Investcorp Credit Management BDC(ICMB) - 2019 Q2 - Quarterly Report

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 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 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] - Net Asset Value Per Share decreased by $1.08 from $12.57 at June 30, 2018, to $11.49 at December 31, 2018[8] Consolidated Statements of Operations 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] - 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] Consolidated Statements of Changes in Net Assets 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] Consolidated Statements of Cash Flows 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] - The company received $34.5 million in proceeds from 2023 Notes in 2018, contributing to a positive net change in cash[14] Consolidated Schedule of Investments 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] Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements Note 1. Organization 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] - 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] - 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][39] Note 2. Significant Accounting Policies 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][43] - 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][47][52] - 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][74] - 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] - 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] Note 3. Recent Accounting Pronouncements 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] - The new standard is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted[95] - The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements and disclosures[95] Note 4. Investments 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][101][105] 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][120] Note 5. Notes Payable 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] - 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] - 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][164] - 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][166] Note 6. Indemnification, Guarantees, Commitments and Contingencies 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] 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] Note 7. Agreements and Related Party Transactions 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][175] - 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][179] - 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] Note 8. Directors' Fees 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] - The chairman of the audit committee receives an additional annual fee of $7,500, while other committee chairpersons receive $2,500 annually[191] - For the three months ended December 31, 2018, the company recorded directors' fees of $101,250, with $93,448 payable at period end[191] Note 9. Net Change in Net Assets Resulting from Operations Per Share 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] Note 10. Distributions 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] Note 11. Share Repurchase Program 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] 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] Note 12. Share Transactions 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] Note 13. Financial Highlights 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] - 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] Note 14. Other Fee Income 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] Note 15. Tax Information 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] Note 16. Subsequent Events 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] - During the same subsequent period, the company received $29.0 million from repayments or sales proceeds[208] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses CM Finance Inc's financial condition, operational results, and outlook, covering investment objectives, accounting policies, portfolio activity, liquidity, and regulatory status 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][213] - The company's board approved increasing the maximum leverage from a 200% to a 150% asset coverage ratio, effective May 2, 2019[218] - Taxable subsidiaries are utilized to hold equity securities of portfolio companies, ensuring compliance with RIC requirements[217] Critical accounting policies 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][224] - 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][229] - 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][228] Revenue recognition 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] - Origination, closing, commitment, and amendment fees, along with prepayment penalties, are accreted into interest income or recognized as other fee income[231][232] - 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] Financing Facility 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] - 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] - The Citi Revolving Financing was fully repaid and terminated on December 8, 2017[238] Notes due 2023 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] - 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] - 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] 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] - 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] - To qualify as a RIC, the company must meet specific source-of-income and asset diversification requirements to avoid corporate-level taxes[246] 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] - Debt investments typically have an expected maturity of three to five years, with interest generally payable quarterly or semi-annually[247] - Additional revenue is generated from prepayment fees, commitment, origination, structuring, or due diligence fees, and fees for providing managerial assistance[247] 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] - 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][250] Portfolio and investment activity 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] - 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] - The weighted average total yield of debt and income-producing securities at amortized cost was 11.08% as of December 31, 2018[253] - 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] - 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][256] Asset Quality 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] 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] Results of Operations 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] - 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] - Net investment income remained stable at approximately $3.7 million for both the three months ended December 31, 2018, and 2017[262] - 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] Liquidity and capital resources 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] - 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] - Primary liquidity needs include interest and principal repayments on financing facilities, unfunded loan commitments, new investments, dividend distributions, and operating expenses[267] Regulated Investment Company Status and Distributions 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][271] - 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][274] Investment Advisory Agreement 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] - 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][278] - 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][281] Off-Balance Sheet Arrangements 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] - 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] Recent Developments 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - Floating rate investments subject to a floor only benefit from increases in interest rates once such rates exceed the floor[291] Item 4. Controls and Procedures 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] - No material changes in the company's internal control over financial reporting were identified during the quarter ended December 31, 2018[295] 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 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] - 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the current report - Not applicable[299] Item 3. Defaults Upon Senior Securities This item is not applicable for the current report - Not applicable[300] Item 4. Mine Safety Disclosures This item is not applicable for the current report - Not applicable[301] Item 5. Other Information This item is not applicable for the current report - Not applicable[302] Item 6. Exhibits 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] - Amended and Restated Articles of Incorporation and Bylaws are incorporated by reference from a previous filing[303] 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]