Investcorp Credit Management BDC, Inc. - FORM 10-Q

Investcorp Credit Management BDC, Inc. - FORM 10-Q - February 8, 2017

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2016

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

COMMISSION FILE NUMBER: 814-01054

CM FINANCE INC

(Exact Name of Registrant as Specified in Its Charter)

Maryland

46-2883380

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

601 Lexington Avenue

26th Floor

New York, NY 10022

(Address of Principal Executive Offices) (Zip Code)

(212) 257-5199

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of February 7, 2017 was 13,688,441.

CM FINANCE INC

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Assets and Liabilities as of December 31, 2016 (unaudited) and June 30, 2016		3
	Consolidated Statements of Operations for the three months ended December 31, 2016 (unaudited) and December 31, 2015 (unaudited)		4
	Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2016 (unaudited) and December 31, 2015 (unaudited)		5
	Consolidated Statements of Cash Flows for the three months ended December 31, 2016 (unaudited) and December 31, 2015 (unaudited)		6
	Consolidated Schedule of Investments as of December 31, 2016 (unaudited) and June 30, 2016		7
	Notes to Unaudited Consolidated Financial Statements (unaudited)		11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		40
Item 4.	Controls and Procedures		41

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		41
Item 1A.	Risk Factors		41
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3.	Defaults Upon Senior Securities		41
Item 4.	Mine Safety Disclosures		42
Item 5.	Other Information		42
Item 6.	Exhibits		42

SIGNATURES		43

CM Finance Inc and subsidiaries

Consolidated Statements of Assets and Liabilities


	December 31, 2016 (Unaudited)			June 30, 2016
Assets
Non-controlled, non-affiliated investments, at fair value (amortized cost of $268,644,626 and $307,364,949, respectively)	$	245,398,868		$	272,114,164
Derivatives, at fair value (cost $0 and $0, respectively)		6,483,333			9,071,659
Cash		26,569,817			18,433,066
Cash, restricted		27,792,121			18,023,466
Interest receivable		1,530,437			1,897,710
Deferred offering costs		186,513			186,513
Prepaid expenses and other assets		1,125			234,837

Total Assets	$	307,962,214		$	319,961,415

Liabilities
Notes Payable:
Term loan	$	102,000,000		$	102,000,000
Revolving credit facility		14,332,649			30,478,329
Deferred debt issuance costs		(782,100	)		(1,510,491	)

Notes Payable, net		115,550,549			130,967,838
Base management fees payable		2,395,481			1,257,768
Income-based incentive fees payable		1,167,813			275,540
Payable for investments purchased		9,965,000			8,828,750
Derivatives, at fair value (cost $0 and $0, respectively)		6,483,333			9,071,659
Dividend payable		4,812,446			4,809,778
Deferred financing costs payable		620,500			879,042
Interest payable		262,216			175,792
Accrued expenses and other liabilities		650,825			945,365

Total Liabilities		141,908,163			157,211,532

Commitments and Contingencies (Note 6)

Net Assets
Common Stock, par value $0.001 per share (100,000,000 shares authorized, 13,687,280 and 13,679,686 shares issued and outstanding, respectively)		13,687			13,680
Additional paid-in capital		199,790,758			199,722,997
Accumulated net realized loss		(7,988,787	)		—
Distributions in excess of net investment income		(2,515,849	)		(1,736,009	)
Net unrealized depreciation on investments		(23,245,758	)		(35,250,785	)

Total Net Assets		166,054,051			162,749,883

Total Liabilities and Net Assets	$	307,962,214		$	319,961,415

Net Asset Value Per Share	$	12.13		$	11.90

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Consolidated Statements of Operations (Unaudited)


	For the three months ended December 31,						For the six months ended December 31,
	2016			2015			2016			2015
Investment Income:
Interest income	$	8,792,597		$	8,707,519		$	16,160,979		$	18,303,132
Payment in-kind interest income		—			721,364			—			960,603
Other fee income		359,494			529,819			575,961			563,561

Total investment income		9,152,091			9,958,702			16,736,940			19,827,296

Expenses:
Base management fees		1,183,946			1,444,998			2,395,481			2,897,155
Income-based incentive fees		1,095,515			—			1,095,515			1,229,032
Interest expense		1,037,818			1,007,104			2,029,208			1,992,092
Amortization of deferred debt issuance costs		364,195			364,195			728,391			712,654
Professional fees		229,804			172,434			424,393			464,768
Allocation of administrative costs from advisor		148,710			161,180			416,952			438,131
Custodian and administrator fees		107,473			136,038			216,162			222,682
Directors’ fees		99,999			96,750			199,999			211,500
Insurance expense		92,651			102,443			185,211			188,646
Other expenses		123,210			158,475			406,055			287,031

Total expenses		4,483,321			3,643,617			8,097,367			8,643,691
Waiver of income-based incentive fees		(203,242	)		—			(203,242	)		—

Net expenses		4,280,079			3,643,617			7,894,125			8,643,691

Net investment income		4,872,012			6,315,085			8,842,815			11,183,605

Net realized and unrealized gains (losses) on investment transactions:
Net realized gains (losses) on investments		39,502			106,604			(7,988,787	)		301,924
Net change in unrealized appreciation (depreciation) on investments and unfunded commitments		3,642,584			(21,819,026	)		12,005,027			(26,714,703	)

Net realized and unrealized gains (losses)		3,682,086			(21,712,422	)		4,016,240			(26,412,779	)

Net increase (decrease) in net assets resulting from operations	$	8,554,098		$	(15,397,337	)	$	12,859,055		$	(15,229,174	)

Basic and diluted:
Net investment income per share	$	0.36		$	0.46		$	0.64		$	0.82
Earnings (loss) per share	$	0.62		$	(1.13	)	$	0.94		$	(1.11	)
Weighted Average Shares of Common Stock Outstanding		13,686,865			13,671,273			13,683,841			13,669,733

Distributions paid per common share	$	0.3516		$	0.3469		$	0.7032		$	1.1238

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Consolidated Statements of Changes in Net Assets (Unaudited)


	For the six months ended December 31,
	2016			2015
Net assets at beginning of period	$	162,749,883		$	196,950,849

Increase (decrease) in net assets resulting from operations
Net investment income		8,842,815			11,183,605
Net realized gain (loss) on investments		(7,988,787	)		301,924
Net change in unrealized appreciation (depreciation) on investments and unfunded commitments		12,005,027			(26,714,703	)

Net increase (decrease) in net assets from operations		12,859,055			(15,229,174	)

Stockholder distributions
Dividend from net investment income		(9,622,655	)		(10,995,215	)
Distributions from net realized gains		—			(4,366,660	)

Net decrease in net assets resulting from stockholder distributions		(9,622,655	)		(15,361,875	)

Capital transactions
Reinvestments of stockholder distributions		67,768			45,363

Net increase in net assets resulting from capital transactions		67,768			45,363

Total increase (decrease) in net assets		3,304,168			(30,545,686	)

Net assets at end of period (including distributions in excess of net investment income of $(2,515,849) and $(224,523), respectively)	$	166,054,051		$	166,405,163

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	For the six months ended December 31,
	2016			2015
Cash Flows from Operating Activities
Net increase (decrease) in net assets resulting from operations	$	12,859,055		$	(15,229,174	)

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Origination and purchases of investments		(48,982,799	)		(49,695,702	)
Payment in-kind interest		—			(960,603	)
Sales and repayments of investments		81,125,266			62,943,320
Net realized loss (gain) on investments in securities		7,988,787			(301,924	)
Net change in unrealized (appreciation) depreciation on investments and unfunded commitments		(12,005,027	)		26,714,703
Amortization of discount/premium on investments		(1,410,931	)		(1,149,087	)
Amortization of deferred debt issuance costs		728,391			712,654
Net (increase) decrease in operating assets:
Cash, restricted		(9,768,655	)		(6,245,207	)
Interest receivable		367,273			346,177
Prepaid expenses and other assets		233,712			178,669
Net increase (decrease) in operating liabilities:
Payable for investments purchased		1,136,250			(2,876,132	)
Interest payable		86,424			17,706
Accrued expenses and other liabilities		(294,540	)		209,130
Base management fees payable		1,137,713			1,476,177
Income-based incentive fees payable		892,273			(219,562	)

Net Cash Provided by Operating Activities		34,093,192			15,921,145

Cash Flows from Financing Activities
Payment for deferred financing costs		(258,542	)		(1,266,458	)
Distributions to shareholders		(9,552,219	)		(15,315,111	)
Proceeds from borrowing on revolving credit facility		18,532,649			34,939,022
Repayments of borrowing on revolving credit facility		(34,678,329	)		(39,394,801	)

Net Cash Used in Financing Activities		(25,956,441	)		(21,037,348	)

Net Change in Cash		8,136,751			(5,116,203	)

Cash
Beginning of period		18,433,066			21,535,492

End of period	$	26,569,817		$	16,419,289


Supplemental and non-cash financing cash flow information:
Cash paid for interest	$	1,942,784		$	1,974,386
Issuance of shares pursuant to Dividend Reinvestment Plan		67,768			45,363

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Consolidated Schedule of Investments

(Unaudited)

December 31, 2016


Investments⁽¹⁾	Industry	Interest Rate	Base Floor Rate		Maturity Date		Principal Amount/ Shares⁽²⁾		Amortized Cost		Fair Value			% of Net Assets
Non-Controlled/Non-Affiliates
Senior Secured First Lien Debt Investments
AAR Intermediate Holdings, LLC - Revolver⁽³⁾	Oilfield Services	1M L + 5.00%		1.00%		9/30/2021	$	237,624	$	237,624	$	237,624			0.14	%
AAR Intermediate Holdings, LLC - Term A	Oilfield Services	1M L + 5.00%		1.00%		9/30/2021		4,950,495		4,950,495		4,950,495			2.98	%
AAR Intermediate Holdings, LLC - Term B⁽⁴⁾	Oilfield Services	1M L + 8.00% PIK		1.00%		9/30/2021		10,166,879		4,392,772		4,951,270			2.98	%
American Gaming Systems, Inc.⁽⁵⁾	Entertainment and Leisure	3M L + 8.25%		1.00%		12/21/2020		29,284,177		28,969,059		28,844,915			17.37	%
Dayton Superior Corporation⁽⁶⁾	Construction & Building	1M L + 8.00%		1.00%		11/9/2021		10,000,000		9,700,000		9,700,000			5.84	%
FPC Holdings, Inc.⁽⁵⁾	Trucking and Leasing	1M L + 4.00%		1.25%		11/19/2019		9,857,285		8,654,660		9,265,847			5.58	%
Land Holdings I, LLC⁽⁵⁾	Entertainment and Leisure	12.00%		—		6/26/2019		11,162,500		11,129,538		11,329,937			6.82	%
Montreign Operating Company, LLC⁽⁷⁾	Gaming and Leisure	1M L + 8.25%		1.00%		12/7/2022		8,000,000		7,985,000		7,985,000			4.81	%
PR Wireless, Inc.⁽⁵⁾	Telecommunications	3M L + 9.00%		1.00%		6/27/2020		16,575,000		15,461,395		14,420,250			8.68	%
Premiere Global Services, Inc.⁽⁷⁾	Business Services	1M L + 6.50%		1.00%		12/8/2021		11,685,126		10,915,485		11,568,275			6.97	%
Redbox Automated Retail, LLC⁽⁶⁾	Retail	1M L + 7.50%		1.00%		9/23/2021		9,562,500		9,275,625		9,275,625			5.59	%
School Specialty, Inc.⁽⁶⁾	Business Services	1M L + 8.50%		1.00%		6/11/2019		9,335,313		9,181,861		9,335,313			5.62	%
U.S. Well Services, LLC	Oilfield Services	1M L + 11.50%		0.50%		5/2/2019		6,443,824		6,112,408		5,000,408			3.01	%
YRC Worldwide, Inc.⁽⁵⁾⁽⁸⁾	Trucking and Leasing	3M L + 7.25%		1.00%		2/13/2019		14,011,382		13,963,682		13,591,041			8.19	%

Total Senior Secured First Lien Debt Investments								151,272,105		140,929,604		140,456,000			84.58	%
Senior Secured Second Lien Debt Investments
AP NMT Acquisition BV^(5)(8)(9)	Media	3M L + 9.00%		1.00%		8/13/2022		20,000,000		18,952,994		16,000,000			9.64	%
Bird Electric Enterprises, LLC⁽⁴⁾	Utilities	14.63%, 3.00% PIK		—		10/9/2020		15,037,500		14,809,208		7,518,750			4.53	%
Caelus Energy Alaska 03, LLC⁽⁵⁾	Oil and Gas	3M L + 7.50%		1.25%		4/15/2020		26,000,000		23,974,331		20,280,000			12.21	%
North American Lifting Holdings, Inc.⁽⁵⁾	Industrial	3M L + 9.00%		1.00%		11/23/2021		16,200,000		15,460,206		10,854,000			6.54	%
Premiere Global Services, Inc.⁽⁵⁾	Business Services	1M L + 9.50%		1.00%		6/6/2022		5,000,000		4,803,158		4,800,000			2.89	%
Telecommunications Management, LLC⁽⁵⁾	Cable	3M L + 8.00%		1.00%		10/30/2020		11,333,096		11,287,636		11,219,766			6.76	%
TNS, Inc.⁽⁵⁾	Telecommunications	3M L + 8.00%		1.00%		8/14/2020		15,092,924		15,096,023		15,017,459			9.04	%
Trident USA Health Services, LLC⁽⁵⁾	Healthcare-Products/Services	3M L + 9.50%		1.25%		7/31/2020		21,878,286		21,797,457		19,252,891			11.59	%

Total Senior Secured Second Lien Debt Investments								130,541,806		126,181,013		104,942,866			63.20	%

Investments⁽¹⁾	Industry				Maturity Date		Principal Amount/ Shares⁽²⁾		Amortized Cost		Fair Value			% of Net Assets
Equity, Warrants and Other Investments⁽¹⁰⁾
AAR Intermediate Holdings, LLC (Equity Interest)	Oilfield Services					N/A		11,880		—		1			—
Endeavour International Holding B.V., $3.01 strike (Warrants)⁽⁸⁾	Oil and Gas					11/30/2017		160,000		160,000		1			—
PR Wireless, Inc., $0.01 strike (Warrants)	Telecommunications					9/24/2027		201		1,374,009		—			—

Total Equity, Warrants and Other Investments								172,081		1,534,009		2			—

Total Non-Controlled/Non-Affiliates							$	281,985,992	$	268,644,626	$	245,398,868			147.78	%

Liabilities in excess of other assets												(79,344,817	)		(47.78	%)
Net Assets											$	166,054,051			100.00	%

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Consolidated Schedule of Investments (continued)

(Unaudited)

December 31, 2016


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

Embedded derivative— Notes Payable⁽¹¹⁾	Diversified Financial Services						$	102,000,000	$	—	$	6,483,333			3.90	%

Total Assets								102,000,000		—		6,483,333			3.90	%

Liabilities
Total Return Swap^(10)(11)	Diversified Financial Services		1M L + 2.75	%		12/4/2018		102,000,000		—		(6,483,333	)		(3.90	%)

Total Liabilities								102,000,000		—		(6,483,333	)		(3.90	%)

Total Derivatives							$	204,000,000	$	—	$	—			—

⁽¹⁾	All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the board of directors.

⁽²⁾	Principal amount includes capitalized PIK interest.

⁽³⁾	Refer to Note 6 for more detail on the unfunded commitment.

⁽⁴⁾	Classified as non-accrual asset.

⁽⁵⁾	Held by the Company indirectly through CM Finance SPV, Ltd. and pledged as collateral for the Total Return Swaps.

⁽⁶⁾	Held by the Company indirectly through CM Finance SPV, LLC. and pledged as collateral for the revolving credit facility held through Citibank, N.A.

⁽⁷⁾	Security, or a portion thereof, unsettled as of December 31, 2016.

⁽⁸⁾

The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 10.09% of total assets.

⁽⁹⁾	A portfolio company domiciled in a foreign country. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company.

⁽¹⁰⁾	Securities are non-income producing.

⁽¹¹⁾	Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives—Notes Payable.


1M L –		1 month LIBOR (0.77% as of December 31, 2016)
3M L –		3 month LIBOR (1.00% as of December 31, 2016)
PIK –		Payment-In-Kind

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Consolidated Schedule of Investments

June 30, 2016


Investments⁽¹⁾	Industry	Interest Rate	Base Floor Rate		Maturity Date		Principal Amount/ Shares⁽²⁾			Amortized Cost			Fair Value			% of Net Assets
Non-Controlled/Non-Affiliates
Senior Secured First Lien Debt Investments
A.S.V., Inc.	Construction & Building	1M L + 10.50%⁽³⁾		1.00%		12/19/2019		$	16,750,000		$	16,470,094		$	16,080,000		9.88	%
AAR Intermediate Holdings, LLC⁽⁴⁾	Oilfield Services	3M L + 14.00% PIK		1.00%		3/30/2019			16,987,758			16,069,253			9,343,267		5.74	%
AM General, LLC	Automobiles and Components	3M L + 9.00%⁽³⁾		1.25%		3/22/2018			8,088,889			8,041,201			7,603,555		4.67	%
American Gaming Systems, Inc.	Entertainment and Leisure	3M L + 8.25%⁽³⁾		1.00%		12/21/2020			29,435,127			29,071,821			28,993,600		17.81	%
JAC Holdings Corp.	Automobiles and Components	11.50%⁽³⁾		—		10/1/2019			13,060,000			13,274,716			13,843,600		8.51	%
Land Holdings I, LLC	Entertainment and Leisure	12.00%⁽³⁾		—		6/26/2019			23,500,000			23,460,521			23,970,000		14.73	%
NS NWN Acquisition LLC	Information Technology	3M L + 9.00%⁽³⁾		1.00%		10/16/2020			9,812,500			9,616,250			9,616,250		5.91	%
PR Wireless, Inc.	Telecommunications	3M L + 9.00%⁽³⁾		1.00%		6/27/2020			16,660,000			15,417,305			15,160,600		9.32	%
Premiere Global Services, Inc.	Business Services	1M L + 6.50%		1.00%		12/8/2021			4,937,343			4,453,235			4,443,609		2.73	%
School Specialty, Inc.	Business Services	1M L + 8.50%		1.00%		6/11/2019			9,000,000			8,828,750			8,831,250		5.43	%
U.S. Well Services, LLC	Oilfield Services	1M L + 11.50%⁽³⁾		0.50%		5/2/2019			6,189,789			6,106,044			5,539,861		3.40	%
YRC Worldwide, Inc.⁽⁵⁾	Trucking and Leasing	3M L + 7.00%⁽³⁾		1.00%		2/13/2019			14,612,470			14,550,898			13,662,660		8.39	%

Total Senior Secured First Lien Debt Investments									169,033,876			165,360,088			157,088,252		96.52	%

Senior Secured Second Lien Debt Investments
AP NMT Acquisition BV⁽⁵⁾⁽⁶⁾	Media	3M L + 9.00%⁽³⁾		1.00%		8/13/2022			20,000,000			18,890,373			16,000,000		9.83	%
Bird Electric Enterprises, LLC⁽⁴⁾	Utilities	14.63%, 3.00% PIK		—		10/9/2020			15,037,500			14,799,123			7,518,750		4.62	%
Caelus Energy Alaska 03 LLC	Oil and Gas	3M L + 7.50%⁽³⁾		1.25%		4/15/2020			26,000,000			23,813,825			16,900,000		10.38	%
Language Line, LLC	Services	3M L + 9.75%⁽³⁾		1.00%		7/7/2022			8,000,000			7,957,817			8,000,000		4.92	%
Maxim Crane	Industrial	3M L + 9.25%⁽³⁾		1.00%		11/26/2018			10,000,000			10,053,345			10,000,000		6.14	%
North American Lifting Holdings, Inc.	Industrial	3M L + 9.00%⁽³⁾		1.00%		11/27/2021			16,200,000			15,384,245			11,664,000		7.17	%
Telecommunications Management, LLC	Cable	3M L + 8.00%⁽³⁾		1.00%		10/30/2020			11,333,096			11,281,657			11,106,434		6.82	%
TNS, Inc.	Telecommunications	3M L + 8.00%⁽³⁾		1.00%		8/14/2020			15,092,924			15,096,455			14,866,530		9.14	%
Trident USA Health Services, LLC	Healthcare-Products/ Services	3M L + 9.00%⁽³⁾		1.25%		7/31/2020			21,878,286			21,787,931			18,815,326		11.56	%

Total Senior Secured Second Lien Debt Investments									143,541,806			139,064,771			114,871,040		70.58	%

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Consolidated Schedule of Investments – (continued)

June 30, 2016


Investments⁽¹⁾	Industry	Maturity Date		Principal Amount/ Shares⁽²⁾		Amortized Cost		Fair Value			% of Net Assets
Equity, Warrants and Other Investments⁽⁷⁾
AAR Intermediate Holdings, LLC (Warrants)⁽⁴⁾⁽⁵⁾	Oilfield Services		9/30/2024	$	1,643,206	$	1,251,058	$	—			—	%
Endeavour International Holding B.V., $3.01 strike (Warrants)⁽⁵⁾	Oil and Gas		11/3/2017		160,000		160,000		1			—
NS NWN Acquisition LLC (Equity Interest)	Information Technology				154		155,023		154,871			0.10	%
PR Wireless, Inc., $0.01 strike (Warrants)	Telecommunications		9/24/2027		201		1,374,009		—			—

Total Equity, Warrants and Other Investments					1,803,561		2,940,090		154,872			0.10	%

Total Non-Controlled/Non-Affiliates				$	314,379,243	$	307,364,949	$	272,114,164			167.20	%

Liabilities in excess of other assets									(109,364,281	)		(67.20	)%

Net Assets								$	162,749,883			100.00	%


	Industry	Interest Rate			Maturity Date		Notional Amount		Amortized Cost		Fair Value			% of Net Assets
Derivatives
Assets
Embedded derivative—Notes Payable⁽⁸⁾	Diversified Financial Services						$	102,000,000	$	—	$	6,929,903			4.26	%
Embedded derivative—Notes Payable⁽⁸⁾	Diversified Financial Services							50,000,000		—		2,141,756			1.31	%

Total Assets								152,000,000		—		9,071,659			5.57	%


Liabilities
Total Return Swap⁽⁷⁾⁽⁸⁾	Diversified Financial Services		1M L + 2.75	%		12/4/2018		102,000,000		—		(6,929,903	)		(4.26	)%
Total Return Swap⁽⁷⁾⁽⁸⁾	Diversified Financial Services		0.50	%		12/4/2016		50,000,000		—		(2,141,756	)		(1.31	)%

Total Liabilities								152,000,000		—		(9,071,659	)		(5.57	)%

Total Derivatives							$	304,000,000	$	—	$	—			—

⁽¹⁾	All investments are in non-controlled and non-affiliated issuers. All investments are valued in good faith by the board of directors.

⁽²⁾	Principal amount includes capitalized PIK interest.

⁽³⁾	Held by the Company indirectly through CM Finance SPV, Ltd. and pledged as collateral for the Total Return Swaps.

⁽⁴⁾	Classified as non-accrual asset.

⁽⁵⁾

⁽⁶⁾	A portfolio company domiciled in a foreign country. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company.

⁽⁷⁾	Securities are non-income producing.

⁽⁸⁾	Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives — Notes Payable.


1M L –		1 month LIBOR (0.47% as of June 30, 2016)
3M L –		3 month LIBOR (0.65% as of June 30, 2016)
PIK –		Payment-In-Kind

See notes to unaudited consolidated financial statements.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 1. Organization

CM Finance Inc (“CMFN” 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 Topic 946 Financial Services – Investment Companies.

On February 11, 2014, CM Finance Inc 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 CM Finance Inc (the “Merger”). In connection with the Merger, CM Finance Inc 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”). CM Finance Inc had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became the books and records of CM Finance Inc, as the surviving entity. Immediately after the Merger, CM Finance Inc issued 2,181,818 shares of its common stock to Stifel Venture Corp. in exchange for $32.7 million in cash. CM Finance Inc used all of the proceeds of the sale of shares to Stifel Venture Corp., to repurchase 2,181,818 shares of common stock from the Original Investors. Immediately after the completion of the Offering, the Company had 13,666,666 shares outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with the Merger.

Upon its election to be regulated as a BDC on February 5, 2014, the Company entered into an investment advisory agreement (the “Advisory Agreement”) and an administrative agreement with CM Investment Partners LLC (the “Adviser”) as its investment adviser and administrator, respectively.

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 SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.

The Company consolidates the operations of its wholly owned subsidiaries, CM Finance SPV, Ltd. (“SPV”), and CM Finance SPV, LLC (“LLC”) are special purpose vehicles used to finance certain investments.

On September 23, 2014, the Company formed CM Portfolio Companies LLC, a wholly owned and consolidated taxable subsidiary.

The Company may form certain additional taxable subsidiaries (collectively, with CM Portfolio Companies LLC, the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. These Taxable Subsidiaries allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 2. Significant Accounting Policies

The following is a summary of significant accounting policies followed by the Company.

a. Basis of Presentation

The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and all values are stated in U.S. dollars, unless noted otherwise. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by U.S. GAAP. These adjustments are normal and recurring in nature.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing the Company’s consolidated financial statements are reasonable and prudent. Actual results could differ materially from these estimates. All material inter-company balances and transactions have been eliminated.

b. Revenue Recognition, Security Transactions, and Realized/Unrealized Gains or Losses

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis.

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 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, 2016, $2,104,998 and $2,393,949 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively. During the three and six months ended December 31, 2015, $46,565 and $803,256 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively.

Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other fee income.

Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using the specific identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Unaudited Consolidated Statements of Operations.

Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although management may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

The Company may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company earned no PIK interest during the three and six months ended December 31, 2016, respectively. The Company earned PIK interest of $721,364 and $960,603 during the three and six months ended December 31, 2015, respectively.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 2. Significant Accounting Policies (Continued)

c. Paid In Capital

The Company records the proceeds from the sale of its common stock to common stock and additional paid-in capital, after all commissions and marketing support fees.

d. Earnings per Share

Earnings 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 shareholders are recorded on the ex-dividend date. The amount to be paid out as a dividend or distribution is generally determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed annually, although the Company may decide to retain such capital gains for investment.

The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions the Company declares in cash on behalf of the Company’s shareholders, unless a shareholder elects to receive cash. As a result, if the Company’s board of directors authorizes, and the Company declares, a cash distribution, then the Company’s shareholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution.

f. Cash and Restricted Cash

Cash and restricted cash consists of bank demand deposits. The Company deposits its cash in a financial institution and, at times, such balance may be in excess of the Federal Deposit Insurance Corporation insurance limits. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote. The Company has restrictions on the uses of the cash held by SPV based on the terms of the Notes Payable. For more information on the Notes Payable, see Note 5.

g. Deferred Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock and bonds, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering becomes effective.

h. Investment Transactions and Expenses

Purchases of loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are known or estimable, which in many cases may not be until settlement.

Expenses are accrued as incurred.

Deferred debt issuance costs, incurred in connection with the Company’s Notes Payable, are amortized using the straight line method over the life of the notes.

Offering costs were charged to paid-in capital upon sale of shares in the Offering.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 2. Significant Accounting Policies (Continued)

i. Investment Valuation

The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its investments and financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

Fair value is defined as the price that would be received upon a sale of an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).

Securities that are traded on securities exchanges (including such securities traded in the afterhours market) are valued on the basis of the closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last “bid” and “ask” prices for such options, are valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last “bid” and “ask” prices are valued at the average of the last “bid” and “ask” prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. The Company did not hold any Level 1 investments as of December 31, 2016 or June 30, 2016.

Investments that are not traded on securities exchanges but are traded on the over-the-counter (“OTC”) markets (such as term loans, notes and warrants) are valued using various techniques, which may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (when observable) and fundamental data relating to the issuer. These investments are categorized in Level 2 of the fair value hierarchy, or in instances when lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.

The embedded derivative in the Term Notes payable (defined below) from SPV to UBS, AG (“UBS”) and the Total Return Swaps (the “TRS”) referencing the terms of the Notes Payable 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 derivatives referencing the 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 derivatives in the Notes Payable and the TRS have been categorized in Level 3 of the fair value hierarchy. See Note 4 and Note 5 for more detail.

Investments for which market quotations are not readily available or may be considered unreliable are fair valued, in good faith, using a method determined to be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest rate yield curves, credit spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method of the Company may change as changes in the underlying company dictates, such as moving from the Cost Approach to Market Approach when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these circumstances, the fair values for the aforementioned investments may differ significantly from values that would have been used had a ready and liquid market for such investments existed or from the amounts that might ultimately be realized, and such differences could be material.

The Company’s valuation policies and procedures are developed by the Adviser, which is also responsible for ensuring that the valuation policies and procedures are consistently applied across all investments of the Company, and approved by the Company’s board of directors. The valuations are continuously monitored and the valuation process for Level 3 investments is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The valuation process begins with each portfolio company or investment being initially valued by the investment professionals

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 2. Significant Accounting Policies (Continued)

of the Adviser responsible for the portfolio investment. These investment professionals prepare the preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable securities from the same company or that of comparable companies as well as any other relevant factors including recent purchases and sales that may have occurred preceding month-end.

Valuation models are typically calibrated upon initial funding, and are re-calibrated as necessary upon subsequent material events (including, but not limited to additional financing activity, changes in comparable companies, and recent trades). The preliminary valuation conclusions are then documented and discussed with senior management of the Adviser. On a periodic basis and at least once annually, independent valuation firm(s) engaged by the Company conduct independent appraisals and review the Adviser’s preliminary valuations and make their own independent assessment. The Valuation Committee of the Company’s board of directors then reviews the preliminary valuations of the Adviser and that of the independent valuation firms. The Valuation Committee discusses the valuations and makes a recommendation to the Company’s board of directors regarding the fair value of each investment in good faith based on the input of the Adviser and the independent valuation firms. Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third party independent valuation firms, the board of directors of the Company determines, in good faith, the fair value of each investment.

For more information on the classification of the Company’s investments by major categories, see Note 4.

The fair value of the Company’s assets and liabilities that qualify as financial instruments under U.S. GAAP approximates the carrying amounts presented in the Unaudited Consolidated Statements of Assets and Liabilities.

j. Income Taxes

The Company has elected to be treated, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To qualify and maintain qualification as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to shareholders, for each taxable year, at least 90% of the Company’s “investment company taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues to satisfy the annual distribution requirement, the Company will not have to pay corporate level federal income taxes on any income that the Company distributes to its shareholders. The Company intends to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute to its shareholders at least 98% of net ordinary income, 98.2% of capital gains, if any, and any recognized and undistributed income from prior year for which it paid no federal income taxes.

Book and tax basis differences that are permanent differences are reclassified among the Company’s capital accounts, as appropriate at year-end. Additionally, the tax character of distributions is determined in accordance with the Code, which differs from U.S. GAAP. During the three and six months ended December 31, 2016, the Company recorded distributions of $4.8 million and $9.6 million, respectively. During the three and six months ended December 31, 2015, the Company recorded distributions of $4.8 million and $15.4 million, respectively. The tax character of a portion of these distributions may be return of capital.

U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The Company’s policy is to recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision.

The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for any tax year since inception. Each of the tax years since inception remain 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.

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.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 2. Significant Accounting Policies (Continued)

The cost basis used to compute gains and losses for the purpose of determining incentive fees is the fair value of the Company’s investment on February 5, 2014, at the time the Company priced its Offering.

As of December 31, 2016 and June 30, 2016, there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement.

Note 3. New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.

Note 4. Investments

The Company’s investments at any time may include securities and other financial instruments, including, without limitation, corporate and government bonds, convertible securities, collateralized loan obligations, term loans, trade claims, equity securities, privately negotiated securities, direct placements, working interests, warrants and investment derivatives (such as credit default swaps, recovery swaps, total return swaps, options, forward contracts, and futures) (all of the foregoing collectively referred to in these financial statements as “investments.”)

a. Certain Risk Factors

In the ordinary course of business, the Company manages a variety of risks including market risk, liquidity risk and credit risk. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying exposures and activities across a variety of instruments, markets and counterparties.

Market risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and other movements and volatility in security prices or commodities. In particular, the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or bankruptcy proceedings), which involves significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.

The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.

Credit risk is the potential loss the Company may incur from a failure of an issuer to make payments according to the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The Company’s exposure to credit risk on its investments is limited to the fair value of the investments. The Company’s TRS contract is executed pursuant to an International Swaps and Derivatives Association (“ISDA”) master agreement (the “ISDA Agreement”) that the Company currently has in place with UBS. At December 31, 2016 and June 30, 2016, the Company had all of its counterparty credit risk associated with non-performance for swaps with UBS. With regard to derivatives, the Company attempts to limit its credit risk by considering its counterparty’s (or its guarantor’s) credit rating. The Company’s policy is to not hold counterparty collateral on ISDA Agreements, but would do so if the exposure were material.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 4. Investments (Continued)

b. Investments

Investment purchases, sales and principal payments/paydowns are summarized below for the three and six months ended December 31, 2016 and December 31, 2015, respectively. These purchase and sale amounts exclude derivative instruments.


	Three Months Ended December 31,				Six Months Ended December 31,
	2016		2015		2016		2015
Investment purchases, at cost (including PIK interest)	$	24,702,624	$	10,838,066	$	48,982,799	$	50,656,305
Investment sales and repayments		47,904,900		18,188,956		81,125,266		62,943,320

The composition of the Company’s investments as of December 31, 2016, 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	$	140,929,604		52.46	%	$	140,456,000			57.24	%
Senior Secured Second Lien Debt Investments		126,181,013		46.97			104,942,866			42.76
Equity, Warrants and Other Investments		1,534,009		0.57			2			0.0
Embedded derivative— Notes Payable		—		—			6,483,333			2.64
Total Return Swap		—		—			(6,483,333	)		(2.64	)

Total	$	268,644,626		100.00	%	$	245,398,868			100.00	%

The composition of the Company’s investments as of June 30, 2016, 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	$	165,360,088		53.80	%	$	157,088,252			57.73	%
Senior Secured Second Lien Debt Investments		139,064,771		45.24			114,871,040			42.21
Equity, Warrants and Other Investments		2,940,090		0.96			154,872			0.06
Embedded derivative— Notes Payable		—		—			9,071,659			3.33
Total Return Swap		—		—			(9,071,659	)		(3.33	)

Total	$	307,364,949		100.00	%	$	272,114,164			100.00	%

The following table shows the portfolio composition by industry grouping at fair value at December 31, 2016:


	Investments at Fair Value		Percentage of Total Portfolio
Entertainment and Leisure	$	48,159,852		19.62	%
Telecommunications		29,437,709		12.00
Business Services		25,703,588		10.48
Trucking and Leasing		22,856,888		9.32
Oil and Gas		20,280,001		8.26
Healthcare-Products/Services		19,252,891		7.85
Media		16,000,000		6.52
Oilfield Services		15,139,798		6.17
Cable		11,219,766		4.57
Industrial		10,854,000		4.42
Construction & Building		9,700,000		3.95
Retail		9,275,625		3.78
Utilities		7,518,750		3.06

Total	$	245,398,868		100.00	%

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 4. Investments (Continued)

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2016:


	Investments at Fair Value		Percentage of Total Portfolio
Entertainment and Leisure	$	52,963,600		19.46	%
Telecommunications		30,027,130		11.04
Industrial		21,664,000		7.96
Automobiles and Components		21,447,155		7.88
Healthcare-Products/Services		18,815,326		6.92
Oil and Gas		16,900,001		6.21
Construction & Building		16,080,000		5.91
Media		16,000,000		5.88
Oilfield Services		14,883,128		5.47
Trucking and Leasing		13,662,660		5.02
Business Services		13,274,859		4.88
Cable		11,106,434		4.08
Information Technology		9,771,121		3.59
Services		8,000,000		2.94
Utilities		7,518,750		2.76

Total	$	272,114,164		100.00	%

The following table shows the portfolio composition by geographic grouping at fair value at December 31, 2016:


	Fair Value		Percentage Total Portfolio
U.S. Southwest	$	65,295,108		26.61	%
U.S. West		47,638,140		19.41
U.S. Midwest		43,421,745		17.69
U.S. Mid-Atlantic		34,270,350		13.97
U.S. Southeast		30,788,525		12.55
Europe		16,000,000		6.52
U.S. Northeast		7,985,000		3.25

Total	$	245,398,868		100.00	%

The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2016:


	Fair Value		Percentage Total Portfolio
U.S. Midwest	$	71,127,499		26.14	%
U.S. Southwest		70,167,462		25.79
U.S. West		33,762,017		12.41
U.S. Mid-Atlantic		33,681,856		12.38
U.S. Northeast		27,771,121		10.20
U.S. Southeast		19,604,209		7.20
Europe		16,000,000		5.88

Total	$	272,114,164		100.00	%

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 4. Investments (Continued)

The Company’s primary investment objective is to maximize total return to shareholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held lower middle-market companies to help these companies fund acquisitions, growth or refinancing. During the six months ended December 31, 2016, the Company made investments in new and existing portfolio companies of approximately $37.0 million and $11.8 million, respectively, to which it was not previously contractually committed to provide financial support. During the six months ended December 31, 2016, the Company did not make investments in companies to which it was previously committed to provide financial support. The details of the Company’s investments have been disclosed on the Unaudited Consolidated Schedule of Investments.

c. Derivatives

Derivative contracts include total return swaps and embedded derivatives in Notes Payable. The Company enters into derivative contracts as part of its investment strategies.

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 derivatives, and net change in unrealized appreciation (depreciation) on derivatives in the Unaudited 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.

The Company’s ISDA Agreement may contain provisions for early termination of OTC derivative transactions in the event the net assets of the Company decline below specific levels (“net asset contingent features”). If these levels are triggered, the Company’s counterparty has the right to terminate such transaction and require the Company to pay or receive a settlement amount in connection with the terminated transaction.

The Company has determined that each of the Term Notes payable from SPV to UBS (discussed further in Note 5) contain 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 derivatives are included in the net realized gain or loss on derivatives, and net change in unrealized appreciation (depreciation) on derivatives in the Unaudited Consolidated Statements of Operations.

The following table reflects the fair value and notional amount or number of contracts of the Company’s derivative contracts, none of which were designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at December 31, 2016.


	Assets		Liabilities		Notional		Contracts
Credit Risk:
Total Return Swaps	$	—	$	6,483,333		102,000,000		1
Embedded derivatives
Notes Payable		6,483,333		—		102,000,000		1

Gross fair value of derivative contracts	$	6,483,333	$	6,483,333
Counterparty netting		—		—

Net fair value of derivative contracts		6,483,333		6,483,333
Collateral not offset		—		—

Net amount	$	6,483,333	$	6,483,333

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 4. Investments (Continued)


	Assets		Liabilities		Notional		Contracts
Credit Risk:
Total Return Swaps	$	—	$	9,071,659		152,000,000		2
Embedded derivatives
Notes Payable		9,071,659		—		152,000,000		2

Gross fair value of derivative contracts	$	9,071,659	$	9,071,659
Counterparty netting		—		—

Net fair value of derivative contracts		9,071,659		9,071,659
Collateral not offset		—		—

Net amount	$	9,071,659	$	9,071,659

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, 2016 and December 31, 2015, 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,
	2016			2015			2016			2015
Total Return Swaps	$	2,375,799		$	(8,950,661	)	$	2,588,326		$	(10,236,226	)
Embedded derivatives
Notes Payable		(2,375,799	)		8,950,661			(2,588,326	)		10,236,226

Total	$	—		$	—		$	—		$	—

d. Fair Value Measurements

ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency. The valuation hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assets and liabilities measured at fair value have been classified in the following three categories:

Level 1 – valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

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.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 4. Investments (Continued)

The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of December 31, 2016:


	Level 1		Level 2		Level 3			Total
Assets

Investments
Senior Secured First Lien Debt Investments	$	—	$	—	$	140,456,000		$	140,456,000
Senior Secured Second Lien Debt Investments		—		—		104,942,866			104,942,866
Equity, Warrants and Other Investments		—		—		2			2

Total Investments		—		—		245,398,868			245,398,868
Derivatives
Embedded derivative
Notes Payable		—		—		6,483,333			6,483,333

Total Derivatives		—		—		6,483,333			6,483,333

Total Assets	$	—	$	—	$	251,882,201		$	251,882,201

Liabilities
Derivatives
Total Return Swaps	$	—	$	—	$	(6,483,333	)	$	(6,483,333	)

Total Derivatives		—		—		(6,483,333	)		(6,483,333	)
Total Liabilities	$	—	$	—	$	(6,483,333	)	$	(6,483,333	)

The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of June 30, 2016:


	Level 1		Level 2		Level 3			Total
Assets

Investments
Senior Secured First Lien Debt Investments	$	—	$	—	$	157,088,252		$	157,088,252
Senior Secured Second Lien Debt Investments		—		—		114,871,040			114,871,040
Equity, Warrants and Other Investments		—		—		154,872			154,872

Total Investments		—		—		272,114,164			272,114,164
Derivatives
Embedded derivative
Notes Payable		—		—		9,071,659			9,071,659

Total Derivatives		—		—		9,071,659			9,071,659

Total Assets	$	—	$	—	$	281,185,823		$	281,185,823

Liabilities
Derivatives
Total Return Swaps	$	—	$	—	$	(9,071,659	)	$	(9,071,659	)

Total Derivatives		—		—		(9,071,659	)		(9,071,659	)
Total Liabilities	$	—	$	—	$	(9,071,659	)	$	(9,071,659	)

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 4. Investments (Continued)

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended December 31, 2016:


	Senior Secured First Lien Debt Investments			Senior Secured Second Lien Debt Investments			Equity, Warrants and Other Investments			Total Investments
Balance as of June 30, 2016	$	157,088,252		$	114,871,040		$	154,872		$	272,114,164
Purchases (including PIK interest)		44,182,799			4,800,000			—			48,982,799
Sales		(62,970,243	)		(18,000,000	)		(155,023	)		(81,125,266	)
Amortization		1,094,689			316,242			—			1,410,931
Net realized gains (losses)		(6,737,729	)		—			(1,251,058	)		(7,988,787	)
Transfers in		—			—			—			—
Transfers out		—			—			—			—
Net change in unrealized (depreciation) appreciation		7,798,232			2,955,584			1,251,211			12,005,027

Balance as of December 31, 2016	$	140,456,000		$	104,942,866		$	2		$	245,398,868

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2016	$	813,392		$	2,944,421		$	1		$	3,757,814


	Total Return Swaps			Embedded derivatives - Notes Payable			Total Derivatives
Balance as of June 30, 2016	$	(9,071,659	)	$	9,071,659		$	—
Net change in unrealized (depreciation) appreciation		2,588,326			(2,588,326	)		—

Balance as of December 31, 2016	$	(6,483,333	)	$	6,483,333		$	—

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2016	$	2,588,326		$	(2,588,326	)	$	—

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, 2015:


	Senior Secured First Lien Debt Investments			Senior Secured Second Lien Debt Investments			Unsecured Debt			Equity, Warrants and Other Investments			Total Investments
Balance as of June 30, 2015	$	165,068,123		$	156,420,966		$	8,280,000		$	554,767		$	330,323,856
Purchases (including PIK interest)		36,292,532			10,012,500			4,196,250			155,023			50,656,305
Sales		(46,723,320	)		(12,450,000	)		(3,770,000	)		—			(62,943,320	)
Amortization		573,034			401,241			174,812			—			1,149,087
Net realized gains (losses)		75,871			(2,937	)		228,990			—			301,924
Transfers in		—			—			—			—			—
Transfers out		—			—			—			—			—
Net change in unrealized (depreciation) appreciation		(6,686,090	)		(19,341,295	)		(132,552	)		(554,766	)		(26,714,703	)

Balance as of December 31, 2015	$	148,600,150		$	135,040,475		$	8,977,500		$	155,024		$	292,773,149

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2015	$	(6,587,187	)	$	(19,280,830	)	$	(132,552	)	$	—		$	(26,000,569	)

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 4. Investments (Continued)


	Total Return Swaps			Embedded derivatives - Notes Payable		Total Derivatives
Balance as of June 30, 2015	$	(1,845,768	)	$	1,845,768	$	—
Net change in unrealized (depreciation) appreciation		(10,236,226	)		10,236,226		—

Balance as of December 31, 2015	$	(12,081,994	)	$	12,081,994	$	—

Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2015	$	(10,236,226	)	$	10,236,226	$	—

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 six months ended December 31, 2016 and December 31, 2015, the Company did not transfer any investments among Levels 1 and 2 and 3.

The following tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 investments as of December 31, 2016 and June 30, 2016. These ranges represent the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not representative of the inputs that could have been used in the valuation of any one investment. For example, the highest market yield presented in the table for senior secured notes is appropriate for valuing a specific investment but may not be appropriate for valuing any other investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 investments.

Fair Value as of

Valuation

Unobservable

Weighted

December 31, 2016

Methodology

Input(s)

Average

Range

Senior Secured First Lien Debt Investments

122,771,000

Yield Analysis

Market Yields

11.4%

0.0% - 24.3%

Senior Secured First Lien Debt Investments

17,685,000

Recent Purchase

N/A

Senior Secured Second Lien Debt Investments

104,942,866

Yield Analysis

Market Yields

16.4%

7.7% - 35.5%

Equity, Warrants and Other Investments

Intrinsic Value

N/A

Total Return Swaps

(6,483,333

)

Intrinsic Value

N/A

Embedded derivatives - Note Payable

6,483,333

Intrinsic Value

N/A

Fair Value as of

Valuation

Unobservable

Weighted

June 30, 2016

Methodology

Input(s)

Average

Range

Senior Secured First Lien Debt Investments

143,813,393

Yield Analysis

Market Yields

10.8

9.5% - 31.5%

Senior Secured First Lien Debt Investments

13,274,859

Recent Purchase

N/A

Senior Secured Second Lien Debt Investments

114,871,040

Yield Analysis

Market Yields

16.1

8.1% - 29.7%

Equity, Warrants and Other Investments

154,872

EV Multiple

LTM EBITDA

7.9x

7.5x - 7.9x

Total Return Swaps

(9,071,659

)

Intrinsic Value

Intrinsic value

N/A

Embedded derivatives - Note Payable

9,071,659

Intrinsic Value

Intrinsic value

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.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 5. Notes Payable

On November 9, 2016, we entered into the $50.0 million Senior Secured Revolving Credit Facility (the “Citi Revolving Financing”) with Citibank, N.A. (“Citibank”) which is secured by collateral consisting primarily of commercial loans and corporate bonds. The Citi Revolving Financing will expire on May 1, 2019.

Borrowings under the Citi Revolving Financing will generally bear interest at a rate per annum equal to LIBOR plus 4.85%. Default interest rate will be equal to the interest rate then in effect plus 2.00%. The Citi Revolving Financing requires the payment of an unused fee of 2.85% annually for any undrawn amounts below 75% of the Citi Revolving Financing, and 0.75% annually for any undrawn amounts above 75% of the Citi Revolving Financing. Borrowings under the Citi Revolving Financing are based on a borrowing base. The Citi Revolving Financing generally requires payment of interest on a quarterly basis. All outstanding principal is due upon maturity. The Citi Revolving Financing also requires mandatory prepayment of interest and principal upon certain events. As of December 31, 2016, $14.3 million was outstanding on the Citi Revolving Financing.

On May 23, 2013, as amended on June 6, 2013, December 4, 2013, September 26, 2014, July 20, 2015 and August 14, 2015, the Company, through SPV, entered into a $102.0 million financing transaction (the “Term Facility”) due December 5, 2018 with UBS. The Term Facility is collateralized by the portion of the Company’s assets held by SPV (the “SPV Assets”) and pledged as collateral as noted in the Consolidated Schedule of Investments. The Company will pay interest on the face amount of the Term Facility at a rate of one month LIBOR plus a spread of 2.75% per annum (the “Financing Rate”). Prior to September 26, 2014, the Company paid interest on the Term Facility at a rate of one month LIBOR plus a spread of 2.85% per annum.

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 “Revolving Financing” and together with the Term Facility, the “UBS Financing Facility”), which expired in accordance with its terms, on December 5, 2016. From December 4, 2013 through September 25, 2014, the Revolving Financing bore an interest at a fixed rate of 2.10 per annum on drawn amounts and 0.50% per annum on any undrawn portion. From September 26, 2014 through December 5, 2016, the Revolving Financing bore an interest at a fixed rate of 2.00 per annum on drawn amounts and 0.50% per annum on any undrawn portion. As of December 31, 2016 and June 30, 2016, $0.0 and $30.5 million was outstanding on the Revolving Financing, respectively.

This financing transaction was initially executed in four steps:

First, the Company organized SPV, a consolidated wholly owned bankruptcy remote special purpose vehicle in the Cayman Islands to purchase the SPV Assets through (i) the issuance and sale of notes secured by the SPV Assets (the “Term Notes”) to UBS and the Company and (ii) the transfer of cash to the Company. UBS purchased Term Notes with a face value of $76.5 million, which represent 51% of the Term Notes issued and outstanding, for $76.5 million in cash. The Company purchased Term Notes with a face value of $73.5 million (which are eliminated in consolidation), which represent 49% of the Term Notes issued and outstanding. Under the terms of the indenture under which the Term Notes were issued (the “Indenture”), the holders of the Term Notes are entitled to (i) periodic interest payments equal to their pro rata portion of the interest collected on the assets held by SPV and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the Term Notes”). This represents the embedded derivative in the Term Notes payable from SPV to UBS. On September 26, 2014, the Company increased the size of the Term Facility to $102.0 million. In connection with the upsize, UBS purchased additional Term Notes with a face value of $25.5 million for $25.5 million in cash. The Company also purchased additional Term Notes with a face value of $24.5 million.

Second, the Company and UBS entered into a TRS transaction whereby the Company will receive the Total Return of the Term Notes purchased by UBS and pay the Financing Rate.

Third, SPV issued and sold an additional $50.0 million notes (the “Revolving Notes”) together with the Term Notes, the “Notes”, secured by the SPV Assets to UBS. Cash is only exchanged when the Revolving Notes are drawn. Under the terms of the Indenture under which the Revolving Notes were issued (the “Revolver Indenture”), the holders of the Revolving Notes are entitled to (i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the Revolving Notes”).

Fourth, the Company and UBS entered into another TRS transaction whereby the Company will receive the Total Return of the Revolving Notes purchased by UBS and pay the Revolver Financing Rate. On December 5, 2016 the Revolving Notes matured and the corresponding TRS transaction associated with the Revolving Notes unwound in unison.

The fair value of the Company’s Notes Payable is estimated based on the rate at which similar facilities would be priced. At December 31, 2016 and June 30, 2016, the fair value of the Notes Payable was estimated at $116.3 million and $132.5 million, respectively, which the Company concluded was a Level 3 fair value.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 5. Notes Payable (Continued)

Cash, restricted (as shown on the Unaudited Consolidated Statements of Assets and Liabilities) is held by the trustee of the UBS Financing Facility and is restricted to purchases of investments by SPV that must meet certain eligibility criteria identified by the Indenture. As of December 31, 2016, SPV had assets of $191.5 million, which included $169.5 million of the Company’s portfolio investments at fair value, $1.2 million of accrued interest receivable and $20.7 million in cash held by the trustee of the UBS Financing Facility. As of June 30, 2016, SPV had assets of $248.2 million, which included $241.8 million of the Company’s portfolio investments at fair value, $1.9 million of accrued interest receivable and $4.5 million in cash held by the trustee of the UBS Financing Facility. For the three and six months ended December 31, 2016, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facility was $114.1 million and 3.61%, respectively, and $118.9 million and 3.39%, respectively. For the three and six months ended December 31, 2015, the weighted average outstanding debt balance and the weighted average stated interest rate under the UBS Financing Facility was $147.5 million and 2.72%, respectively, and $144.8 million and 2.74%, respectively.

Note 6. Indemnification, Guarantees, Commitments and Contingencies

In the normal course of business, the Company enters into contracts that provide a variety of representations and warranties and general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve future claims that may be made against the Company; however, based on the Company’s experience, the risk of loss is remote and no such claims are expected to occur. As such, the Company has not accrued any liability in connection with such indemnifications.

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

Declared

Ex-Date

Record Date

Pay Date

Amount

Fiscal Quarter

August 25, 2016

September 14, 2016

September 16, 2016

October 6, 2016

0.3516

1st 2017

November 3, 2016

December 14, 2016

December 16, 2016

January 5, 2017

0.3516

2nd 2017

November 3, 2016

March 15, 2017

March 17, 2017

April 6, 2017

0.2500

3rd 2017

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, 2016:


Investments	Unfunded Commitment		Fair Value		Annual Non-use Fee		Expiration Date
AAR Intermediate Holdings, LLC	$	752,475	$	—		0.50		9/30/21

Total Unfunded Commitments	$	752,475	$	—

As of June 30, 2016, the Company did not have any unfunded commitments.

Note 7. Agreements and Related Party Transactions

Related Party Transactions

In connection with the Offering, the Adviser, paid $3.45 million or 50.0% of the total underwriting costs, and offering costs in excess of the $1.2 million paid by Company.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 7. Agreements and Related Party Transactions (Continued)

Investment Advisory Agreement

Pursuant to the Advisory Agreement, the Company has agreed to pay to the Adviser a base management fee of 1.75% of gross assets, as adjusted, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and “fair value of derivatives associated with the Company’s financing”, and an incentive fee consisting of two parts.

The first part of the incentive fee, which is calculated and payable quarterly in arrears, equals 20.0% of the “pre-incentive fee net investment income” (as defined in the agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized), and is subject to a “catch-up” feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 12 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 12 preceding quarters. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 1.75% base management fee.

The second part of the incentive fee is calculated and payable in arrears as of the end of each calendar year and equals 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.

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

For the three and six months ended December 31, 2016, $1,183,946 and $2,395,481 in base management fees were earned by the Adviser, of which $2,395,481 was payable at December 31, 2016. For the three and six months ended December 31, 2015, $1,444,998 and $2,897,155 in base management fees were earned by the Adviser, of which $2,897,155 was payable at December 31, 2015.

For the three and six months ended December 31, 2016, the Company incurred $1,095,515 and $1,095,515, respectively, of incentive fees related to pre-incentive fee net investment income of which $203,242 and $203,242 was waived, respectively. As of December 31, 2016, $904,951 of such incentive fees are currently payable to the Adviser and $262,862 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, 2015, the Company incurred $0 and $1,229,032, respectively, of incentive fees related to pre-incentive fee net investment income. As of December 31, 2015, $1,160,353 of such incentive fees are currently payable to the Adviser and $343,345 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 and unrealized gains. As of December 31, 2016 and June 30, 2016, there was no capital gains incentive fee earned or payable to the Adviser under the Advisory Agreement.

With respect to the incentive fee expense accrual relating to the capital gains incentive fee, U.S. GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Advisory Agreement.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 7. Agreements and Related Party Transactions (Continued)

partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.

Prior to the Company’s election to be regulated as a BDC on February 5, 2014, no base management or incentive fees were due and payable.

Administration Agreement

The Company entered into an administration agreement with the Adviser 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 this administration agreement, the Adviser will perform, or oversee the performance of, its required administrative services, which includes, among other things, being responsible for the financial records which it is required to maintain and preparing reports to its shareholders and reports filed with the SEC. Under an administration agreement with the Adviser, the Adviser provides the Company with the Company’s other accounting and back-office professionals, equipment and clerical, bookkeeping, recordkeeping and other administrative services. The Investment Adviser has also retained the services of accounting and back office professionals on an as needed basis through a services agreement with the Cyrus Funds to assist the Adviser in fulfilling certain of its obligations to the Company under the administration agreement. The Company incurred costs of $148,710 and $416,952 under the administration agreement for the three and six months ended December 31, 2016, respectively. The Company incurred costs of $161,180 and $438,131 under the administration agreement for the three and six months ended December 31, 2015, respectively.

As of December 31, 2016 and June 30, 2016, the Company recorded $111,254 and $120,000, respectively, in accrued expenses and other liabilities on its Unaudited Consolidated Statements of Assets and Liabilities for reimbursement of expenses owed to the Adviser under the administration agreement.

License Agreement

The Company has entered into a license agreement with the Adviser under which the Adviser has agreed to grant the Company a non-exclusive, royalty-free license to use the name “CM Finance.” Under this agreement, the Company has a right to use the “CM Finance” name for so long as the Adviser or one of its affiliates remains the Adviser. Other than with respect to this limited license, the Company has no legal right to the “CM Finance” name.

Stifel Arrangement

In December 2013, the Company entered into an arrangement pursuant to which Stifel made a capital contribution to the Company on February 5, 2014 and the Company granted Stifel certain rights, such as a right to nominate for election a member of the Company’s board of directors. Stifel has not exercised its right to nominate for election a member of the Company’s board of directors. Stifel does not have any rights to exercise a controlling influence over the Company’s day-to-day operations or the investment management function of the Adviser.

Five of the investment professionals employed by the Adviser as part of the investment team are also employees of Stifel. Although these investment professionals dedicate substantially all of their time to the business and activities of the Adviser, they are dual employees of both Stifel and the Adviser, and as a result, may continue to engage in investment advisory activities for Stifel. As of December 31, 2016, Stifel Venture Corp. (“Stifel”) owned approximately 16.0% of the Company’s outstanding common stock, and also holds a 20.0% interest in the Adviser.

Note 8. Directors Fees

Each of the Company’s four independent directors receive (i) an annual fee of $75,000, and (ii) $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person or telephonically each regular board of directors meeting and each special telephonic meeting. The Company’s independent directors also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee receives an annual fee of $7,500. The chairperson of the valuation committee, the nominating and corporate governance committee and the compensation committee receives an annual fee of $2,500, $2,500 and $2,500, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf of the Company’s directors and officers. Independent directors have the option of having their directors’ fees paid in shares of the Company’s common

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 8. Directors Fees (Continued)

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 three and six months ended December 31, 2016, the Company recorded directors’ fees of $99,999 and $199,999, of which none were payable at December 31, 2016. For three and six months ended December 31, 2015, the Company recorded directors’ fees of $96,750 and $211,500, respectively, of which none were payable at December 31, 2015.

Note 9. Earnings Per Share

In accordance with the provisions of ASC Topic 260 – Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations:


Basic and Diluted Net Increase (Decrease) in Net Assets Per Share
	For the three months ended December 31,					For the six months ended December 31,
	2016		2015			2016		2015
Net increase (decrease) in net assets resulting from operations	$	8,554,098	$	(15,397,337	)	$	12,859,055	$	(15,229,174	)
Weighted average shares of common stock outstanding		13,686,865		13,671,273			13,683,841		13,669,733
Basic/diluted net increase (decrease) in net assets from operations per share	$	0.62	$	(1.13	)	$	0.94	$	(1.11	)

Note 10. Distributions

The following table reflects the cash distributions per share that the Company declared and/or paid to its shareholders since the Offering in February 2014. Shareholders of record as of each respective record date were entitled to receive the distribution:


Declaration Date	Record Date	Payment Date	Amount Per Share
March 14, 2014	March 24, 2014	March 31, 2014	$	0.1812
May 14, 2014	June 16, 2014	July 1, 2014	$	0.3375
September 4, 2014	September 18, 2014	October 1, 2014	$	0.3375
November 6, 2014	December 18, 2014	January 5, 2015	$	0.3375
January 28, 2015	March 18, 2015	April 2, 2015	$	0.3469
May 6, 2015	June 8, 2015	July 5, 2015	$	0.3469
June 10, 2015*	September 1, 2015	September 15, 2015	$	0.4300
June 10, 2015	September 18, 2015	October 2, 2015	$	0.3469
November 3, 2015	December 18, 2015	January 5, 2016	$	0.3469
February 2, 2016	March 18, 2016	April 7, 2016	$	0.3516
April 28, 2016	June 17, 2016	July 7, 2016	$	0.3516
August 25, 2016	September 16, 2016	October 6, 2016	$	0.3516
November 3, 2016	December 16, 2016	January 5, 2017	$	0.3516
November 3, 2016	March 17, 2017	April 6, 2017	$	0.2500

^*	Special distribution

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 10. Distributions (Continued)

The following table reflects for U.S. federal income tax purposes the sources of the cash dividend distributions that the Company has paid on its common stock during the six months ended December 31, 2016 and December 31, 2015:


	Six months ended December 31,
	2016					2015
	Distribution Amount		Percentage			Distribution Amount		Percentage
Ordinary income and short-term capital gains	$	9,622,655		100	%	$	15,361,875		100	%
Long-term capital gains		—		—			—		—

Total	$	9,622,655		100	%	$	15,361,875		100	%

Note 11. Share Transactions

The following table summarizes the total shares issued for the six months ended December 31, 2016 and December 31, 2015.


	Six months ended December 31,
	2016				2015
	Shares		Amount		Shares		Amount
Balance at beginning of period		13,679,686	$	200,482,695		13,667,267	$	200,357,871
Reinvestments of shareholder distributions		7,594		67,768		4,035		45,363

Balance at end of period		13,687,280	$	200,550,463		13,671,302	$	200,403,234

Note 12. Financial Highlights

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


	Six months ended December 31, 2016			Six months ended December 31, 2015
Per Share Data:⁽¹⁾
Net asset value, beginning of period	$	11.90		$	14.41

Net investment income		0.64			0.82
Net realized and unrealized gains (losses)		0.29			(1.94	)

Net increase (decrease) in net assets resulting from operations		0.93			(1.12	)

Capital transactions⁽²⁾
Dividends from net investment income		(0.70	)		(0.80	)
Distributions from net realized gains		—			(0.32	)

Net decrease in net assets resulting from capital transactions		(0.70	)		(1.12	)

Net asset value, end of period	$	12.13		$	12.17
Market value per share, end of period	$	9.30		$	10.02

Total return based on market value⁽³⁾⁽⁴⁾		13.09	%		(18.76	)%

Shares outstanding at end of period		13,687,280			13,671,302

Ratio/Supplemental Data:
Net assets, at end of period	$	166,054,051		$	166,405,163
Ratio of total expenses to average net assets⁽⁵⁾		9.81	%		9.38	%
Ratio of net expenses to average net assets⁽⁵⁾		9.57	%		9.38	%
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net assets⁽⁵⁾		3.34	%		2.94	%
Ratio of net investment income before fee waiver to average net assets⁽⁵⁾		10.47	%		12.14	%
Ratio of net investment income after fee waiver to average net assets⁽⁵⁾		10.72	%		12.14	%
Total Notes Payable		116,332,649			146,391,680
Asset Coverage Ratio⁽⁶⁾		2.43			2.14
Portfolio Turnover Rate⁽⁴⁾		19	%		16	%

⁽¹⁾	The per share data was derived by using the shares outstanding during the period.

⁽²⁾	The per share data for dividends and distributions declared reflects the actual amount of the dividends and distributions declared per share during the period.

⁽³⁾	Total returns are historical and are calculated by determining the percentage change in the market value with all dividends and distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the company’s dividend reinvestment plan.

⁽⁴⁾	Not annualized.

⁽⁵⁾	Annualized.

⁽⁶⁾	Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited)

December 31, 2016

Note 13. Other Fee Income

The other fee income consists of structuring fee income, amendment fee income and royalty income. The following tables summarize the Company’s other fee income for the three and six months ended December 31, 2016 and December 31, 2015:


	For the three months ended December 31,				For the six months ended December 31,
	2016		2015		2016		2015
Loan Structuring Fee	$	—	$	—	$	—	$	—
Loan Amendment/Consent Fee		359,494		529,819		575,961		563,561
Royalty Income		—		—		—		—

Other Fee Income	$	359,494	$	529,819	$	575,961	$	563,561

Note 14. Tax Information

As of December 31, 2016, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:


Tax cost	$	269,712,494

Gross unrealized appreciation		2,176,327
Gross unrealized depreciation		(26,489,954	)

Net unrealized investment depreciation	$	(24,313,627	)

As of June 30, 2016, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:


Tax cost	$	308,124,324

Gross unrealized appreciation		1,123,046
Gross unrealized depreciation		(37,133,205	)

Net unrealized investment depreciation	$	(36,010,159	)

Note 15. Subsequent Events

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.

Subsequent to the six months ended December 31, 2016 through February 6, 2017, the Company invested $22.3 million in new and existing portfolio companies and received no repayment or sales proceeds. The restructuring of U.S. Well Services, resulted in a reduction of $2.9 million of principal.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

the effect of investments that we expect to make;

•

our contractual arrangements and relationships with Stifel Venture Corp. (“Stifel”) and certain funds managed by Cyrus Capital Partners, L.P. (“Cyrus Capital”);

•

our contractual arrangements and relationships with lenders and other third parties;

•

actual and potential conflicts of interest with CM Investment Partners LLC (the “Adviser”);

•

the dependence of our future success on the general economy, interest rates and the effects of each on the industries in which we invest;

•

the ability of our portfolio companies to achieve their objectives or service their debt obligations to us;

•

the use of borrowed money to finance a portion of our investments;

•

the adequacy of our financing sources and working capital;

•

the timing of cash flows, if any, from the operations of our portfolio companies;

•

the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;

•

the ability of the Adviser to attract and retain highly talented professionals;

•

our ability to qualify and maintain our qualification as a regulated investment company (“RIC”) and as a business development company (“BDC”);

•

our ability to obtain exemptive relief from the SEC;

•

our ability to obtain a small business investment company license; and

•

the effect of changes to tax legislation and our tax position and other legislative and regulatory changes.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

CM Finance Inc (“CMFN” the “Company”, “us”, “we” or “our”), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”), and intends to elect to be treated as a RIC under Subchapter M of the Internal Revenue Code, (the “Code”) for U.S. federal income tax purposes.

Our primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held lower middle-market companies to help these companies fund acquisitions, growth or refinancing. We invest, and intend to continue to invest, in unitranche loans and standalone second and first lien loans, with an emphasis on floating rate debt. Unitranche loans are loans structured as first lien loans with certain characteristics of mezzanine loan risk in one security. We also selectively invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments, in most cases taking such upside participation interests as part of a broader investment relationship.

On February 11, 2014, we completed our initial public offering, selling 7,666,666 shares of our common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.

CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to our initial public offering, the merger was consummated, whereby CM Finance LLC merged with and into us (the “Merger”). In connection with the Merger, we issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of certain funds (the “Cyrus Funds”) managed by Cyrus Capital. CM Finance Inc had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became our books and records, as the surviving entity. Immediately after the Merger, we issued 2,181,818 shares of our common stock to Stifel in exchange for $32.7 million in cash. We used all of the proceeds of the sale of shares to Stifel, to repurchase 2,181,818 shares of common stock from the Cyrus Funds. Immediately after the completion of the initial public offering, we had 13,666,666 shares outstanding. We used a portion of the net proceeds of the initial public offering to repay 100% of the debt issued to the Cyrus Funds in connection with the Merger.

Upon our election to be regulated as a BDC on February 5, 2014, we entered into the investment advisory agreement (the “Advisory Agreement”) and the administration agreement (the “Administration Agreement”) with the Adviser as our investment adviser and administrator, respectively.

We consolidate the operations of our wholly-owned subsidiaries, CM Finance SPV Ltd. (“CM SPV”) and CM Finance SPV, LLC each a special purpose vehicle used to finance certain investments, and CM Portfolio Companies LLC, a taxable subsidiary formed to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements for a RIC under the Code.

Critical accounting policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our consolidated financial statements.

Valuation of portfolio investments

We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker dealers or market makers.

Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by our board of directors. Because a readily available market value for many of the investments in our portfolio is often not available, we value many of our portfolio investments at fair value as determined in good faith by our board of directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may also be deemed not to represent fair value in certain circumstances where we believe that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a

particular security causes current market quotations not to reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently, causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid ask spread.

With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:

•

our quarterly valuation process begins with each portfolio company or investment being initially valued by the members of the Adviser’s investment team responsible for the portfolio investment;

•

preliminary valuation conclusions are then documented and discussed by our senior management and the Adviser;

•

on a periodic basis, at least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm engaged by our board of directors;

•

the valuation committee of our board of directors then reviews the preliminary valuations prepared by the Adviser’s investment team and the independent valuation firm and makes a recommendation to our board of directors regarding the fair value of each investment; and

•

the board of directors then reviews and discusses the preliminary valuations and the report of the independent valuation firm and determines the fair value of each investment in our portfolio in good faith, based on the input of the Adviser, the independent valuation firm and the valuation committee.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.

When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available under the circumstances.

Our investments are categorized based on the types of inputs used in their valuation. The level in the U.S. GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by U.S. GAAP into the three broad levels as follows:


Level I		Investments valued using unadjusted quoted prices in active markets for identical assets.

Level II		Investments valued using other unadjusted observable market inputs, e.g. quoted prices in markets that are not active or quotes for comparable instruments.

Level III		Investments that are valued using quotes and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole.

As of December 31, 2016 and June 30, 2016, all of our investments were classified as Level 3 investments, determined based on valuations by our board of directors.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the consolidated financial statements.

Revenue recognition

Our revenue recognition policies are as follows:

Net realized gains (losses) on investments: Gains or losses on the sale of investments are calculated using the specific identification method.

Interest Income: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.

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

Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. PIK interest is not accrued if we do not expect the issuer to be able to pay all principal and interest when due. As of December 31, 2016, we had two investments on non-accrual status, which represented approximately 5.1% of our portfolio at fair value. As of June 30, 2016, we had two investments on non-accrual status, which represented approximately 6.2% of our portfolio at fair value.

Financing Facilities

On May 23, 2013, as amended on June 6, 2013, December 4, 2013, September 26, 2014, July 17, 2015, July 20, 2015 and August 14, 2015, we, through CM SPV, our wholly owned subsidiary, entered into a $102.0 million term secured financing facility (the “Term Facility”) with UBS AG, London Branch (together with its affiliates, “UBS”), which expires on December 5, 2018. On December 4, 2013, as amended on September 26, 2014 and July 17, 2015, we entered into a $50.0 million revolving financing (the “UBS Revolving Financing”), which expired on December 5, 2016 in accordance with its term. The Term Financing is collateralized by a portion of the debt investments in our portfolio. We pay interest on the face amount of the Term Financing monthly at a rate of LIBOR plus 2.75% per annum. For the period from December 5, 2017 through December 5, 2018, we will pay interest on the face amount of the Term Financing monthly at a rate of LIBOR plus 3.00% per annum. As of December 31, 2016 and June 30, 2016, we had $102.0 million and $102.0 million outstanding under the Term Financing. On December 5, 2016, the UBS Revolving Facility expired in accordance with its terms. As of December 31, 2016, we had no outstanding borrowings under the UBS Revolving Facility.

On November 9, 2016, we entered into a $50 million senior secured revolving credit facility (the “Citi Revolving Financing”) with Citibank, N.A. (“Citibank”), which is secured by collateral consisting primarily of commercial loans and corporate bonds. The Citi Revolving Financing will expire on May 1, 2019. Borrowings under the Citi Revolving Financing generally bear interest at a rate per annum equal to LIBOR plus 4.85% and the default interest rate is equal to the interest rate then in effect plus 2.00%. As of December 31, 2016, $14.3 million was outstanding under the Citi Revolving Financing. We refer to the Term Financing and the Citi Revolving Financing together as the “Financing Facilities.”

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount we have available to invest as well as the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are

not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. In each case, the company must be organized in the United States. As of December 31, 2016, approximately 10% of our total assets were non-qualifying assets.

To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders.

Revenues

We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from royalty income, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK interest. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, incentive fees, expenses reimbursable by us under the Advisory Agreement, and administration fees and our allocable portion of overhead under the Administration Agreement. The base management fee and incentive compensation remunerates the Adviser for work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:

•

our organization, the formation transactions and our initial public offering;

•

calculating our net asset value (including the cost and expenses of any independent valuation firm(s));

•

fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;

•

interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts;

•

offerings of our common stock and other securities;

•

administration fees and expenses, if any, payable under the Administration Agreement (including our allocable portion of the Adviser’s overhead in performing its obligations under the Administration Agreement, including rent, equipment and the allocable portion of the cost of our chief compliance officer, chief financial officer and their respective staffs’ compensation and compensation-related expenses);

•

transfer agent, dividend agent and custodial fees and expenses;

•

costs associated with our reporting and compliance obligations under the 1940 Act, the Securities Exchange Act of 1934 (the “Exchange Act”), and other applicable federal and state securities laws, and stock exchange listing fees;

•

fees and expenses associated with independent audits and outside legal costs;

•

federal, state and local taxes;

•

independent directors’ fees and expenses;

•

costs of any reports, proxy statements or other notices to or communications and meetings with stockholders;

•

costs associated with investor relations;

•

costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

•

direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff; and

•

all other expenses incurred by us or the Adviser in connection with administering our business.

Portfolio and investment activity

Portfolio composition

We invest primarily in lower middle-market companies in the form of unitranche loans, standalone first and second lien and mezzanine loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.

At December 31, 2016, our investment portfolio of $245.4 million (at fair value) consisted of investments in 19 portfolio companies, of which 57.2% were first lien investments and 42.8% were second lien investments. At December 31, 2016, our average and largest portfolio company investment at fair value was $12.4 million and $28.8 million, respectively.

At June 30, 2016, our investment portfolio of $272.1 million (at fair value) consisted of investments in 22 portfolio companies, of which 57.7% were first lien investments, 42.2% were second lien investments, and 0.1% were in equity and warrant positions. At June 30, 2016, our average and largest portfolio company investment at fair value was $12.4 million and $29.0 million, respectively.

As of December 31, 2016 and June 30, 2016, respectively, our weighted average total yield of debt and income producing securities at amortized cost (which includes interest income and amortization of fees and discounts) was 9.79% and 9.80%, respectively.

At December 31, 2016 and June 30, 2016, respectively, the industry composition of our portfolio at fair value was as follows:


	Percentage of Total Portfolio at December 31, 2016			Percentage of Total Portfolio at June 30, 2016
Entertainment and Leisure		19.62	%		19.46	%
Telecommunications		12.00			11.04
Business Services		10.48			4.88
Trucking and Leasing		9.32			5.02
Oil and Gas		8.26			6.21
Healthcare-Products/Services		7.85			6.92
Media		6.52			5.88
Oilfield Services		6.17			5.47
Cable		4.57			4.08
Industrial		4.42			7.96
Construction & Building		3.95			5.91
Retail		3.78			—
Utilities		3.06			2.76
Automobiles and Components		—			7.88
Information Technology		—			3.59
Services		—			2.94

Total		100	%		100	%

During the three months ended December 31, 2016, we added five new investments totaling approximately $24.5 million. Two of these investments were in new portfolio companies of which all of the investments were first lien investments.

At December 31, 2016, 95.4% of our debt investments bore interest with floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 4.6% bore interest at fixed rates. At June 30, 2016, 87.9% of our debt investments bore interest with floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 11.6% bore interest at fixed rates.

Our investment portfolio may from time to time contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of December 31, 2016, we had one investment with an unfunded commitment of 752,475 and as of June 30, 2016, we had no investments with unfunded commitments.

Asset Quality

In addition to various risk management and monitoring tools, we use the Adviser’s investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:


Investment Rating 1		Investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.

Investment Rating 2		Investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans will initially be rated 2.

Investment Rating 3		Investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with their financial covenants.

Investment Rating 4		Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in workout. Investments with a rating of 4 will be those for which some loss of return but no loss of principal is expected.

Investment Rating 5		Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in workout. Investments with a rating of 5 will be those for which some loss of return and principal is expected.

If the Adviser determines that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, the Adviser will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and suggesting recommended actions. While the investment rating system identifies the relative risk for each investment, the rating alone does not dictate the scope and/or frequency of any monitoring that will be performed. The frequency of the Adviser’s monitoring of an investment will be determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the investment.

The following table shows the investment rankings of the debt investments in our portfolio:


	As of December 31, 2016							As of June 30, 2016
	Fair Value		% of Portfolio			Number of Investments		Fair Value		% of Portfolio			Number of Investments
1	$	—		—	%		—	$	13,843,600		5.1	%		1
2		192,633,428		78.5			14		205,389,359		75.5			15
3		35,295,010		14.4			2		36,019,187		13.2			3
4		5,000,408		2.0			1		—		—			—
5		12,470,022		5.1			2		16,862,018		6.2			3

Total	$	245,398,868		100.0	%		19	$	272,114,164		100.0	%		22

Results of Operations

Comparison of the three months ended December 31, 2016 and December 31, 2015

Investment income

Investment income, attributable primarily to interest and fees on our debt investments, for the three months ended December 31, 2016, decreased to $9.2 million from $10.0 million for the three months ended December 31, 2015, primarily due to the repayment of portfolio companies with higher yields during the quarter ended December 31, 2016.

Expenses

Total expenses for the three months ended December 31, 2016 increased to $4.5 million, compared to $3.6 million for the three months ended December 31, 2015, due primarily to an increase in income based incentive fees.

Net investment income

Net investment income decreased to $4.9 million for the three months ended December 31, 2016 from $6.3 million for the three months ended December 31, 2015, primarily due to a decrease in investment income primarily due to the repayment of portfolio companies with higher yields and two investments on non-accrual during the quarter ended December 31, 2016.

Net realized gain or loss

During the three months ended December 31, 2016, we had a realized gain of $39,502, primarily due to the sale of one portfolio company.

The net realized gain on investments totaled $0.1 million for the three months ended December 31, 2015, primarily due to the gain on the sale of a portion of Nexeo Solutions Holdings LLC.

Net change in unrealized (depreciation) appreciation on investments

We recorded a net change in unrealized appreciation of $3.6 million for the three months ended December 31, 2016, primarily due to the increase in fair value of eight portfolio companies.

During the three months ended December 31, 2015, we recorded a net change in unrealized depreciation of $21.8 million for the three months ended December 31, 2015, primarily due to the decline in fair value of our investments in Bird Electric Enterprises, LLC, AP NMT Acquisitions, AAR Intermediate Holdings, LLC, Caelus Energy Alaska 03 LLC, North American Lifting Holdings, Inc and YRC Worldwide, Inc.

Liquidity and capital resources

Cash flows

For the three months ended December 31, 2016, our unrestricted cash balance increased by $11.7 million. During that period, we generated $19.2 million in cash from operating activities, primarily due to proceeds from repayment and sale of investments in portfolio companies of $47.9 million, offset by investments of $24.5 million in portfolio companies. During the same period, we used $5.2 million towards financing activities, consisting primarily of distributions to our stockholders, repayments of borrowings under the UBS Revolving Financing which expired on December 5, 2016 in accordance with its terms and borrowings under the Citi Revolving Financing.

Capital Resources

As of December 31, 2016, we had $26.7 million of cash as well as $27.8 million in restricted cash and $35.7 million of capacity under the Citi Revolving Financing. We intend to generate additional cash primarily from future offerings of securities, future borrowings under the Citi Revolving Financing as well as cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary liquidity needs include interest and principal repayments on our Financing Facilities, our unfunded loan commitments (if any), investments in portfolio companies, dividend distributions to our stockholders and operating expenses.

As discussed below in further detail, we have elected to be treated as a RIC under the Code. To maintain our RIC status, we generally must distribute substantially all of our net taxable income to stockholders in the form of dividends. Our net taxable income does not necessarily equal our net income as calculated in accordance with U.S. GAAP.

Regulated Investment Company Status and Distributions

We have elected to be treated as a RIC under Subchapter M of the Code. If we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To qualify for RIC tax treatment, we must, among other things, distribute to our stockholders, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). We will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.

We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Financing Facilities may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in Financing Facilities. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each shareholder elects to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each shareholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any shareholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.

Investment Advisory Agreement

Pursuant to the Advisory Agreement, we have agreed to pay to the Adviser a base management fee of 1.75% of gross assets, as adjusted, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and “fair value of derivatives associated with our financing”, and an incentive fee consisting of two parts.

The first part of the incentive fee, which is calculated and payable quarterly in arrears, equals 20.0% of the “pre-incentive fee net investment income” (as defined in the Advisory Agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized), and is subject to a “catch-up” feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee.

The Adviser has 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 our common stock in the initial public offering of $15.00, and (ii) all or portions of the incentive fee for 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 our common stock in the initial public offering of $15.00. Fees permanently waived by the Adviser are not subject to future repayment or recoupment by the Adviser.

For the three months ended December 31, 2016 and December 31, 2015, $1,183,946 and $1,444,998 in base management fees were earned by the Adviser, respectively, of which $2,395,481 and $2,897,155 were payable at December 31, 2016 and December 31, 2015, respectively.

For the three months ended December 31, 2016, we incurred $1,095,515 of incentive fees related to pre-incentive fee net investment income of which $203,242 was waived. As of December 31, 2016, $904,951 of previous incentive fees are currently payable to the Adviser which consist of $262,862 of pre-incentive fees incurred by us that were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three months ended December 31, 2015, the Company incurred $0 of incentive fees related to pre-incentive fee net investment income. As of December 31, 2015, $1,160,353 of incentive fees were currently payable to the Adviser, of which $343,345 of pre-incentive fees incurred by us were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash.

The realized gains incentive fee consists of fees related to both realized gains and unrealized gains. As of December 31, 2016, there was no realized gains incentive fee payable to the Adviser under the Advisory Agreement. As of December 31, 2015, there was no realized gains incentive fee payable to the Adviser under the Advisory Agreement.

With respect to the incentive fee expense accrual relating to the unrealized gains incentive fee, U.S. GAAP requires that the realized gains incentive fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a realized gains incentive fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Advisory Agreement.

The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.

Prior to our election to be regulated as a BDC on February 5, 2014, no base or incentive management fees were due and payable.

Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of December 31, 2016 and June 30, 2016, we did not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We are subject to financial market risks, including changes in interest rates. At December 31, 2016, 95.4% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.

Generally, we believe higher yielding assets such as those in our investment portfolio do not necessarily follow a linear interest rate relationship and are less sensitive in price to interest rate changes than many other debt investments. Our investments in fixed rate assets are generally exposed to changes in value due to interest rate fluctuations, and our floating rate assets are generally exposed to cash flow variability from fluctuation in rates. Consequently, our net interest income (interest income less interest expense) is exposed to risks related to interest rate fluctuations. Based on our current portfolio with certain interest rate floors and our financing at December 31, 2016, a 1.00% increase in interest rates would increase our net interest income by approximately 5.8% and a 2.00% increase in interest rates would increase our net interest income by approximately 13.2%. Variable-rate instruments subject to a floor generally reset periodically to the applicable floor and, in the case of investments in our portfolio, quarterly to a floor based on LIBOR, only if the floor exceeds the index. Under these loans, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor.

Although management believes that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit markets, the size, credit quality or composition of the assets in our portfolio and other business developments, including borrowing, that could affect the net increase in net assets resulting from operations, or net income. It also does not adjust for the effect of the time lag between a change in the relevant interest rate index and the rate adjustment under the applicable loan. Accordingly, we can offer no assurances that actual results would not differ materially from the statement above.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2016, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings.

(b) Changes in Internal Control Over Financial Reporting

Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A. Risk Factors

During the three months ended December 31, 2016, there have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:



3.1		Amended and Restated Articles of Incorporation⁽¹⁾

3.2		Bylaws⁽¹⁾

11.1		Computation of Per Share Earnings (included in “Note 9. Earnings Per Share” to the unaudited financial statements contained in this report)

31.1		Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*	Filed herewith

(1)	Incorporated by reference to Registrant’s Registration Statement on Form N-2 (File No. 333-192370), filed on November 15, 2013.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: February 8, 2017


CM FINANCE INC

By:		/s/ Michael C. Mauer
		Michael C. Mauer
		Chief Executive Officer

By:		/s/ Rocco DelGuercio
		Rocco DelGuercio
		Chief Financial Officer

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