PART I. FINANCIAL INFORMATION This section presents CM Finance Inc's unaudited consolidated financial statements and detailed notes covering organization, accounting policies, investment valuation, debt, and related party transactions [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section provides CM Finance Inc's unaudited consolidated financial statements and detailed notes covering organization, accounting policies, investment valuation, debt, and related party transactions [Consolidated Statements of Assets and Liabilities](index=3&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) This statement presents the company's financial position, detailing total assets, liabilities, and net assets, along with net asset value per share at specific dates Consolidated Statements of Assets and Liabilities | Metric | Dec 31, 2018 | Jun 30, 2018 | | :----- | :----------- | :----------- | | Total Assets | $301,984,402 | $314,534,581 | | Total Liabilities | $145,548,094 | $143,011,915 | | Notes Payable, net | $134,005,483 | $117,869,229 | | Total Net Assets | $156,436,308 | $171,522,666 | | Net Asset Value Per Share | $11.49 | $12.57 | - Total Assets decreased by **$12.55 million** from June 30, 2018, to December 31, 2018[8](index=8&type=chunk) - Net Asset Value Per Share decreased by **$1.08** from $12.57 at June 30, 2018, to $11.49 at December 31, 2018[8](index=8&type=chunk) [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) This statement details the company's revenues, expenses, and net increase or decrease in net assets from operations over specific periods Consolidated Statements of Operations | Metric | 3 Months Ended Dec 31, 2018 | 3 Months Ended Dec 31, 2017 | 6 Months Ended Dec 31, 2018 | 6 Months Ended Dec 31, 2017 | | :----- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Total Investment Income | $9,298,924 | $8,449,774 | $17,553,814 | $15,178,183 | | Total Expenses | $5,580,012 | $4,762,645 | $10,447,406 | $8,474,879 | | Net Investment Income | $3,718,912 | $3,687,129 | $7,128,408 | $6,703,304 | | Net Realized Gain (Loss) from Investments | $75,000 | $0 | $(183,192) | $(7,380,690) | | Net Change in Unrealized Appreciation (Depreciation) in Value of Investments | $(13,176,208) | $1,172,018 | $(14,899,471) | $8,672,249 | | Net Increase (Decrease) in Net Assets from Operations | $(9,382,296) | $4,859,147 | $(7,954,255) | $7,994,863 | | Earnings Per Share | $(0.69) | $0.35 | $(0.58) | $0.58 | - Total investment income increased by **10.05%** for the three months ended December 31, 2018, compared to the same period in 2017[10](index=10&type=chunk) - The company experienced a significant net unrealized depreciation of **$(13.18 million)** for the three months ended December 31, 2018, compared to an appreciation of $1.17 million in the prior year[10](index=10&type=chunk) [Consolidated Statements of Changes in Net Assets](index=5&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) This statement outlines the changes in the company's net assets over a period, reflecting operational results, distributions, and share repurchases Consolidated Statements of Changes in Net Assets | Metric | 6 Months Ended Dec 31, 2018 | 6 Months Ended Dec 31, 2017 | | :----- | :---------------------------- | :---------------------------- | | Net Assets at Beginning of Year | $171,522,666 | $169,948,112 | | Net Increase (Decrease) in Net Assets from Operations | $(7,954,255) | $7,994,863 | | Net Realized Loss on Investments | $(183,192) | $(7,380,690) | | Net Change in Unrealized Appreciation (Depreciation) on Investments | $(14,899,471) | $8,672,249 | | Distributions from Net Investment Income | $(6,823,243) | $(6,845,051) | | Repurchase of Common Stock | $(358,573) | $0 | | Net Assets at End of Period | $156,436,308 | $171,109,737 | - Net assets decreased by **$15.09 million** for the six months ended December 31, 2018, primarily due to net unrealized depreciation on investments[12](index=12&type=chunk) [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows | Metric | 6 Months Ended Dec 31, 2018 | 6 Months Ended Dec 31, 2017 | | :----- | :---------------------------- | :---------------------------- | | Net Cash Provided by (Used in) Operating Activities | $(3,719,899) | $(36,646,636) | | Origination and Purchase of Investments | $(104,067,555) | $(81,850,777) | | Sales and Repayments of Investments | $101,767,898 | $54,842,377 | | Net Cash Provided by (Used in) Financing Activities | $7,572,095 | $10,504,746 | | Proceeds from 2023 Notes | $34,500,000 | $0 | | Net Change in Cash | $3,852,196 | $(26,141,890) | | Cash and Restricted Cash at End of Period | $12,178,910 | $7,120,984 | - Net cash used in operating activities significantly decreased from **$(36.6 million)** in 2017 to **$(3.7 million)** in 2018[14](index=14&type=chunk) - The company received **$34.5 million** in proceeds from 2023 Notes in 2018, contributing to a positive net change in cash[14](index=14&type=chunk) [Consolidated Schedule of Investments](index=7&type=section&id=Consolidated%20Schedule%20of%20Investments) This schedule provides a detailed breakdown of the company's investment portfolio by type and industry classification at fair value Investment Portfolio by Type | Investment Type | Dec 31, 2018 Fair Value | % of Net Assets | | :-------------- | :---------------------- | :-------------- | | Senior Secured First Lien Debt Investments | $192,079,797 | 122.79% | | Senior Secured Second Lien Debt Investments | $89,912,571 | 57.48% | | Unsecured Debt Investments | $0 | 0.00% | | Equity, Warrants and Other Investments | $1,342,934 | 0.86% | | Total Non-Controlled/Non-Affiliates | $283,335,302 | 181.12% | Investment Portfolio by Industry Classification | Industry Classification | Dec 31, 2018 Fair Value | Percentage of Total Portfolio | | :-------------------- | :---------------------- | :---------------------------- | | Professional Services | $42,538,788 | 15.01% | | Media | $36,174,874 | 12.77% | | Energy Equipment & Services | $29,956,343 | 10.57% | | Oil, Gas & Consumable Fuels | $24,024,000 | 8.48% | | Diversified Telecommunication Services | $21,941,509 | 7.74% | - The portfolio is heavily weighted towards Senior Secured First Lien Debt Investments, representing **122.79% of net assets** at fair value[20](index=20&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements [Note 1. Organization](index=11&type=section&id=Note%201.%20Organization) This note describes CM Finance Inc's structure as a closed-end BDC and RIC, its investment strategy, and regulatory compliance - CM Finance Inc is a closed-end, externally managed, non-diversified management investment company regulated as a Business Development Company (BDC) and elected to be treated as a Regulated Investment Company (RIC)[31](index=31&type=chunk) - The company's primary investment objective is to maximize total return to stockholders by investing directly in debt and related equity of privately held middle-market companies[35](index=35&type=chunk) - As a BDC, the company must maintain at least **70% of its total assets** as 'qualifying assets' and uses taxable subsidiaries to hold equity securities of portfolio companies while satisfying RIC requirements[36](index=36&type=chunk)[39](index=39&type=chunk) [Note 2. Significant Accounting Policies](index=12&type=section&id=Note%202.%20Significant%20Accounting%20Policies) This note details the company's accounting practices for financial statements, revenue recognition, investment valuation, income taxes, and share repurchases - The company prepares consolidated financial statements in conformity with U.S. GAAP, consolidating wholly-owned special purpose vehicles and taxable subsidiaries[41](index=41&type=chunk)[43](index=43&type=chunk) - Interest income, including PIK interest and amortization of discounts/premiums, is recorded on an accrual basis, with loans placed on non-accrual status when payments are **90+ days past due** or collectability is doubtful[44](index=44&type=chunk)[47](index=47&type=chunk)[52](index=52&type=chunk) - Investments are valued at fair value in accordance with ASC Topic 820, categorized into a three-level hierarchy, with non-marketable investments valued in good faith by the board using various approaches[67](index=67&type=chunk)[74](index=74&type=chunk) - The company has elected to be treated as a RIC for U.S. federal income tax purposes, aiming to distribute at least **90% of its investment company taxable income** to avoid corporate-level taxes[80](index=80&type=chunk) - A discretionary share repurchase program of up to **$5.0 million** was authorized until May 1, 2019; **42,214 shares** were repurchased for **$358,573** during the six months ended December 31, 2018[93](index=93&type=chunk) [Note 3. Recent Accounting Pronouncements](index=19&type=section&id=Note%203.%20Recent%20Accounting%20Pronouncements) This note discusses the company's evaluation of ASU 2018-13, related to fair value measurement disclosure requirements, effective after December 15, 2019 - ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, was issued in August 2018[95](index=95&type=chunk) - The new standard is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted[95](index=95&type=chunk) - The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements and disclosures[95](index=95&type=chunk) [Note 4. Investments](index=20&type=section&id=Note%204.%20Investments) This note details the investment portfolio, risk management, purchases, sales, composition, and fair value measurement, including derivatives - The company manages market, liquidity, and credit risks through various control mechanisms, including trading limits and diversifying exposures[100](index=100&type=chunk)[101](index=101&type=chunk)[105](index=105&type=chunk) Investment Purchases and Sales | Metric | 6 Months Ended Dec 31, 2018 | 6 Months Ended Dec 31, 2017 | | :----- | :---------------------------- | :---------------------------- | | Investment Purchases, at cost (including PIK interest) | $105,021,483 | $83,054,878 | | Investment Sales and Repayments | $101,767,898 | $54,842,377 | Investment Portfolio Composition | Investment Type | Dec 31, 2018 Percentage | Jun 30, 2018 Percentage | | :-------------- | :---------------------- | :---------------------- | | Senior Secured First Lien Debt Investments | 63.69% | 56.30% | | Unitranche First Lien Debt Investment | 4.10% | N/A (included in First Lien) | | Senior Secured Second Lien Debt Investment | 31.74% | 43.30% | | Unsecured Debt Investments | 0.00% | 0.20% | | Equity, Warrants and Other Investments | 0.47% | 0.20% | Fair Value Hierarchy of Assets | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--------- | :------ | :------ | :------ | :---- | | Investments | $501,878 | $0 | $282,833,424 | $283,335,302 | | Derivatives | $0 | $0 | $94,380 | $94,380 | | Total Assets | $501,878 | $0 | $282,927,804 | $283,429,682 | - The company utilizes Total Return Swaps and has embedded derivatives in Notes Payable, none of which are designated as hedging instruments[114](index=114&type=chunk)[120](index=120&type=chunk) [Note 5. Notes Payable](index=31&type=section&id=Note%205.%20Notes%20Payable) This note details the company's debt obligations, including term financing, revolving facilities, and unsecured notes, along with their fair value classification - The company has a **$102.0 million** Term Financing outstanding as of December 31, 2018, due December 5, 2020, collateralized by SPV Assets, with interest at one-month LIBOR plus **2.55%** (from December 5, 2018)[145](index=145&type=chunk) - A **$50 million** 2017 UBS Revolving Financing is available, with no borrowings outstanding as of December 31, 2018, bearing interest at one-month LIBOR plus **3.55%** and maturing December 5, 2019[155](index=155&type=chunk) - The company closed a public offering of **$34.5 million** in **6.125% Notes due 2023** in July 2018, which are unsecured obligations but structurally subordinated to subsidiary debt[161](index=161&type=chunk)[164](index=164&type=chunk) - The fair value of the Notes Payable was estimated at **$102.0 million** (Term Loan) and **$34.1 million** (2023 Notes) as of December 31, 2018, classified as Level 3 fair value[157](index=157&type=chunk)[166](index=166&type=chunk) [Note 6. Indemnification, Guarantees, Commitments and Contingencies](index=34&type=section&id=Note%206.%20Indemnification%2C%20Guarantees%2C%20Commitments%20and%20Contingencies) This note outlines the company's contractual obligations, including unfunded loan commitments and declared distributions - The Board of Directors declared quarterly distributions of **$0.2500 per share** for the first and second fiscal quarters of 2019[171](index=171&type=chunk) Unfunded Commitments | Investment | Unfunded Commitment (Dec 31, 2018) | Unfunded Commitment (Jun 30, 2018) | | :--------- | :--------------------------------- | :--------------------------------- | | 1888 Industrial Services, LLC | $891,089 | $693,069 | | PR Wireless, Inc. | $1,292,534 | $1,846,478 | | Sears Holding Company Delayed Draw | $7,857,143 | $0 | | U.S. Well Services, LLC | $0 | $215,004 | | Total Unfunded Commitments | $10,040,766 | $2,754,551 | - Total unfunded commitments increased from **$2.8 million** at June 30, 2018, to **$10.0 million** at December 31, 2018[172](index=172&type=chunk) [Note 7. Agreements and Related Party Transactions](index=35&type=section&id=Note%207.%20Agreements%20and%20Related%20Party%20Transactions) This note details agreements with the Investment Adviser, including management and incentive fees, administration services, and significant ownership interests - The Investment Advisory Agreement mandates a base management fee of **1.75% of gross assets** and a two-part incentive fee, including **20.0% of pre-incentive fee net investment income** above an **8.0% annualized hurdle rate**[173](index=173&type=chunk)[175](index=175&type=chunk) - For the three months ended December 31, 2018, base management fees earned were **$1,405,207**, and incentive fees incurred were **$753,721** (with $22,000 waived)[178](index=178&type=chunk)[179](index=179&type=chunk) - Stifel owned approximately **16.0% of the company's outstanding common stock** and holds a **20.0% interest in the Adviser** as of December 31, 2018[190](index=190&type=chunk) [Note 8. Directors' Fees](index=38&type=section&id=Note%208.%20Directors%27%20Fees) This note outlines the compensation structure for independent directors, including annual fees, meeting fees, and committee chair stipends - Each independent director receives an annual fee of **$75,000**, plus **$2,500** for each regular board meeting and special telephonic meeting[191](index=191&type=chunk) - The chairman of the audit committee receives an additional annual fee of **$7,500**, while other committee chairpersons receive **$2,500 annually**[191](index=191&type=chunk) - For the three months ended December 31, 2018, the company recorded directors' fees of **$101,250**, with **$93,448** payable at period end[191](index=191&type=chunk) [Note 9. Net Change in Net Assets Resulting from Operations Per Share](index=38&type=section&id=Note%209.%20Net%20Change%20in%20Net%20Assets%20Resulting%20from%20Operations%20Per%20Share) This note presents the calculation of basic and diluted net increase or decrease in net assets per share from operations Net Change in Net Assets Resulting from Operations Per Share | Metric | 3 Months Ended Dec 31, 2018 | 3 Months Ended Dec 31, 2017 | 6 Months Ended Dec 31, 2018 | 6 Months Ended Dec 31, 2017 | | :----- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Net Increase (Decrease) in Net Assets from Operations | $(9,382,296) | $4,859,147 | $(7,954,255) | $7,994,863 | | Weighted Average Shares Outstanding | 13,638,869 | 13,690,480 | 13,644,483 | 13,690,182 | | Basic/Diluted Net Increase (Decrease) in Net Assets Per Share | $(0.69) | $0.35 | $(0.58) | $0.58 | - Basic and diluted net assets per share decreased to **$(0.69)** for the three months ended December 31, 2018, from $0.35 in the prior year[194](index=194&type=chunk) [Note 10. Distributions](index=39&type=section&id=Note%2010.%20Distributions) This note provides a history of cash dividend distributions and their tax classification for stockholders Cash Dividend Distributions | Declaration Date | Record Date | Payment Date | Amount Per Share | | :--------------- | :---------- | :----------- | :--------------- | | August 23, 2018 | September 18, 2018 | October 5, 2018 | $0.2500 | | November 6, 2018 | December 14, 2018 | January 3, 2019 | $0.2500 | Source of Distributions | Source | 6 Months Ended Dec 31, 2018 (Amount) | 6 Months Ended Dec 31, 2018 (Percentage) | 6 Months Ended Dec 31, 2017 (Amount) | 6 Months Ended Dec 31, 2017 (Percentage) | | :----- | :----------------------------------- | :--------------------------------------- | :----------------------------------- | :--------------------------------------- | | Ordinary income and short-term capital gains | $6,823,243 | 100% | $6,845,051 | 100% | | Long-term capital gains | $0 | 0% | $0 | 0% | | Total | $6,823,243 | 100% | $6,845,051 | 100% | - All cash distributions for the six months ended December 31, 2018, and 2017, were derived from ordinary income and short-term capital gains[197](index=197&type=chunk) [Note 11. Share Repurchase Program](index=40&type=section&id=Note%2011.%20Share%20Repurchase%20Program) This note details the company's discretionary share repurchase program, including shares repurchased and their impact on NAV per share - The company's board authorized a discretionary share repurchase program of up to **$5.0 million** until May 1, 2019[198](index=198&type=chunk) Share Repurchase Activity | Metric | 3 Months Ended Dec 31, 2018 | 6 Months Ended Dec 31, 2018 | | :----- | :---------------------------- | :---------------------------- | | Number of shares repurchased | 30,999 | 42,214 | | Cost of shares repurchased, including commissions | $257,336 | $358,573 | | Weighted average price per share | $8.25 | $8.44 | | Net asset value per share at period end | $11.49 | $11.49 | | Weighted average discount to period end net asset value | 28.19% | 26.52% | - Share repurchases increased the company's NAV per share by **$0.01** for the six months ended December 31, 2018[198](index=198&type=chunk) [Note 12. Share Transactions](index=40&type=section&id=Note%2012.%20Share%20Transactions) This note summarizes changes in common shares outstanding due to reinvestments and repurchases Common Share Transactions | Metric | 6 Months Ended Dec 31, 2018 (Shares) | 6 Months Ended Dec 31, 2018 (Amount) | 6 Months Ended Dec 31, 2017 (Shares) | 6 Months Ended Dec 31, 2017 (Amount) | | :----- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Balance at beginning of period | 13,649,504 | $200,203,363 | 13,689,221 | $200,568,530 | | Reinvestments of stockholder distributions | 5,826 | $49,707 | 1,259 | $11,813 | | Retirement of repurchased shares | (42,214) | $(358,531) | — | — | | Balance at end of period | 13,613,116 | $199,894,539 | 13,690,480 | $200,580,343 | - The number of shares outstanding decreased by **36,388 shares** during the six months ended December 31, 2018, primarily due to the retirement of repurchased shares[201](index=201&type=chunk) [Note 13. Financial Highlights](index=41&type=section&id=Note%2013.%20Financial%20Highlights) This note presents key per share data and financial ratios, including NAV, total return, expense ratios, and portfolio turnover Financial Highlights | Metric | 2018 | 2017 | | :----- | :--- | :--- | | Net asset value, beginning of period | $12.57 | $12.41 | | Net investment income | $0.52 | $0.49 | | Net realized and unrealized gains (losses) | $(1.11) | $0.10 | | Net increase (decrease) in net assets resulting from operations | $(0.59) | $0.59 | | Dividends from net investment income | $(0.50) | $(0.50) | | Net asset value, end of period | $11.49 | $12.50 | | Market value per share, end of period | $8.60 | $8.15 | | Total return based on market value | (24.58)% | (13.65)% | | Ratio of total expenses to average net assets | 12.72% | 9.88% | | Asset Coverage Ratio | 2.15 | 2.46 | | Portfolio Turnover Rate | 32% | 20% | - Net asset value per share decreased from **$12.57** at the beginning of the period to **$11.49** at the end of the period for 2018[203](index=203&type=chunk) - The total return based on market value was a negative **(24.58%)** for the six months ended December 31, 2018, compared to a negative (13.65%) in 2017[203](index=203&type=chunk) [Note 14. Other Fee Income](index=42&type=section&id=Note%2014.%20Other%20Fee%20Income) This note details the components of other fee income, primarily from loan amendment and consent fees Other Fee Income | Metric | 3 Months Ended Dec 31, 2018 | 3 Months Ended Dec 31, 2017 | 6 Months Ended Dec 31, 2018 | 6 Months Ended Dec 31, 2017 | | :----- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Loan Amendment/Consent Fee | $277,365 | $0 | $432,520 | $9,879 | | Total Other Fee Income | $277,365 | $0 | $432,520 | $9,879 | - Other fee income, primarily from loan amendment/consent fees, increased substantially from **$0** in 2017 to **$277,365** for the three months ended December 31, 2018[206](index=206&type=chunk) [Note 15. Tax Information](index=42&type=section&id=Note%2015.%20Tax%20Information) This note provides tax-related information, specifically the aggregate investment unrealized appreciation and depreciation based on cost Investment Unrealized Appreciation and Depreciation for Tax Purposes | Metric | Dec 31, 2018 | Jun 30, 2018 | | :----- | :----------- | :----------- | | Tax cost | $307,290,045 | $302,647,282 | | Gross unrealized appreciation | $4,357,482 | $6,015,163 | | Gross unrealized depreciation | $(28,312,222) | $(15,070,432) | | Net unrealized investment depreciation | $(23,954,740) | $(9,055,269) | - Net unrealized investment depreciation for U.S. federal income tax purposes increased significantly from **$(9.06 million)** at June 30, 2018, to **$(23.95 million)** at December 31, 2018[207](index=207&type=chunk) [Note 16. Subsequent Events](index=42&type=section&id=Note%2016.%20Subsequent%20Events) This note discloses significant events occurring after the reporting period, including investment activities and declared distributions - Subsequent to December 31, 2018, through February 5, 2019, the company invested **$23.4 million** in new and existing portfolio companies[208](index=208&type=chunk) - During the same subsequent period, the company received **$29.0 million** from repayments or sales proceeds[208](index=208&type=chunk) - On February 5, 2019, the board of directors declared a distribution of **$0.25 per share** for the quarter ended March 31, 2019, payable on April 4, 2019[208](index=208&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses CM Finance Inc's financial condition, operational results, and outlook, covering investment objectives, accounting policies, portfolio activity, liquidity, and regulatory status [Overview](index=44&type=section&id=Overview) This section provides a high-level summary of CM Finance Inc's business model, investment objectives, and regulatory framework - CM Finance Inc is a closed-end, externally managed BDC and RIC, aiming to maximize total return by investing in debt and equity of privately held middle-market companies[212](index=212&type=chunk)[213](index=213&type=chunk) - The company's board approved increasing the maximum leverage from a **200% to a 150% asset coverage ratio**, effective May 2, 2019[218](index=218&type=chunk) - Taxable subsidiaries are utilized to hold equity securities of portfolio companies, ensuring compliance with RIC requirements[217](index=217&type=chunk) [Critical accounting policies](index=44&type=section&id=Critical%20accounting%20policies) This section highlights the company's most significant accounting policies, particularly the valuation of portfolio investments at fair value - The valuation of portfolio investments at fair value is a critical accounting policy, determined by the board of directors using market, income, or both approaches[221](index=221&type=chunk)[224](index=224&type=chunk) - Investments are categorized into a three-level fair value hierarchy (Level 1, 2, 3) based on the observability of inputs, with most investments classified as Level 3[227](index=227&type=chunk)[229](index=229&type=chunk) - A multi-step valuation process is employed for investments without readily available market quotations, involving the Adviser's investment team, senior management, independent valuation firms, and the board's Valuation Committee[225](index=225&type=chunk)[228](index=228&type=chunk) [Revenue recognition](index=47&type=section&id=Revenue%20recognition) This section describes how the company recognizes various types of revenue, including interest income, fees, and the policy for non-accrual loans - Revenue is primarily generated from interest income on debt investments, adjusted for amortization of premium and accretion of discount, recorded on an accrual basis[231](index=231&type=chunk) - Origination, closing, commitment, and amendment fees, along with prepayment penalties, are accreted into interest income or recognized as other fee income[231](index=231&type=chunk)[232](index=232&type=chunk) - Loans are placed on non-accrual status when principal or interest payments are **90 days or more past due**, or when collectability is doubtful; one investment was on non-accrual status as of December 31, 2018[234](index=234&type=chunk) [Financing Facility](index=47&type=section&id=Financing%20Facility) This section details the company's debt financing arrangements, including term loans and revolving credit facilities - The company has a **$102.0 million** Term Financing facility due December 5, 2020, collateralized by debt investments, with interest at one-month LIBOR plus **2.55%** (from December 5, 2018)[235](index=235&type=chunk) - A **$50 million** 2017 UBS Revolving Financing facility is available, maturing December 5, 2019, with interest at one-month LIBOR plus **3.55%**; no borrowings were outstanding as of December 31, 2018[236](index=236&type=chunk) - The Citi Revolving Financing was fully repaid and terminated on December 8, 2017[238](index=238&type=chunk) [Notes due 2023](index=48&type=section&id=Notes%20due%202023) This section describes the company's 6.125% Notes due 2023, including their offering, ranking, and redemption terms - The company completed a public offering of **$34.5 million** in **6.125% notes due 2023** in July 2018, generating approximately **$33.2 million** in net proceeds[239](index=239&type=chunk) - These Notes are direct unsecured obligations, ranking pari passu with other unsecured indebtedness, but are effectively and structurally subordinated to secured and subsidiary indebtedness[240](index=240&type=chunk) - The Notes are listed on the NASDAQ Global Select Market under the trading symbol 'CMFNL' and may be redeemed at the company's option on or after July 1, 2020[241](index=241&type=chunk) [Investments](index=49&type=section&id=Investments) This section discusses the company's investment strategy, portfolio activity, and compliance with BDC and RIC requirements - Investment activity fluctuates based on available capital, debt/equity market conditions for middle-market companies, M&A activity, and the competitive environment[244](index=244&type=chunk) - As a BDC, the company must ensure at least **70% of its total assets** are 'qualifying assets' (investments in eligible portfolio companies); non-qualifying assets were approximately **10.1% of total assets** as of December 31, 2018[245](index=245&type=chunk) - To qualify as a RIC, the company must meet specific source-of-income and asset diversification requirements to avoid corporate-level taxes[246](index=246&type=chunk) [Revenues](index=49&type=section&id=Revenues) This section outlines the company's primary revenue streams, including interest income, dividends, capital gains, and various fees - Primary revenue sources include interest on debt investments, royalty income, dividends on equity interests, and capital gains from the sale of warrants and other debt/equity interests[247](index=247&type=chunk) - Debt investments typically have an expected maturity of **three to five years**, with interest generally payable quarterly or semi-annually[247](index=247&type=chunk) - Additional revenue is generated from prepayment fees, commitment, origination, structuring, or due diligence fees, and fees for providing managerial assistance[247](index=247&type=chunk) [Expenses](index=49&type=section&id=Expenses) This section details the company's operating expenses, including management fees, administration fees, and other out-of-pocket costs - Primary operating expenses include base management fees, incentive fees, administration fees, and reimbursable expenses under the Advisory and Administration Agreements[248](index=248&type=chunk) - The company bears all other out-of-pocket costs, including organization and offering costs, asset valuation, interest on debt, transfer agent and custody fees, federal and state registration fees, taxes, and independent directors' fees[249](index=249&type=chunk)[250](index=250&type=chunk) [Portfolio and investment activity](index=51&type=section&id=Portfolio%20and%20investment%20activity) This section provides an overview of the investment portfolio's size, composition, yield, and recent investment activities - As of December 31, 2018, the investment portfolio totaled **$283.3 million** (fair value) across **29 portfolio companies**[251](index=251&type=chunk) - The portfolio composition at fair value was **63.7% first lien**, **31.7% second lien**, **4.1% unitranche first lien**, and **0.5% equities/warrants**[251](index=251&type=chunk) - The weighted average total yield of debt and income-producing securities at amortized cost was **11.08%** as of December 31, 2018[253](index=253&type=chunk) - During the three months ended December 31, 2018, **14 new investments** totaling approximately **$50.1 million** were added, all consisting of first lien investments[253](index=253&type=chunk) - As of December 31, 2018, **94.8% of debt investments** bore interest based on floating rates, and the company had **$10.0 million** in aggregate unfunded commitments[255](index=255&type=chunk)[256](index=256&type=chunk) [Asset Quality](index=52&type=section&id=Asset%20Quality) This section describes the Adviser's rating system for monitoring investment credit profiles and the portfolio's asset quality distribution - The Adviser uses a five-level numeric rating system to monitor the credit profile and expected returns of each investment, with Rating 1 indicating performance above expectations and Rating 5 indicating expected loss of return and principal[257](index=257&type=chunk) Investment Asset Quality Ratings | Rating | Dec 31, 2018 Fair Value | % of Portfolio | Number of Investments | | :----- | :---------------------- | :------------- | :-------------------- | | 1 | $11,933,992 | 4.2% | 3 | | 2 | $249,958,456 | 88.2% | 29 | | 3 | $21,442,735 | 7.6% | 2 | | 4 | — | — | — | | 5 | $119 | — | 4 | - As of December 31, 2018, **88.2% of the portfolio** (by fair value) was rated 2, indicating performance within expectations, while **7.6%** was rated 3, requiring closer monitoring[259](index=259&type=chunk) [Results of Operations](index=53&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, including investment income, expenses, and net changes in unrealized appreciation or depreciation - Investment income increased to **$9.3 million** for the three months ended December 31, 2018, from $8.4 million in the prior year, driven by additional investments[260](index=260&type=chunk) - Total expenses rose to **$5.6 million** for the three months ended December 31, 2018, from $4.8 million in the prior year, primarily due to increased interest expenses from higher LIBOR rates and payments on the 2023 Notes[261](index=261&type=chunk) - Net investment income remained stable at approximately **$3.7 million** for both the three months ended December 31, 2018, and 2017[262](index=262&type=chunk) - The company recorded a net change in unrealized depreciation of **$(13.2 million)** for the three months ended December 31, 2018, primarily due to decreased valuations of Trident USA Health Services, LLC and Premiere Global Services, Inc[264](index=264&type=chunk) [Liquidity and capital resources](index=54&type=section&id=Liquidity%20and%20capital%20resources) This section discusses the company's available cash, financing capacity, and primary liquidity needs - As of December 31, 2018, the company had **$6.2 million** in unrestricted cash, **$6.0 million** in restricted cash, and **$50.0 million** of capacity under the 2017 UBS Revolving Financing[267](index=267&type=chunk) - Cash from operating activities increased by **$20.6 million** for the three months ended December 31, 2018, primarily due to sales of investments offsetting purchases[266](index=266&type=chunk) - Primary liquidity needs include interest and principal repayments on financing facilities, unfunded loan commitments, new investments, dividend distributions, and operating expenses[267](index=267&type=chunk) [Regulated Investment Company Status and Distributions](index=54&type=section&id=Regulated%20Investment%20Company%20Status%20and%20Distributions) This section explains the company's RIC status, its distribution requirements, and potential constraints on distribution ability - The company has elected to be treated as a RIC, requiring it to distribute at least **90% of its net taxable income** to stockholders annually to avoid corporate-level federal income taxes[269](index=269&type=chunk)[271](index=271&type=chunk) - The company intends to distribute between **90% and 100% of its annual taxable income**, but distribution ability may be constrained by covenants in its Financing Facilities and BDC asset coverage tests[273](index=273&type=chunk)[274](index=274&type=chunk) [Investment Advisory Agreement](index=55&type=section&id=Investment%20Advisory%20Agreement) This section details the terms of the Investment Advisory Agreement, including base management fees and the two-part incentive fee structure - The Adviser receives a base management fee of **1.75% of gross assets** (excluding cash/equivalents and fair value of derivatives)[276](index=276&type=chunk) - Incentive fees consist of two parts: **20.0% of pre-incentive fee net investment income** above a **2.0% quarterly (8.0% annualized) hurdle rate**, and **20.0% of aggregate cumulative realized capital gains**[277](index=277&type=chunk)[278](index=278&type=chunk) - For the three months ended December 31, 2018, **$1,405,297** in base management fees and **$753,721** in incentive fees were incurred; **$1,566,513** in previous incentive fees were payable, including **$693,771** from deferred interest[280](index=280&type=chunk)[281](index=281&type=chunk) [Off-Balance Sheet Arrangements](index=56&type=section&id=Off-Balance%20Sheet%20Arrangements) This section describes the company's off-balance sheet arrangements, primarily focusing on unfunded commitments to portfolio companies - The company's off-balance sheet arrangements primarily consist of unfunded commitments to portfolio companies[286](index=286&type=chunk) - As of December 31, 2018, unfunded commitments totaled **$10.0 million** to three portfolio companies, an increase from $2.8 million to four companies at June 30, 2018[286](index=286&type=chunk) [Recent Developments](index=56&type=section&id=Recent%20Developments) This section provides an update on significant events that occurred after the reporting period, including investment activities and declared distributions - From December 31, 2018, through February 5, 2019, the company invested **$23.4 million** in new and existing portfolio companies and received **$29.0 million** from repayments or sales[287](index=287&type=chunk) - On February 5, 2019, the board of directors declared a distribution of **$0.25 per share** for the quarter ended March 31, 2019, payable on April 4, 2019[288](index=288&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=57&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section addresses the company's exposure to financial market risks, particularly interest rate risk, and its potential impact on net interest income - The company is subject to financial market risks, including changes in interest rates, with **94.4% of its debt investments** bearing floating rates as of December 31, 2018[290](index=290&type=chunk) - A **1.00% increase in interest rates** would decrease net interest income by approximately **8.1%**, while a **2.00% increase** would increase net interest income by approximately **16.2%**, considering existing interest rate floors[291](index=291&type=chunk) - Floating rate investments subject to a floor only benefit from increases in interest rates once such rates exceed the floor[291](index=291&type=chunk) [Item 4. Controls and Procedures](index=58&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[294](index=294&type=chunk) - No material changes in the company's internal control over financial reporting were identified during the quarter ended December 31, 2018[295](index=295&type=chunk) PART II. OTHER INFORMATION This section covers other information including legal proceedings, risk factors, equity sales, defaults, mine safety, and a comprehensive list of exhibits [Item 1. Legal Proceedings](index=58&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any material legal proceedings, nor are any material legal proceedings threatened against it - The company is not currently subject to any material legal proceedings, nor is any material legal proceeding threatened against it[297](index=297&type=chunk) - Any legal proceedings in the ordinary course of business are not expected to have a material effect on the company's financial condition or results of operations[297](index=297&type=chunk) [Item 1A. Risk Factors](index=58&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2018 - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2018, occurred during the three and six months ended December 31, 2018[298](index=298&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=58&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable for the current report - Not applicable[299](index=299&type=chunk) [Item 3. Defaults Upon Senior Securities](index=58&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable for the current report - Not applicable[300](index=300&type=chunk) [Item 4. Mine Safety Disclosures](index=58&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable for the current report - Not applicable[301](index=301&type=chunk) [Item 5. Other Information](index=58&type=section&id=Item%205.%20Other%20Information) This item is not applicable for the current report - Not applicable[302](index=302&type=chunk) [Item 6. Exhibits](index=58&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of this report or incorporated by reference, including certifications and corporate organizational documents - Exhibits filed include Chief Executive Officer and Chief Financial Officer Certifications pursuant to Exchange Act Rule 13a-14(a) and 18 U.S.C. Section 1350[303](index=303&type=chunk) - Amended and Restated Articles of Incorporation and Bylaws are incorporated by reference from a previous filing[303](index=303&type=chunk) SIGNATURES This section contains the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report's submission - The report is signed by Michael C. Mauer, Chief Executive Officer, and Rocco DelGuercio, Chief Financial Officer, on February 6, 2019[306](index=306&type=chunk)