|
$
|
(878,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
(878,000
|
)
|
|
|
(878,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(878,000
|
)
|
|
$
|
(878,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2018
Note 4.
Investments (continued)
The following table summarizes the classifications within the fair value hierarchy of the
Companys 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 three months ended September 30, 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)
|
|
|
54,365,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,365,570
|
|
Sales
|
|
|
(3,929,096
|
)
|
|
|
(11,615,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,544,096
|
)
|
Amortization
|
|
|
(2,356
|
)
|
|
|
264,796
|
|
|
|
|
|
|
|
|
|
|
|
262,440
|
|
Net realized gains (losses)
|
|
|
18,750
|
|
|
|
(276,942
|
)
|
|
|
|
|
|
|
|
|
|
|
(258,192
|
)
|
Transfers in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
(335,829
|
)
|
|
|
(810,484
|
)
|
|
|
(576,950
|
)
|
|
|
|
|
|
|
(1,723,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2018
|
|
$
|
215,253,355
|
|
|
$
|
114,763,324
|
|
|
$
|
154,792
|
|
|
$
|
523,001
|
|
|
$
|
330,694,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
September 30, 2018
|
|
$
|
(335,829
|
)
|
|
$
|
(1,057,916
|
)
|
|
$
|
(576,951
|
)
|
|
$
|
|
|
|
$
|
(1,970,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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
|
|
|
(648,082
|
)
|
|
|
648,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2018
|
|
$
|
(878,000
|
)
|
|
$
|
878,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
September 30, 2018
|
|
$
|
(648,082
|
)
|
|
$
|
648,082
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use
Level 3 inputs for the three months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
First Lien
Debt Investments
|
|
|
Senior Secured
Second Lien
Debt Investments
|
|
|
Equity, Warrants
and Other
Investments
|
|
|
Total
Investments
|
|
Balance as of June 30, 2017
|
|
$
|
127,103,981
|
|
|
$
|
126,593,792
|
|
|
$
|
1,209,398
|
|
|
$
|
254,907,171
|
|
Purchases (including PIK interest)
|
|
|
27,458,844
|
|
|
|
19,600,000
|
|
|
|
|
|
|
|
47,058,844
|
|
Sales
|
|
|
(15,752,403
|
)
|
|
|
(15,092,924
|
)
|
|
|
|
|
|
|
(30,845,327
|
)
|
Amortization
|
|
|
258,578
|
|
|
|
364,138
|
|
|
|
|
|
|
|
622,716
|
|
Net realized gains (losses)
|
|
|
(69,580
|
)
|
|
|
(7,311,110
|
)
|
|
|
|
|
|
|
(7,380,690
|
)
|
Transfers in
|
|
|
|
|
|
|
|
|
|
|
7,518,750
|
|
|
|
7,518,750
|
|
Transfers out
|
|
|
|
|
|
|
(7,518,750
|
)
|
|
|
|
|
|
|
(7,518,750
|
)
|
Net change in unrealized (depreciation) appreciation
|
|
|
(371,398
|
)
|
|
|
4,560,480
|
|
|
|
3,311,150
|
|
|
|
7,500,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
138,628,022
|
|
|
$
|
121,195,626
|
|
|
$
|
12,039,298
|
|
|
$
|
271,862,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
September 30, 2017
|
|
$
|
(470,447
|
)
|
|
$
|
(2,753,277
|
)
|
|
$
|
3,311,150
|
|
|
$
|
87,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Return
Swaps
|
|
|
Embedded
Derivatives -
Notes
Payable
|
|
|
Total
Derivatives
|
|
Balance as of June 30, 2017
|
|
$
|
(5,830,501
|
)
|
|
$
|
5,830,501
|
|
|
$
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
(719,947
|
)
|
|
|
719,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
(6,550,448
|
)
|
|
$
|
6,550,448
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
September 30, 2017
|
|
$
|
(719,947
|
)
|
|
$
|
719,947
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 months ended September 30, 2018 and September 30, 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 Companys Level 3
investments as of September 30, 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 Companys Level 3 investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
September 30, 2018
|
|
Valuation
Methodology
|
|
Unobservable
Input(s)
|
|
Weighted
Average
|
|
Range
|
Senior Secured First Lien Debt Investments
|
|
|
$
|
110,085,934
|
|
|
Yield Analysis
|
|
Market Yields
|
|
|
|
7.3
|
%
|
|
4.9% - 12.9%
|
Unitranche First Lien Debt Investments
|
|
|
|
11,879,796
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
|
15.2
|
%
|
|
14.7% - 15.7%
|
Senior Secured First Lien Debt Investments
|
|
|
|
28,462,638
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
|
12.6
|
%
|
|
8.0% - 20.4%
|
Senior Secured First Lien Debt Investments
|
|
|
|
12,113,324
|
|
|
Broker Quoted
|
|
Market Comparable
|
|
|
|
90.1
|
%
|
|
89.3% - 90.8%
|
Senior Secured First Lien Debt Investments
|
|
|
|
52,711,664
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
|
|
N/A
|
|
|
N/A
|
Senior Secured Second Lien Debt Investments
|
|
|
|
86,903,324
|
|
|
Yield Analysis
|
|
Market Yields
|
|
|
|
15.5
|
%
|
|
9.2% - 54.2%
|
Senior Secured Second Lien Debt Investments
|
|
|
|
27,860,000
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
|
11.5
|
%
|
|
10.2% - 16.2%
|
Equity, Warrants, and Other Investments
|
|
|
|
677,792
|
|
|
EV Multiple
|
|
EBITDA Multiple
|
|
|
|
0.0x
|
|
|
0.0x - 0.0x
|
Total Return Swaps
|
|
|
|
(878,000
|
)
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
|
N/A
|
|
|
N/A
|
Embedded Derivatives - Notes Payable
|
|
|
|
878,000
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
|
N/A
|
|
|
N/A
|
33
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 Companys 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 September 30, 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)
September 30, 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 September 30, 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)
September 30, 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 September 30, 2018 and June 30, 2018, there were $11.8 million and $17.8 million, respectively, 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 Companys Notes Payable is estimated
based on the rate at which similar facilities would be priced. At September 30, 2018 and June 30, 2018, the fair value of the Notes Payable was estimated at $113.8 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)
September 30, 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 Companys assets, they
are effectively subordinated to all of the Companys 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 Companys 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 Companys subsidiaries. None of the Companys 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 Companys 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 September 30, 2018, the outstanding principal balance of the Notes was approximately $34.5 million and had an estimated fair value
of $34.7 million based on the closing price as of September 28, 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 September 30, 2018, SPV and LLC had aggregate assets of $224.5 million, which included $223.8 million of the Companys portfolio investments at
fair value, $0.7 million of accrued interest receivable and $0.0 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 Companys 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 months ended September 30, 2018, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing
Facilities was $104.9 million and 5.12%, respectively. For the three months ended September 30, 2017, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $123.6 million
and 3.18%, 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 Companys 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)
September 30, 2018
Note 6.
Indemnification, Guarantees, Commitments and Contingencies (continued)
The Companys 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
|
Loans purchased by the Company may include revolving credit agreements or other financing commitments
obligating the Company to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
The following table details the unfunded commitments as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
Unfunded
Commitment
|
|
|
Fair
Value
|
|
|
Annual
Non-use
Fee
|
|
|
Expiration
Date
|
|
1888 Industrial Services, LLC
|
|
$
|
396,039
|
|
|
$
|
|
|
|
|
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
|
|
$
|
2,457,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys financing, and an incentive fee consisting of two parts.
38
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 Companys 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 Companys 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 Companys 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 Companys 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 months ended September 30, 2018, $1,351,855 in base management fees were earned by the Adviser, of which $1,351,855 was
payable at September 30, 2018. For the three months ended September 30, 2017, $1,153,880 in base management fees were earned by the Adviser, of which $1,153,880 was payable at September 30, 2017.
For the three months ended September 30, 2018, the Company incurred $120,321 of incentive fees related to pre-incentive fee net
investment income, of which $22,000 was waived. As of September 30, 2018, $2,392,999 of such incentive fees are currently payable to the Adviser and $705,492 of pre-incentive fees incurred by the Company were generated from deferred interest
(i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three months ended September 30, 2017, the Company incurred $0 of incentive fees related to pre-incentive fee net investment income.
As of September 30, 2017, $240,538 of incentive fees were currently payable to the Adviser and $221,883 of pre-incentive fees incurred by the Company were generated from deferred interest (i.e., PIK and certain discount accretion) and are not
payable until such amounts are received in cash.
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 September 30, 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)
September 30, 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 Advisers 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 Companys 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 Companys 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 $338,063 under the Administration
Agreement for the three months ended September 30, 2018. The Company incurred costs of $127,229 under the Administration Agreement for the three months ended September 30, 2017.
As of September 30, 2018 and June 30, 2018, the Company recorded $0 and $0, respectively, in accrued expenses and other liabilities
on its Unaudited Consolidated Statements of Assets and Liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement.
License Agreement
The Company has
entered into a license agreement with the Adviser under which the Adviser has agreed to grant the Company a non-exclusive, royalty-free license to use the name CM Finance. Under this agreement, the Company has a right to use the CM
Finance name for so long as the Adviser or one of its affiliates remains the Adviser. Other than with respect to this limited license, the Company has no legal right to the CM Finance name.
40
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 Companys board of directors. Stifel has not exercised its right to nominate for
election a member of the Companys board of directors. Stifel does not have any rights to exercise a controlling influence over the Companys day-to-day operations or the investment management function of the Adviser.
As of September 30, 2018, four 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 Advisers investment committee designated by Stifel. Although these four 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 Advisers 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 September 30, 2018, Stifel
owned approximately 16.0% of the Companys outstanding common stock, and also holds a 20.0% interest in the Adviser.
Note 8. Directors Fees
Each of the Companys 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 Companys 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 Companys directors and officers. Independent directors have the option of having their directors fees paid in shares of the Companys common stock issued at a price per share equal to the greater
of net asset value or the market price at the time of payment. For the three months ended September 30, 2018, the Company recorded directors fees of $101,250, of which $97,673 were payable at September 30, 2018. For the three months
ended September 30, 2017, the Company recorded directors fees of $99,667, of which $97,043 were payable at September 30, 2017.
Note 9.
Net Change in Net Assets Resulting from Operations Per Share
Basic earnings per share is computed by dividing earnings available to
common 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)
September 30, 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 September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
1,428,041
|
|
|
$
|
3,135,717
|
|
Weighted average shares of common stock outstanding
|
|
|
13,650,097
|
|
|
|
13,689,885
|
|
Basic/diluted net increase (decrease) in net assets from operations per share
|
|
$
|
0.10
|
|
|
$
|
0.23
|
|
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
|
|
May 2, 2018
|
|
June 15, 2018
|
|
July 5, 2018
|
|
$
|
0.2500
|
|
August 23, 2018
|
|
September 18, 2018
|
|
October 5, 2018
|
|
$
|
0.2500
|
|
42
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 three months ended September 30, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Distribution Amount
|
|
|
Percentage
|
|
|
Distribution Amount
|
|
|
Percentage
|
|
Ordinary income and short-term capital gains
|
|
$
|
3,412,531
|
|
|
|
100
|
%
|
|
$
|
3,422,431
|
|
|
|
100
|
%
|
Long-term capital gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$3,412,531
|
|
|
|
100%
|
|
|
|
$3,422,431
|
|
|
|
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 months ended September 30, 2018, the Company repurchased 11,215 shares of its
common stock on the open market for $101,195. The Companys NAV per share increased by less than $0.00 for the three months ended September 30, 2018 as a result of the share repurchases. The following table summarizes the Companys
share repurchases under the share repurchase program for the three months ended September 30, 2018 and September 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Number of shares repurchased
|
|
|
11,215
|
|
|
|
|
|
Cost of shares repurchased, including commissions
|
|
$
|
101,195
|
|
|
|
|
|
Weighted average price per share
|
|
$
|
8.97
|
|
|
|
|
|
Net asset value per share at prior quarter end
|
|
$
|
12.41
|
|
|
|
|
|
Weighted average discount to prior quarter net asset value
|
|
|
27.7
|
%
|
|
$
|
|
|
Note 12. Share Transactions
The following table summarizes the total shares issued for the three months ended September 30, 2018 and September 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
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 shareholder distributions
|
|
|
620
|
|
|
|
5,417
|
|
|
|
1,259
|
|
|
|
11,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
13,650,124
|
|
|
$
|
200,208,780
|
|
|
|
13,690,480
|
|
|
$
|
200,580,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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 three months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Per Share Data:
(1)
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
12.57
|
|
|
$
|
12.41
|
|
|
|
|
Net investment income
|
|
|
0.25
|
|
|
|
0.22
|
|
Net realized and unrealized gains (losses)
|
|
|
(0.15
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
0.10
|
|
|
|
0.23
|
|
|
|
|
Capital transactions
(2)
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
(0.01
|
)
|
|
|
|
|
Dividends from net investment income
|
|
|
(0.25
|
)
|
|
|
(0.25
|
)
|
Distributions from net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from capital transactions
|
|
|
(0.26
|
)
|
|
|
(0.25
|
)
|
|
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
12.41
|
|
|
$
|
12.39
|
|
|
|
|
|
|
|
|
|
|
Market value per share, end of period
|
|
$
|
8.60
|
|
|
$
|
9.35
|
|
|
|
|
Total return based on market
value
(3)
|
|
|
(0.44
|
)%
|
|
|
(3.95
|
)%
|
|
|
|
Shares outstanding at end of period
|
|
|
13,650,124
|
|
|
|
13,690,480
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
Net assets, at end of period
|
|
$
|
169,442,399
|
|
|
$
|
169,673,211
|
|
Ratio of total expenses to average net assets
|
|
|
11.40
|
%
|
|
|
8.70
|
%
|
Ratio of net expenses to average net assets
|
|
|
11.35
|
%
|
|
|
8.70
|
%
|
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net
assets
|
|
|
5.76
|
%
|
|
|
3.66
|
%
|
Ratio of net investment income before fee waiver to average net assets
|
|
|
8.03
|
%
|
|
|
7.07
|
%
|
Ratio of net investment income after fee waiver to average net assets
|
|
|
7.98
|
%
|
|
|
7.07
|
%
|
Total Notes Payable
|
|
|
148,343,470
|
|
|
|
129,260,000
|
|
Asset Coverage Ratio
(6)
|
|
|
2.14
|
|
|
|
2.31
|
|
Portfolio Turnover Rate
|
|
|
5
|
%
|
|
|
12
|
%
|
(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 companys dividend reinvestment plan.
|
(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.
|
44
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 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
Companys other fee income for the three months ended September 30, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Loan Amendment/Consent Fee
|
|
$
|
155,155
|
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
Other Fee Income
|
|
$
|
155,155
|
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
Note 15. Tax Information
As of September 30, 2018, the Companys aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal
income tax purposes were as follows:
|
|
|
|
|
Tax cost
|
|
$
|
341,548,123
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
5,696,215
|
|
Gross unrealized depreciation
|
|
|
(16,549,866
|
)
|
|
|
|
|
|
Net unrealized investment depreciation
|
|
$
|
(10,853,651
|
)
|
|
|
|
|
|
As of June 30, 2018, the Companys 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 November 6, 2018, our board of directors declared a distribution for the quarter ended December 31, 2018 of $0.25 per share payable on
January 3, 2019 to stockholders of record as of December 14, 2018.
45