Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 1.
Organization
CM Finance Inc (CMFN or the
Company), a Maryland corporation formed in May 2013, is a
closed-end,
externally managed,
non-diversified
management investment company that has elected to
be regulated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act), and has elected to be treated as a regulated investment company (RIC) under Subchapter M of
the Internal Revenue Code (the Code) for U.S. federal income tax purposes. The Company is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board
(FASB) Accounting Standard Codification (ASC) Topic 946 Financial Services Investment Companies.
On
February 11, 2014, the Company completed its initial public offering (the Offering), selling 7,666,666 shares of its common stock, par value $0.001, including the underwriters over-allotment, at a price of $15.00 per share
with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in
March 2012. Immediately prior to the Offering, CM Finance LLC was merged with and into the Company (the Merger). In connection with the Merger, the Company issued 6,000,000 shares of common stock and $39.8 million in debt to the
pre-existing
CM Finance LLC investors, consisting of funds managed by Cyrus Capital Partners, L.P. (the Original Investors or the Cyrus Funds). The Company had no assets or operations prior
to completion of the Merger and, as a result, the books and records of CM Finance LLC became the books and records of the Company, as the surviving entity. Immediately after the Merger, the Company issued 2,181,818 shares of its common stock to
Stifel Venture Corp. (Stifel) in exchange for $32.7 million in cash. The Company used all of the proceeds of the sale of shares to Stifel to repurchase 2,181,818 shares of common stock from the Original Investors. Immediately after
the completion of the Offering, the Company had 13,666,666 shares outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with the Merger.
Upon its election to be regulated as a BDC on February 5, 2014, the Company entered into an investment advisory agreement (the
Advisory Agreement) and an administration agreement with CM Investment Partners LLC (the Adviser) as its investment adviser and administrator, respectively.
The 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)
December 31, 2018
Note 1.
Organization (continued)
From time-to-time, the
Company may form taxable subsidiaries which are taxed as corporations for federal income tax purposes (the Taxable Subsidiaries). At December 31, 2018, the Company had one Taxable Subsidiary: Zinc Borrower Blocker, LLC; at June 30,
2018, the Company had four Taxable Subsidiaries: CM Portfolio Companies LLC, U.S. Well Services Blocker, LLC, Bird Electric Blocker, LLC, and Zinc Borrower Blocker, LLC. The Taxable Subsidiaries allow the Company to hold equity securities of
portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
Note 2.
Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company.
a. Basis of Presentation
The
accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and all values are stated in U.S. dollars, unless noted otherwise. The financial statements reflect
all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by U.S. GAAP. These adjustments are normal and recurring in nature.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the fair value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing the 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 Zinc Borrower Blocker, LLC in its consolidated financial
statements. All intercompany balances and transactions have been eliminated.
b. Revenue Recognition, Security Transactions, and Realized/Unrealized
Gains or Losses
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis.
Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or
premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are
included in other fee income and unamortized fees and discounts are recorded as interest income and are
non-recurring
in nature.
15
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies (continued)
Loans are placed on
non-accrual
status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on
non-accrual
status. Interest payments received on
non-accrual
loans may be recognized as income or applied to principal depending upon 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 and six months ended December 31, 2018, $877,376 and $1,015,923 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest
income, respectively. During the three and six months ended December 30, 2017, $1,218,231 and $1,240,123 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the
difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using
the specific identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Unaudited Consolidated Statements of Operations.
Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or
interest will be collected for possible placement on
non-accrual
status. Accrued interest is generally reversed when a loan is placed on
non-accrual
status. Interest
payments received on
non-accrual
loans may be recognized as income or applied to principal depending upon 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 $540,308 and $953,928 during the three and six months ended December 31, 2018, respectively. The Company earned PIK interest of $722,039 and $1,014,517 during the three and six months ended
December 31, 2017, respectively.
The Company may hold equity investments in its portfolio that contain a PIK dividend provision. PIK
dividends, which represents contractual dividend payments added to the investment balance, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company earned no PIK dividends during the three and six
months ended December 31, 2018. The Company earned PIK dividends of $189,583 and $189,583 during the three and six months ended December 31, 2017, respectively.
16
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies (continued)
c. Paid In Capital
The Company records the proceeds from the sale of its common stock to common stock and additional
paid-in
capital, net of commissions and marketing support fees.
d. Net Increase in Net Assets Resulting from
Operations per Share
The net increase in net assets resulting from operations per share is calculated based upon the weighted average
number of shares of common stock outstanding during the reporting period.
e. Distributions
Dividends and distributions to common stockholders are recorded on the
ex-dividend
date. The amount to
be paid out as a dividend or distribution is determined by the 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 stockholders 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 is completed.
h. Investment Transactions and Expenses
Purchases of loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are
known or estimable, which in many cases may not be until settlement.
Expenses are accrued as incurred.
17
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies (continued)
Deferred debt issuance costs, incurred in connection with the
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 held one Level 1 investment as of December 31, 2018 and held no Level 1 investments as of June 30, 2018.
Investments that are not traded on securities exchanges but are traded on the
over-the-counter
(OTC) markets (such as term loans, notes and warrants) are valued using various techniques, which may consider recently executed
transactions in securities of the issuer or comparable issuers, market price quotations (when observable) and fundamental data relating to the issuer. These investments are categorized in Level 2 of the fair value hierarchy, or in instances
when lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
18
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2.
Significant Accounting Policies (continued)
The
embedded derivative in the Term Notes and the 2017 Revolving Notes (as defined in Note 5) payable from SPV to UBS AG, London Branch (together with its affiliates, UBS) and total return swaps referencing the terms of the Term Notes
payable and the total return of the 2017 Revolving Notes referencing the 2017 Revolving Notes (together, the TRS) are valued based on the change in fair value and the underlying accrued interest of the portfolio of assets held in SPV
less the accrued interest payable on the financing due to the TRS counterparty, UBS. Consideration has been given to counterparty risk. The Company has assessed the unsecured risk of the counterparty, UBS, in the form of credit ratings and the
trading levels of that risk and has determined that the counterparty risk is minimal. The Company also notes that counterparty risk is further mitigated by the monthly settlement of both the interest portion of the embedded derivative referencing
the Term Notes and the 2017 Revolving Notes payable and the TRS. If the Company were to determine that counterparty risk were material, an adjustment to the fair value of the TRS would be made. The embedded derivative in the Term Notes and the 2017
Revolving Notes payable and the TRS have been categorized in Level 3 of the fair value hierarchy. See Note 4 and Note 5 for more detail.
Investments for which market quotations are not readily available or may be considered unreliable are fair valued, in good faith, using a
method determined to be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest rate
yield curves, credit spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method of the Company may change as changes in the underlying company dictates, such as moving from the Cost Approach
to Market Approach when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these circumstances, the fair values for the aforementioned investments may differ significantly from values that would have
been used had a ready and liquid market for such investments existed or from the amounts that might ultimately be realized, and such differences could be material.
The 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)
December 31, 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 and six months ended December 31,
2018 and for the three and six months ended December 31, 2017 for U.S. federal and state income taxes related to the Taxable Subsidiaries.
Book and tax basis differences that are permanent differences are reclassified among the 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 and six months ended December 31, 2018, the Company recorded
distributions of $3.4 million and $6.8, respectively. During the three and six months ended December 31, 2017, the Company recorded distributions of $3.4 million and $6.8 million, respectively. The tax character of a portion of
these distributions may be return of capital.
U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the
course of preparing the 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)
December 31, 2018
Note 2.
Significant Accounting Policies (continued)
Permanent differences
between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result
from the treatment of short-term gains as ordinary income for tax purposes. During the year ended June 30, 2018, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax
treatment of paydown gains and losses, and income/(loss) from wholly owned subsidiaries as follows:
|
|
|
|
|
|
|
As of
June 30, 2018
|
|
Additional
paid-in
capital
|
|
$
|
|
|
Distributions in excess of net investment income
|
|
|
|
|
Accumulated net realized gain (loss)
|
|
|
|
|
The tax character of all distributions paid by the Company during the year ended June 30, 2018 was
ordinary income.
At June 30, 2018, the components of distributable earnings on a tax basis detailed below differ from the amounts
reflected in the 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)
December 31, 2018
Note 2.
Significant Accounting Policies (continued)
k. Capital Gains Incentive Fee
Under U.S. GAAP, the Company calculates the capital gains incentive fee payable to the Adviser as if the Company had realized all
investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to
the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from the incentive fee that is ultimately realized and the differences could be material.
The cost basis used to compute gains and losses for the purpose of determining incentive fees is the fair value of the Companys
investments on February 5, 2014, at the time the Company priced the Offering.
As of December 31, 2018 and June 30, 2018,
there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement.
l. Share Repurchase Program
On May 2, 2018, the 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 and six months ended December 31, 2018, the Company repurchased 30,999 and 42,214 shares of common stock on the open market for $257,336 and $358,573, respectively (including commissions). Refer to Note 11 for
additional information concerning share repurchases.
Note 3. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of
the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure
Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 will modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for annual reporting
periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact ASU 2018-13 will have on the Companys consolidated financial
statements and disclosures.
22
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 3. Recent
Accounting Pronouncements (continued)
Certain items in the
December 31, 2017 consolidated financial statements has been reclassified to conform to the December 31, 2018 presentation with no effect on net income.
Note 4. Investments
The 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)
December 31, 2018
Note 4.
Investments (continued)
Credit risk is the potential loss the Company may incur from a failure of an issuer to make
payments according to the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The 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 December 31, 2018 and June 30, 2018, the Company had all of its counterparty credit risk associated with
non-performance
for swaps with UBS. With
regard to derivatives, the Company attempts to limit its credit risk by considering its 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 and six months ended December 31, 2018 and
December 31, 2017, respectively. These purchase and sale amounts exclude derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
Six months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Investment purchases, at cost (including PIK interest)
|
|
$
|
50,655,913
|
|
|
$
|
35,996,034
|
|
|
$
|
105,021,483
|
|
|
$
|
83,054,878
|
|
Investment sales and repayments
|
|
|
86,223,802
|
|
|
|
23,997,051
|
|
|
|
101,767,898
|
|
|
|
54,842,377
|
|
The composition of the Companys investments as of December 31, 2018, as a percentage of the total
portfolio, at amortized cost and fair value, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at
Amortized Cost
|
|
|
Percentage
|
|
|
Investments at
Fair Value
|
|
|
Percentage
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
179,301,088
|
|
|
|
58.35
|
%
|
|
$
|
180,466,937
|
|
|
|
63.69
|
%
|
Unitranche First Lien Debt Investment
|
|
|
11,612,863
|
|
|
|
3.78
|
|
|
|
11,612,860
|
|
|
|
4.10
|
|
Senior Secured Second Lien Debt Investment
|
|
|
113,706,960
|
|
|
|
37.00
|
|
|
|
89,912,571
|
|
|
|
31.74
|
|
Unsecured Debt Investments
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments
|
|
|
2,669,134
|
|
|
|
0.87
|
|
|
|
1,342,934
|
|
|
|
0.47
|
|
Embedded Derivative Notes Payable
|
|
|
|
|
|
|
|
|
|
|
(94,380
|
)
|
|
|
(0.03
|
)
|
Total Return Swap
|
|
|
|
|
|
|
|
|
|
|
94,380
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$307,290,045
|
|
|
|
100.00%
|
|
|
|
$283,335,302
|
|
|
|
100.00%
|
|
24
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4.
Investments (continued)
The composition of the 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 December 31, 2018:
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
Professional Services
|
|
$
|
42,538,788
|
|
|
|
15.01
|
%
|
Media
|
|
|
36,174,874
|
|
|
|
12.77
|
%
|
Energy Equipment & Services
|
|
|
29,956,343
|
|
|
|
10.57
|
%
|
Oil, Gas & Consumable Fuels
|
|
|
24,024,000
|
|
|
|
8.48
|
%
|
Diversified Telecommunication Services
|
|
|
21,941,509
|
|
|
|
7.74
|
%
|
Construction and Engineering
|
|
|
21,887,875
|
|
|
|
7.73
|
%
|
Hotels, Restaurants & Leisure
|
|
|
12,214,224
|
|
|
|
4.31
|
%
|
Commercial Services & Supplies
|
|
|
12,000,000
|
|
|
|
4.24
|
%
|
Internet Software & Services
|
|
|
10,941,238
|
|
|
|
3.86
|
%
|
IT Services
|
|
|
10,929,936
|
|
|
|
3.86
|
%
|
Distributors
|
|
|
9,900,000
|
|
|
|
3.49
|
%
|
Construction Materials
|
|
|
9,850,000
|
|
|
|
3.48
|
%
|
Auto Components
|
|
|
9,072,500
|
|
|
|
3.20
|
%
|
Technology Hardware, Storage and Peripherals
|
|
|
8,815,816
|
|
|
|
3.11
|
%
|
Health Care Equipment & Supplies
|
|
|
7,461,375
|
|
|
|
2.63
|
%
|
Containers & Packaging
|
|
|
6,985,095
|
|
|
|
2.47
|
%
|
Chemicals
|
|
|
5,550,239
|
|
|
|
1.96
|
%
|
Retail
|
|
|
2,078,571
|
|
|
|
0.73
|
%
|
Wireless Telecommunication Services
|
|
|
1,012,919
|
|
|
|
0.36
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,335,302
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
25
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4.
Investments (continued)
The following table shows the portfolio composition by industry grouping at fair value at
June 30, 2018:
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
Professional Services
|
|
$
|
41,040,567
|
|
|
|
13.98
|
%
|
Hotels, Restaurants & Leisure
|
|
|
33,336,195
|
|
|
|
11.36
|
|
Energy Equipment & Services
|
|
|
32,196,779
|
|
|
|
10.97
|
|
Media
|
|
|
31,950,000
|
|
|
|
10.88
|
|
Commercial Services & Supplies
|
|
|
31,600,000
|
|
|
|
10.76
|
|
IT Services
|
|
|
28,009,599
|
|
|
|
9.54
|
|
Diversified Telecommunication Services
|
|
|
24,933,557
|
|
|
|
8.49
|
|
Oil, Gas & Consumable Fuels
|
|
|
24,180,000
|
|
|
|
8.24
|
|
Distributors
|
|
|
12,468,750
|
|
|
|
4.25
|
|
Healthcare Providers & Services
|
|
|
11,312,696
|
|
|
|
3.85
|
|
Chemicals
|
|
|
8,023,000
|
|
|
|
2.73
|
|
Healthcare Equipment & Supplies
|
|
|
7,499,250
|
|
|
|
2.55
|
|
Electronic Equipment
|
|
|
6,580,000
|
|
|
|
2.24
|
|
Wireless Telecommunication Services
|
|
|
461,620
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by geographic grouping at fair value at December 31,
2018:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
U.S. Northeast
|
|
$
|
82,755,868
|
|
|
|
29.21
|
%
|
U.S. Southeast
|
|
|
57,428,903
|
|
|
|
20.27
|
%
|
U.S. Midwest
|
|
|
51,950,315
|
|
|
|
18.34
|
%
|
U.S. West
|
|
|
49,217,026
|
|
|
|
17.37
|
%
|
International
|
|
|
24,174,874
|
|
|
|
8.53
|
%
|
U.S.
Mid-Atlantic
|
|
|
9,900,000
|
|
|
|
3.49
|
%
|
U.S. Southwest
|
|
|
7,908,316
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,335,302
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
26
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4.
Investments (continued)
The following table shows the
portfolio composition by geographic grouping at fair value at June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
U.S. West
|
|
$
|
74,078,950
|
|
|
|
25.23
|
%
|
U.S. Northeast
|
|
|
57,586,322
|
|
|
|
19.62
|
|
U.S. Southeast
|
|
|
53,203,880
|
|
|
|
18.12
|
|
U.S. Southwest
|
|
|
43,208,281
|
|
|
|
14.72
|
|
U.S. Midwest
|
|
|
29,251,885
|
|
|
|
9.96
|
|
International
|
|
|
24,950,000
|
|
|
|
8.50
|
|
U.S.
Mid-Atlantic
|
|
|
11,312,695
|
|
|
|
3.85
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
The 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 six months ended December 31, 2018,
the Company made investments in four new portfolio companies of approximately $33.1 million to which it was not previously contractually committed to provide financial support. During the six months ended December 31, 2018, the Company
made investments of $17.1 million in companies to which it was previously committed to provide financial support through the terms of the revolvers. The details of the 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)
December 31, 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 December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
|
Contracts
|
|
Credit Risk:
|
|
Total Return Swaps
|
|
$
|
|
|
|
$
|
(94,380)
|
|
|
$
|
152,000,000
|
|
|
|
2
|
|
Embedded Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
(94,380
|
)
|
|
|
|
|
|
|
152,000,000
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fair value of derivative contracts
|
|
|
(94,380
|
)
|
|
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivative contracts
|
|
|
(94,380
|
)
|
|
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
Collateral not offset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
(94,380
|
)
|
|
$
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the fair value and notional amount or number of contracts of the 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)
December 31, 2018
Note 4.
Investments (continued)
The following table reflects the amount of gains (losses) on derivatives included in the
Unaudited Consolidated Statements of Operations for the three and six months ended December 31, 2018 and December 31, 2017, respectively. None of the derivatives were designated as hedging instruments under U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net change in unrealized appreciation
(depreciation) on
investments and derivatives
|
|
|
|
For the three months ended December 31,
|
|
|
For the six months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total Return Swaps
|
|
$
|
(972,380
|
)
|
|
$
|
5,934,561
|
|
|
$
|
(324,298
|
)
|
|
$
|
5,214,614
|
|
Embedded Derivatives - Notes Payable
|
|
|
972,380
|
|
|
|
(5,934,561
|
)
|
|
|
324,298
|
|
|
|
(5,214,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d. Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency.
The valuation hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based
upon the lowest level of input that is significant to the fair value measurement. The 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)
December 31, 2018
Note 4.
Investments (continued)
The availability of observable inputs can vary from security to security and is affected by a
wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that
valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for
instruments categorized in Level 3.
Estimates of fair value for cash and restricted cash are measured using observable, quoted
market prices, or Level 1 inputs. All other fair value significant estimates are measured using unobservable inputs, or Level 3 inputs.
The following table summarizes the classifications within the fair value hierarchy of the Companys assets and liabilities measured at
fair value as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
192,079,797
|
|
|
$
|
192,079,797
|
|
Senior Secured Second Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
89,912,571
|
|
|
|
89,912,571
|
|
Unsecured Debt Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments
|
|
|
501,878
|
|
|
|
|
|
|
|
841,056
|
|
|
|
1,342,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
501,878
|
|
|
|
|
|
|
$
|
282,833,424
|
|
|
$
|
283,335,302
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivatives - Notes Payable
|
|
|
|
|
|
|
|
|
|
|
94,380
|
|
|
|
94,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
94,380
|
|
|
|
94,380
|
|
Total Assets
|
|
$
|
501,878
|
|
|
$
|
|
|
|
$
|
282,927,804
|
|
|
$
|
283,429,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(94,380
|
)
|
|
$
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
(94,380
|
)
|
|
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(94,380
|
)
|
|
$
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4.
Investments (continued)
The following table summarizes the classifications within the fair value hierarchy of the
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 six months ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
First Lien
Debt Investments
|
|
|
Senior Secured
Second Lien
Debt Investments
|
|
|
Unsecured
Debt
Investment
|
|
|
Equity, Warrants
and Other
Investments
|
|
|
Total
Investments
|
|
Balance as of June 30, 2018
|
|
$
|
165,136,316
|
|
|
$
|
127,200,954
|
|
|
$
|
731,742
|
|
|
$
|
523,001
|
|
|
$
|
293,592,013
|
|
Purchases (including PIK interest)
|
|
|
97,164,542
|
|
|
|
7,084,821
|
|
|
|
|
|
|
|
|
|
|
|
104,249,363
|
|
Sales
|
|
|
(68,419,564
|
)
|
|
|
(33,348,333
|
)
|
|
|
|
|
|
|
|
|
|
|
(101,767,898
|
)
|
Amortization
|
|
|
685,295
|
|
|
|
887,902
|
|
|
|
|
|
|
|
|
|
|
|
1,572,366
|
|
Net realized gains (losses)
|
|
|
93,750
|
|
|
|
(276,942
|
)
|
|
|
|
|
|
|
|
|
|
|
(183,192
|
)
|
Transfers in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
(2,580,542
|
)
|
|
|
(11,635,000
|
)
|
|
|
(731,742
|
)
|
|
|
318,055
|
|
|
|
(14,623,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
192,079,797
|
|
|
$
|
89,912,571
|
|
|
$
|
|
|
|
$
|
841,056
|
|
|
$
|
282,833,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2018
|
|
$
|
(2,286,087
|
)
|
|
$
|
(11,970,853
|
)
|
|
$
|
(731,742
|
)
|
|
$
|
47,813
|
|
|
$
|
(14,940,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4.
Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Return
Swaps
|
|
|
Embedded
Derivatives -
Notes
Payable
|
|
|
Total
Derivatives
|
|
Balance as of June 30, 2018
|
|
$
|
(229,918
|
)
|
|
$
|
229,918
|
|
|
$
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
324,298
|
|
|
|
(324,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
94,380
|
|
|
$
|
(94,380
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2018
|
|
$
|
5,924,881
|
|
|
$
|
(5,924,881
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use
Level 3 inputs for the six months ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
First Lien
Debt Investments
|
|
|
Senior Secured
Second Lien
Debt Investments
|
|
|
Unsecured
Debt
Investments
|
|
|
Equity, Warrants
and Other
Investments
|
|
|
Total
Investments
|
|
Balance as of June 30, 2017
|
|
$
|
127,103,981
|
|
|
$
|
126,593,792
|
|
|
$
|
|
|
|
$
|
1,209,398
|
|
|
$
|
254,907,171
|
|
Purchases (including PIK interest)
|
|
|
55,071,877
|
|
|
|
27,460,000
|
|
|
|
|
|
|
|
523,000
|
|
|
|
83,054,877
|
|
Sales
|
|
|
(39,749,453
|
)
|
|
|
(15,092,924
|
)
|
|
|
|
|
|
|
|
|
|
|
(54,842,377
|
)
|
Amortization
|
|
|
1,520,813
|
|
|
|
599,125
|
|
|
|
|
|
|
|
|
|
|
|
2,119,938
|
|
Net realized gains (losses)
|
|
|
(69,579
|
)
|
|
|
(7,311,110
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,380,690
|
)
|
Transfers in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,518,750
|
|
|
|
7,518,750
|
|
Transfers out
|
|
|
|
|
|
|
(7,518,750
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,518,750
|
)
|
Net change in unrealized (depreciation) appreciation
|
|
|
(295,722
|
)
|
|
|
3,851,876
|
|
|
|
823,695
|
|
|
|
4,292,400
|
|
|
|
8,672,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
143,581,917
|
|
|
$
|
128,582,008
|
|
|
$
|
823,695
|
|
|
$
|
13,543,548
|
|
|
$
|
286,531,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2017
|
|
$
|
(99,761
|
)
|
|
$
|
(8,230,453
|
)
|
|
$
|
823,695
|
|
|
$
|
4,292,399
|
|
|
$
|
(3,214,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Return
Swaps
|
|
|
Embedded
Derivatives -
Notes
Payable
|
|
|
Total
Derivatives
|
|
Balance as of June 30, 2017
|
|
$
|
(5,830,501
|
)
|
|
$
|
5,830,501
|
|
|
$
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
5,214,614
|
|
|
|
(5,214,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
(615,887
|
)
|
|
$
|
615,887
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2017
|
|
$
|
5,214,614
|
|
|
$
|
5,214,614
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4.
Investments (continued)
Transfers into Level 3 during or at the end of the reporting period are reported under
Level 1 or Level 2 as of the beginning of the period. Transfers out of Level 3 during or at the end of the reporting period are reported under Level 3 as of the beginning of the period. Changes in unrealized gains (losses)
relating to Level 3 instruments are included in net change in unrealized (depreciation) appreciation on investments and derivatives on the Unaudited Consolidated Statements of Operations.
During the three and six months ended December 31, 2018 and December 31, 2017, the Company did not transfer any investments among
Levels 1, 2 and 3.
The following tables present the ranges of significant unobservable inputs used to value the Companys
Level 3 investments as of December 31, 2018 and June 30, 2018. These ranges represent the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not representative of the inputs
that could have been used in the valuation of any one investment. For example, the highest market yield presented in the table for senior secured notes is appropriate for valuing a specific investment but may not be appropriate for valuing any other
investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Companys Level 3 investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
December 31, 2018
|
|
|
Valuation
Methodology
|
|
Unobservable
Input(s)
|
|
Weighted
Average
|
|
|
Range
|
Senior Secured First Lien Debt Investments
|
|
$
|
109,814,636
|
|
|
Yield Analysis
|
|
Market Yields
|
|
|
9.9
|
%
|
|
6.2% - 20.4%
|
Unitranche First Lien Debt Investments
|
|
|
11,612,863
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
14.4
|
%
|
|
11.9% - 16.9%
|
Senior Secured First Lien Debt Investments
|
|
|
12,843,773
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
8.4
|
%
|
|
7.4% - 20.4%
|
Senior Secured First Lien Debt Investments
|
|
|
12,214,224
|
|
|
Broker Quoted
|
|
Market Comparable
|
|
|
94.3
|
%
|
|
93.5% - 95.1%
|
Senior Secured First Lien Debt Investments
|
|
|
40,885,000
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
|
N/A
|
|
|
N/A
|
Senior Secured First Lien Debt Investments
|
|
|
4,709,302
|
|
|
Repayment Price
|
|
Repayment Price
|
|
|
N/A
|
|
|
N/A
|
Senior Secured Second Lien Debt Investments
|
|
|
67,974,000
|
|
|
Yield Analysis
|
|
Market Yield
|
|
|
12.3
|
%
|
|
9.7% - 85.8%
|
Senior Secure Second Lien Debt Investments
|
|
|
19,860,000
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
11.9
|
%
|
|
9.4% - 85.8%
|
Senior Secure Second Lien Debt Investments
|
|
|
2,078,571
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
|
N/A
|
|
|
N/A
|
Equity, Warrants, and Other Investments
|
|
|
841,056
|
|
|
EV Multiple
|
|
EBITDA Multiple
|
|
|
0.0x
|
|
|
0.0x - 0.0x
|
Equity, Warrants, and Other Investments
|
|
|
501,878
|
|
|
Market Price
|
|
Market Price
|
|
|
0.00x
|
|
|
0.00x - 0.00x
|
Total Return Swaps
|
|
|
94,380
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
N/A
|
|
|
N/A
|
Embedded Derivatives - Notes Payable
|
|
|
94,380
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
N/A
|
|
|
N/A
|
33
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4.
Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
June 30, 2018
|
|
|
Valuation
Methodology
|
|
Unobservable
Input(s)
|
|
Weighted
Average
|
|
|
Range
|
Senior Secured First Lien Debt Investments
|
|
$
|
40,599,649
|
|
|
Yield Analysis
|
|
Market Yields
|
|
|
10.3
|
%
|
|
6.7% - 16.4%
|
Unitranche First Lien Debt Investments
|
|
|
12,286,453
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
17.2
|
%
|
|
15.7% - 18.7%
|
Senior Secured First Lien Debt Investments
|
|
|
65,321,315
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
8.2
|
%
|
|
5.7% - 11.7%
|
Senior Secured First Lien Debt Investments
|
|
|
12,935,744
|
|
|
Broker Quoted
|
|
Market Comparable
|
|
|
98.0
|
%
|
|
97.0% - 99.0%
|
Senior Secured First Lien Debt Investments
|
|
|
37,859,599
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
|
N/A
|
|
|
N/A
|
Senior Secured Second Lien Debt Investments
|
|
|
53,340,953
|
|
|
Yield Analysis
|
|
Market Yields
|
|
|
18.8
|
%
|
|
10.7% - 43.5%
|
Senior Secured Second Lien Debt Investments
|
|
|
69,993,557
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
11.6
|
%
|
|
7.6% - 16.2%
|
Equity, Warrants, and Other Investments
|
|
|
1,254,743
|
|
|
EV Multiple
|
|
EBITDA Multiple
|
|
|
0.0x
|
|
|
0.0x - 0.0x
|
Total Return Swaps
|
|
|
(229,918
|
)
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
N/A
|
|
|
N/A
|
Embedded Derivatives - Notes Payable
|
|
|
229,918
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
N/A
|
|
|
N/A
|
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or
methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair
value measurements.
Note 5. Notes Payable
On May 23, 2013, as amended on June 6, 2013, December 4, 2013, September 26, 2014, July 20,
2015, August 14, 2015, February 28, 2017 and November 20, 2017, the Company, through SPV, entered into a $102.0 million financing transaction (the Term Financing) due December 5, 2020 with UBS. The Term
Financing is collateralized by the portion of the 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 December 31, 2018 and June 30, 2018, there were $102.0 million and $102.0 million borrowings outstanding under the Term Financing, respectively.
34
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 5. Notes
Payable (continued)
On December 4, 2013, as amended on September 26, 2014 and July 17, 2015, the
Company, through SPV, entered into a $50.0 million revolving financing (the 2013 UBS Revolving Financing), which expired in accordance with its terms on December 5, 2016. As of December 31, 2018 and June 30, 2018,
there were no borrowings outstanding under the 2013 UBS Revolving Financing. From December 4, 2013 through September 24, 2014, the 2013 UBS Revolving Financing bore interest at a fixed rate of 2.10% per annum on drawn amounts and
0.50% per annum on any undrawn portion. From September 26, 2014 through December 5, 2016, the 2013 UBS Revolving Financing bore interest at a fixed rate of 2.00% on drawn amounts and 0.50% per annum on any undrawn portion.
The initial financing transaction with UBS executed in four steps:
First, the Company organized SPV, a consolidated wholly owned bankruptcy remote special purpose vehicle in the Cayman Islands to purchase the
SPV Assets through (i) the issuance and sale of notes secured by the SPV Assets (the Term Notes) to UBS and the Company and (ii) the transfer of cash to the Company. UBS purchased Term Notes with a face value of
$76.5 million, which represent 51% of the Term Notes issued and outstanding, for $76.5 million in cash. The Company purchased Term Notes with a face value of $73.5 million (which are eliminated in consolidation), which represent 49%
of the Term Notes issued and outstanding. Under the terms of the indenture under which the Term Notes were issued (the Indenture), the holders of the Term Notes are entitled to (i) periodic interest payments equal to their pro rata
portion of the interest collected on the assets held by SPV and (ii) their
pro-rata
portion of the net appreciation (depreciation) on the SPV Assets at maturity (the Total Return of the Term
Notes). This represents the embedded derivative in the Term Notes payable from SPV to UBS. On September 26, 2014, the Company increased the size of the Term Facility to $102.0 million. In connection with the upsize, UBS purchased
additional Term Notes with a face value of $25.5 million for $25.5 million in cash. The Company also purchased additional Term Notes with a face value of $24.5 million.
Second, the Company and UBS entered into a TRS transaction whereby the Company would receive the Total Return of the Term Notes purchased by
UBS and pay the Financing Rate.
Third, SPV issued and sold an additional $50.0 million notes (the 2013 Revolving Notes)
secured by the SPV Assets to UBS. Cash was only exchanged when the 2013 Revolving Notes were drawn. Under the terms of the Indenture under which the 2013 Revolving Notes were issued (the 2013 Revolver Indenture), the holders of the 2013
Revolving Notes were entitled to (i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their
pro-rata
portion of the net appreciation
(depreciation) on the SPV Assets at maturity (the Total Return of the 2013 Revolving Notes).
Fourth, the Company and UBS
entered into another TRS transaction whereby the Company would receive the Total Return of the Revolving Notes purchased by UBS and pay the revolver financing rate. On December 5, 2016, the 2013 Revolving Notes matured and the corresponding TRS
transaction associated with the 2013 Revolving Notes unwound in unison. On November 20, 2017, the Company and UBS entered into another TRS transaction whereby the Company will receive the total return of the $50 million notes (the
2017 Revolving Notes) purchased by UBS and pay the Revolver Financing Rate (defined below).
35
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 5. Notes
Payable (continued)
On November 20, 2017, the Company entered into a $50 million revolving financing
facility (the 2017 UBS Revolving Financing) with UBS. Borrowings under the 2017 UBS Revolving Financing generally bear interest at a rate per annum equal to
one-month
LIBOR plus 3.55% (the
Revolver Financing Rate). The Company pays a fee on any undrawn amounts of 2.50% per annum; provided that if 50% or less of the 2017 UBS Revolving Financing is drawn, the fee will be 2.75% per annum. Any amounts borrowed under
the 2017 UBS Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on December 5, 2019. As of December 31, 2018, there were no borrowings outstanding under the 2017 UBS Revolving Financing. As of
June 30, 2018, there were $17.8 million in borrowings outstanding under the 2017 UBS Revolving Financing.
As of December 31, 2017,
SPV issued and sold an additional $50.0 million notes (the 2017 Revolving Notes) secured by the SPV Assets to UBS. Cash is only exchanged when the 2017 Revolving Notes are drawn. Under the terms of the Indenture under which the 2017
Revolving Notes were issued (the 2017 Revolver Indenture), the holders of the 2017 Revolving Notes are entitled to (i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and
(ii) their
pro-rata
portion of the net appreciation (depreciation) on the SPV Assets at maturity (the Total Return of the 2017 Revolving Notes).
The fair value of the Companys Notes Payable is estimated based on the rate at which similar facilities would be priced. At
December 31, 2018 and June 30, 2018, the fair value of the Notes Payable was estimated at $102.0 million and $119.8 million, respectively, which the Company concluded was a Level 3 fair value.
On November 9, 2016, the Company entered into the $50.0 million Senior Secured Revolving Credit Facility (the Citi Revolving
Financing) with Citibank, N.A. (Citibank), which was secured by collateral consisting primarily of commercial loans and corporate bonds. There were no upfront costs paid in the establishment of the Citi Revolving Financing.
Borrowings under the Citi Revolving Financing generally bore interest at a rate per annum equal to LIBOR plus 4.85%. The default interest rate
was equal to the interest rate then in effect plus 2.00%. The Citi Revolving Financing required the payment of an unused fee of 2.85% annually for any undrawn amounts below 75% of the Citi Revolving Financing, and 0.75% annually for any undrawn
amounts above 75% of the Citi Revolving Financing. Borrowings under the Citi Revolving Financing were based on a borrowing base. The Citi Revolving Financing generally required payment of interest on a quarterly basis and all outstanding principal
was due upon maturity. The Citi Revolving Financing also required mandatory prepayment of interest and principal upon certain events.
The
Company has repaid in full all indebtedness, liabilities and other obligations under, and terminated, its Citi Revolving Financing on December 8, 2017. In accordance with the termination of the Citi Revolving Financing, all liens on collateral
securing the Citi Revolving Financing were released.
On July 2, 2018, the Company closed the public offering of $30 million in
aggregate principal amount of 6.125% notes due 2023 (the Notes). On July 12, 2018, the underwriters exercised their over-allotment option to purchase an additional $4.5 million in aggregate principal amount of the Notes. The
total net proceeds to the Company from the Notes, including the exercise of the underwriters over-allotment option, after deducting underwriting discounts and commissions of approximately $1.0 million and estimated offering expenses of
approximately $230,000, were approximately $33.2 million.
36
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 5. Notes
Payable (continued)
The Notes will mature on July 1, 2023 and bear interest at a rate of 6.125%. The Notes
are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by the Company. Because the Notes are not secured by any of the 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 December 31, 2018, the outstanding principal balance of the Notes was approximately $34.5 million and had an estimated fair
value of $34.1 million based on the closing price as of December 31, 2018 as traded on NASDAQ.
Cash, restricted (as shown on
the Unaudited Consolidated Statements of Assets and Liabilities) is held by the trustee of the Term Financing and the 2017 UBS Revolving Financing, and the Citi Revolving Financing up until its expiration, and is restricted to purchases of
investments by SPV and LLC that must meet certain eligibility criteria identified by the Indenture. As of December 31, 2018, SPV and LLC had aggregate assets of $202.6 million, which included $197.2 million of the Companys portfolio
investments at fair value, $1.8 million of accrued interest receivable and $3.6 million in cash held by the trustees of the Term Financing and the 2017 UBS Revolving Financing (together, the UBS Financing Facility, and with the
Citi Revolving Financing, the Financing Facilities). As of June 30, 2018, SPV and LLC had aggregate assets of $234.5 million, which included $232.8 million of the 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 and six months ended December 31, 2018, the weighted average outstanding debt balance and the weighted
average stated interest rate under the Financing Facilities was $112.9 million and 5.07%, respectively and $108.8 million and 5.12%, respectively. For the three and six months ended December 31, 2017, the weighted average outstanding debt
balance and the weighted average stated interest rate under the Financing Facilities was $122.3 million and 4.35%, respectively and $118.6 million and 4.28%, respectively.
Note 6. Indemnification, Guarantees, Commitments and Contingencies
In the normal course of business, the Company enters into contracts that provide a variety of representations and warranties and general
indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve future claims that may be made against the
Company; however, based on the 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)
December 31, 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
|
November 6, 2018
|
|
December 13, 2018
|
|
December 14, 2018
|
|
January 3, 2019
|
|
$0.2500
|
|
2nd 2019
|
Loans purchased by the Company may include revolving credit agreements or other financing commitments
obligating the Company to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
The following table details the unfunded commitments as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
Unfunded
Commitment
|
|
|
Fair
Value
|
|
|
Annual
Non-use
Fee
|
|
|
Expiration
Date
|
|
1888 Industrial Services, LLC
|
|
$
|
891,089
|
|
|
$
|
|
|
|
|
7.80
|
|
|
|
9/30/21
|
|
PR Wireless, Inc.
|
|
|
1,292,534
|
|
|
|
|
|
|
|
0.35
|
|
|
|
6/27/19
|
|
Sears Holding Company Delayed Draw
|
|
|
7,857,143
|
|
|
|
|
|
|
|
0.75
|
|
|
|
7/31/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments
|
|
$
|
10,040,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the unfunded commitments as of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
Unfunded
Commitment
|
|
|
Fair
Value
|
|
|
Annual
Non-use
Fee
|
|
|
Expiration
Date
|
|
1888 Industrial Services, LLC
|
|
$
|
693,069
|
|
|
$
|
|
|
|
|
0.50
|
|
|
|
9/30/21
|
|
PR Wireless, Inc.
|
|
|
1,846,478
|
|
|
|
|
|
|
|
0.35
|
|
|
|
6/27/19
|
|
U.S. Well Services, LLC
|
|
|
215,004
|
|
|
|
|
|
|
|
|
|
|
|
1/31/22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments
|
|
$
|
2,754,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Agreements and Related Party Transactions
Investment Advisory Agreement
Pursuant to
the Advisory Agreement, the Company has agreed to pay to the Adviser a base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and fair value of
derivatives associated with the Companys financing, and an incentive fee consisting of two parts.
38
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 7.
Agreements and Related Party Transactions (continued)
The first part of the incentive fee, which is calculated and payable quarterly in arrears,
equals 20.0% of the
pre-incentive
fee net investment income (as defined in the agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized),
and is subject to a
catch-up
feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the 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 and six months
ended December 31, 2018, $1,405,207 and $2,757,152 in base management fees were earned by the Adviser, of which $1,405,297 was payable at December 31, 2018. For the three and six months ended December 31, 2017, $1,161,353 and
$2,315,233 in base management fees were earned by the Adviser, of which $2,315,233 was payable at December 31, 2017.
For the three
and six months ended December 31, 2018, the Company incurred $753,721 and $874,042 of incentive fees related to
pre-incentive
fee net investment income, of which $22,000 was waived. As of
December 31, 2018, $1,566,513 of such incentive fees are currently payable to the Adviser and $693,771 of
pre-incentive
fees incurred by the Company were generated from deferred interest (i.e. PIK and
certain discount accretion) and are not payable until such amounts are received in cash. For the three and six months ended December 31, 2017, the Company incurred $921,782 and $906,758, respectively, of incentive fees related to
pre-incentive
fee net investment income. As of December 31, 2017, $1,162,320 of incentive fees were currently payable to the Adviser and $414,939 of
pre-incentive
fees
incurred by the Company were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are received in cash.
The capital gains incentive fee consists of fees related to both realized gains, realized capital losses and unrealized capital depreciation.
With respect to the incentive fee expense accrual relating to the capital gains incentive fee, U.S. GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a capital
gains incentive fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Advisory Agreement. As of
December 31, 2018, there was no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of June 30, 2018, there was no capital gains incentive fee accrued, earned or payable to the Adviser
under the Advisory Agreement.
39
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 7.
Agreements and Related Party Transactions (continued)
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and
any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from the
rendering of the 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 $341,633 and $679,696 under the Administration Agreement for the three and six months ended December 31, 2018. The Company incurred costs of $184,561 and $311,790 under the Administration
Agreement for the three and six months ended December 31, 2017, respectively.
As of December 31, 2018 and June 30, 2018,
the Company recorded no accrued expenses or other liabilities on its Unaudited Consolidated Statements of Assets and Liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement.
License Agreement
The Company has
entered into a license agreement with the Adviser under which the Adviser has agreed to grant the Company a
non-exclusive,
royalty-free license to use the name CM Finance. Under this agreement, the
Company has a right to use the CM Finance name for so long as the Adviser or one of its affiliates remains the Adviser. Other than with respect to this limited license, the Company has no legal right to the CM Finance name.
40
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 7.
Agreements and Related Party Transactions (continued)
Stifel Arrangement
In December 2013, the Company entered into an arrangement pursuant to which Stifel Venture Corp. (Stifel) made a capital
contribution to the Company on February 5, 2014 and the Company granted Stifel certain rights, such as a right to nominate for election a member of the 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 December 31, 2018, three of the investment professionals
employed by the Adviser as part of its investment team were also employees of Stifel, Nicolaus & Company, Incorporated or its affiliates and were members of the Advisers investment committee designated by Stifel. Although these three
investment professionals dedicated substantially all of their time to the business and activities of the Adviser, they are dual employees of both Stifel, Nicolaus & Company, Incorporated or its affiliates and the Adviser. In addition, a
member of the 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 December 31, 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 and six months ended December 31, 2018, the Company recorded directors fees of $101,250 and $202,500, of which
$93,448 were payable at December 31, 2018. For the three and six months ended December 31, 2017, the Company recorded directors fees of $99,000 and $198,667, of which $96,746 were payable at December 31, 2017.
Note 9. Net Change in Net Assets Resulting from Operations Per Share
Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding
during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
41
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 9. Net
Change in Net Assets Resulting from Operations Per Share (continued)
The following table sets forth the computation of the weighted average basic and diluted net
increase in net assets per share from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Increase (Decrease)
in Net Assets Per Share
|
|
|
|
Three months ended December 31,
|
|
|
Six months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(9,382,296
|
)
|
|
$
|
4,859,147
|
|
|
$
|
(7,954,255
|
)
|
|
$
|
7,994,863
|
|
Weighted average shares of common stock outstanding
|
|
|
13,638,869
|
|
|
|
13,690,480
|
|
|
|
13,644,483
|
|
|
|
13,690,182
|
|
Basic/diluted net increase (decrease) in net assets from operations per share
|
|
$
|
(0.69
|
)
|
|
$
|
0.35
|
|
|
$
|
(0.58
|
)
|
|
$
|
0.58
|
|
Note 10. Distributions
The following table reflects the cash dividend distributions per share that the Company declared and/or paid to its stockholders since the
Offering in February 2014. Stockholders of record as of each respective record date were entitled to receive the distribution:
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Amount
Per
Share
|
|
March 14, 2014
|
|
March 24, 2014
|
|
March 31, 2014
|
|
$
|
0.1812
|
|
May 14, 2014
|
|
June 16, 2014
|
|
July 1, 2014
|
|
$
|
0.3375
|
|
September 4, 2014
|
|
September 18, 2014
|
|
October 1, 2014
|
|
$
|
0.3375
|
|
November 6, 2014
|
|
December 18, 2014
|
|
January 5, 2015
|
|
$
|
0.3375
|
|
January 28, 2015
|
|
March 18, 2015
|
|
April 2, 2015
|
|
$
|
0.3469
|
|
May 6, 2015
|
|
June 8, 2015
|
|
July 5, 2015
|
|
$
|
0.3469
|
|
June 10, 2015*
|
|
September 1, 2015
|
|
September 15, 2015
|
|
$
|
0.4300
|
|
June 10, 2015
|
|
September 18, 2015
|
|
October 2, 2015
|
|
$
|
0.3469
|
|
November 3, 2015
|
|
December 18, 2015
|
|
January 5, 2016
|
|
$
|
0.3469
|
|
February 2, 2016
|
|
March 18, 2016
|
|
April 7, 2016
|
|
$
|
0.3516
|
|
April 28, 2016
|
|
June 17, 2016
|
|
July 7, 2016
|
|
$
|
0.3516
|
|
August 25, 2016
|
|
September 16, 2016
|
|
October 6, 2016
|
|
$
|
0.3516
|
|
November 3, 2016
|
|
December 16, 2016
|
|
January 5, 2017
|
|
$
|
0.3516
|
|
November 3, 2016
|
|
March 17, 2017
|
|
April 6, 2017
|
|
$
|
0.2500
|
|
May 2, 2017
|
|
June 16, 2017
|
|
July 6, 2017
|
|
$
|
0.2500
|
|
August 24, 2017
|
|
September 8, 2017
|
|
October 5, 2017
|
|
$
|
0.2500
|
|
November 7, 2017
|
|
December 15, 2017
|
|
January 4, 2018
|
|
$
|
0.2500
|
|
February 6, 2018
|
|
March 16, 2018
|
|
April 5, 2018
|
|
$
|
0.2500
|
|
May 2, 2018
|
|
June 15, 2018
|
|
July 5, 2018
|
|
$
|
0.2500
|
|
August 23, 2018
|
|
September 18, 2018
|
|
October 5, 2018
|
|
$
|
0.2500
|
|
November 6, 2018
|
|
December 14, 2018
|
|
January 3, 2019
|
|
$
|
0.2500
|
|
42
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 10.
Distributions (continued)
The following table
reflects, for U.S. federal income tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the six months ended December 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Distribution Amount
|
|
|
Percentage
|
|
|
Distribution Amount
|
|
|
Percentage
|
|
Ordinary income and short-term capital gains
|
|
$
|
6,823,243
|
|
|
|
100
|
%
|
|
$
|
6,845,051
|
|
|
|
100
|
%
|
Long-term capital gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,823,243
|
|
|
|
100
|
%
|
|
$
|
6,845,051
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. Share Repurchase Program
As described in Note 2, the Company has a share repurchase program under which the Company may repurchase up to $5.0 million shares of its
common stock until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of its common stock. During the three and six months ended December 31, 2018, the Company repurchased 30,999 and
42,214 shares of its common stock on the open market for $257,336 and $358,573. The Companys NAV per share increased by $0.01 for the three and six months ended December 31, 2018 as a result of the share repurchases. The following table
summarizes the Companys share repurchases under the share repurchase program for the six months ended December 31, 2018 and December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Number of shares repurchased
|
|
|
30,999
|
|
|
|
|
|
|
|
42,214
|
|
|
|
|
|
Cost of shares repurchased, including commissions
|
|
$
|
257,336
|
|
|
|
|
|
|
$
|
358,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average price per share
|
|
$
|
8.25
|
|
|
|
|
|
|
$
|
8.44
|
|
|
|
|
|
Net asset value per share at period end
|
|
$
|
11.49
|
|
|
|
|
|
|
$
|
11.49
|
|
|
|
|
|
Weighted average discount to period end net asset value
|
|
|
28.19
|
%
|
|
|
|
|
|
|
26.52
|
%
|
|
|
|
|
Note 12. Share Transactions
The following table summarizes the total shares issued for the six months ended December 31, 2018 and December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance at beginning of period
|
|
|
13,649,504
|
|
|
$
|
200,203,363
|
|
|
|
13,689,221
|
|
|
$
|
200,568,530
|
|
Reinvestments of stockholder distributions
|
|
|
5,826
|
|
|
|
49,707
|
|
|
|
1,259
|
|
|
|
11,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of repurchased shares
|
|
|
(42,214
|
)
|
|
|
(358,531
|
)
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
13,613,116
|
|
|
$
|
199,894,539
|
|
|
|
13,690,480
|
|
|
$
|
200,580,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 13.
Financial Highlights
The following represents
the per share data and the ratios to average net assets for CM Finance Inc:
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Per Share Data:
(1)
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
12.57
|
|
|
$
|
12.41
|
|
|
|
|
Net investment income
|
|
|
0.52
|
|
|
|
0.49
|
|
Net realized and unrealized gains (losses)
|
|
|
(1.11
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
(0.59
|
)
|
|
|
0.59
|
|
|
|
|
Capital transactions
(2)
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
0.01
|
|
|
|
|
|
Dividends from net investment income
|
|
|
(0.50
|
)
|
|
|
(0.50
|
)
|
Distributions from net realized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from capital transactions
|
|
|
(0.49
|
)
|
|
|
(0.50
|
)
|
|
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
11.49
|
|
|
$
|
12.50
|
|
|
|
|
|
|
|
|
|
|
Market value per share, end of period
|
|
$
|
8.60
|
|
|
$
|
8.15
|
|
|
|
|
Total return based on market
value
(3)
|
|
|
(24.58
|
)%
|
|
|
(13.65
|
)%
|
|
|
|
Shares outstanding at end of period
|
|
|
13,613,116
|
|
|
|
13,690,480
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
Net assets, at end of period
|
|
$
|
156,436,308
|
|
|
$
|
171,109,737
|
|
Ratio of total expenses to average net assets
|
|
|
12.72
|
%
|
|
|
9.88
|
%
|
Ratio of net expenses to average net assets
|
|
|
12.69
|
%
|
|
|
9.88
|
%
|
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net
assets
|
|
|
5.86
|
%
|
|
|
3.90
|
%
|
Ratio of net investment income before fee waiver to average net assets
|
|
|
8.65
|
%
|
|
|
7.81
|
%
|
Ratio of net investment income after fee waiver to average net assets
|
|
|
8.68
|
%
|
|
|
7.81
|
%
|
Total Notes Payable
|
|
|
136,500,000
|
|
|
|
119,830,000
|
|
Asset Coverage Ratio
(6)
|
|
|
2.15
|
|
|
|
2.46
|
|
Portfolio Turnover Rate
|
|
|
32
|
%
|
|
|
20
|
%
|
*
|
Net asset value at beginning of period reflects the deduction of the sales load of $0.25 per share paid by the
stockholder from the $15.00 offering price.
|
(1)
|
The per share data was derived by using the shares outstanding during the period.
|
(2)
|
The per share data for dividends and distributions declared reflects the actual amount of the dividends and
distributions declared per share during the period.
|
(3
)
|
Total returns are historical and are calculated by determining the percentage change in the market value with
all dividends distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the 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.
|
(7)
|
For the period from February 6, 2014 through June 30, 2014.
|
44
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 14. Other Fee Income
The other fee income consists of structuring fee income, amendment fee income and royalty income. The following tables summarize the
Companys other fee income for the three and six months ended December 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended December 31,
|
|
|
For the six months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Loan Amendment/Consent Fee
|
|
$
|
277,365
|
|
|
$
|
|
|
|
$
|
432,520
|
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Fee Income
|
|
$
|
277,365
|
|
|
$
|
|
|
|
$
|
432,520
|
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Tax Information
As of December 31, 2018, the Companys aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal
income tax purposes were as follows:
|
|
|
|
|
Tax cost
|
|
$
|
307,290,045
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
4,357,482
|
|
Gross unrealized depreciation
|
|
|
(28,312,222
|
)
|
|
|
|
|
|
Net unrealized investment depreciation
|
|
$
|
(23,954,740
|
)
|
|
|
|
|
|
As of June 30, 2018, the 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 February 5, 2019, our board of directors declared a distribution for the quarter ended March 31, 2019 of $0.25 per share payable
on April 4, 2019 to stockholders of record as of March 15, 2019.
45