UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2015

OR

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

COMMISSION FILE NUMBER: 1-36300

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 Ave

Floor 26

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  x    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):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x  (do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of May 6, 2015 was 13,667,267.

CM FINANCE INC

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Assets and Liabilities as of March 31, 2015 (unaudited) and June 30, 2014		1
	Consolidated Statements of Operations for the three and nine months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)		2
	Consolidated Statements of Changes in Net Assets for the nine months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)		3
	Consolidated Statements of Cash Flows for the nine months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)		4
	Consolidated Schedule of Investments as of March 31, 2015 (unaudited) and June 30, 2014		5
	Notes to Unaudited Consolidated Financial Statements (unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39
Item 4.	Controls and Procedures		39
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		39
Item 1A.	Risk Factors		40
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3.	Defaults Upon Senior Securities		40
Item 4.	Mine Safety Disclosures		40
Item 5.	Other Information		40
Item 6.	Exhibits		40
SIGNATURES			40

CM Finance Inc and subsidiaries

Consolidated Statements of Assets and Liabilities

	March 31, 2015 (Unaudited)			June 30, 2014
Assets
Non-controlled, non-affiliated investments, at fair value (amortized cost of $311,741,018 and $271,682,258, respectively)	$	311,883,910		$	273,710,465
Derivatives, at fair value (cost $0 and $0, respectively)		1,833,715			563,866
Cash		14,280,014			24,698,073
Cash, restricted		5,089,659			7,139,313
Receivable for investments sold		9,511,348			—
Interest receivable		2,431,561			1,458,043
Deferred debt issuance costs		2,671,625			459,676
Deferred offering costs		186,513			—
Prepaid expenses and other assets		1,183,216			730,562
Total Assets	$	349,071,561		$	308,759,998
Liabilities
Notes Payable:
Term loan	$	102,000,000		$	76,500,000
Revolving credit facility		26,292,558			9,091,314
Payable for investments purchased		13,012,500			16,660,000
Distributions payable		4,740,996			4,612,500
Derivatives, at fair value (cost $0 and $0, respectively)		1,833,715			563,866
Base management fees payable		1,369,920			313,237
Income-based incentive fees payable		548,286			—
Deferred financing costs payable		1,525,000			—
Interest payable		150,235			108,117
Accrued expenses and other liabilities		580,274			694,143
Total Liabilities		152,053,484			108,543,177
Commitments and Contingencies (Note 6)
Net Assets
Common Stock, par value $0.001 per share (100,000,000 shares authorized, 13,666,666 shares issued and outstanding)		13,667			13,667
Additional paid-in capital		198,810,786			198,810,786
Accumulated net realized loss		(1,313,429	)		—
Accumulated distributions in excess of net investment income		(635,839	)		(635,839	)
Net unrealized appreciation on investments		142,892			2,028,207
Total Net Assets		197,018,077			200,216,821
Total Liabilities and Net Assets	$	349,071,561		$	308,759,998
Net Asset Value Per Share	$	14.42		$	14.65

See notes to unaudited consolidated financial statements.

1

CM Finance Inc and subsidiaries

Consolidated Statements of Operations (Unaudited)

	For the three months ended March 31,						For the nine months ended March 31,
	2015			2014			2015			2014
Investment Income:
Interest income	$	8,085,918		$	4,908,129		$	23,906,524		$	12,695,390
Payment in-kind interest income		179,010			412,587			902,862			1,231,371
Other fee income		64,112			213,382			587,874			601,590
Total investment income		8,329,040			5,534,098			25,397,260			14,528,351
Expenses:
Interest expense		923,814			662,838			2,538,128			1,845,391
Amortization of deferred debt issuance costs		340,590			180,120			854,072			280,828
Base management fees		1,369,920			455,934			3,748,061			455,934
Income-based incentive fees		1,018,817			—			3,148,287			—
Capital gains incentive fees		(902,870	)		—			—			—
Custodian and administrator fees		46,412			56,433			216,569			56,433
Directors’ fees		106,750			125,000			318,250			125,000
Professional fees		226,985			178,013			834,216			280,211
Allocation of administrative costs from advisor		37,154			—			381,992			—
Insurance expense		90,126			—			311,619			—
Other expenses		47,258			180,183			254,725			554,861
Total expenses		3,304,956			1,838,521			12,605,919			3,598,658
Waiver of base management fees from Investment Manager		—			(455,934	)		—			(455,934	)
Waiver of income-based incentive fees		(591,826	)		—			(1,174,655	)		—
Waiver of capital gains incentive fees		874,914			—			—			—
Net expenses		3,588,044			1,382,587			11,431,264			3,142,724
Net investment income (1)		4,740,996			4,151,511			13,965,996			11,385,627
Net realized and unrealized gains (losses) on investment transactions:
Net realized gains (losses) on investments attributable to CM Finance LLC		—			122,682			—			(946,608	)
Net realized (losses) gains on investments attributable to CM Finance Inc		(2,233,904	)		107,709			(1,313,429	)		107,709
Net change in unrealized appreciation (depreciation) on investments attributable to CM Finance LLC		—			1,128,765			—			549,814
Net change in unrealized appreciation (depreciation) on investments attributable to CM Finance Inc		(4,417,224	)		186,834			(1,885,315	)		186,834
Net realized and unrealized (losses) gains		(6,651,128	)		1,545,990			(3,198,744	)		(102,251	)
Net (decrease) increase in net assets resulting from operations	$	(1,910,132	)	$	5,697,501		$	10,767,252		$	11,283,376
Net increase in net assets resulting from operations attributable to CM Finance LLC	$	—		$	3,633,977		$	—		$	9,219,852
Net (decrease) increase in net assets resulting from operations attributable to CM Finance Inc	$	(1,910,132	)	$	2,063,524		$	10,767,252		$	2,063,524
CM Finance Inc:
Basic and diluted:
Net investment income per share	$	0.35		$	0.13		$	1.02		$	0.13
Earnings per share	$	(0.14	)	$	0.15		$	0.79		$	0.15
Weighted Average Shares of Common Stock Outstanding		13,666,666			13,666,666			13,666,666			13,666,666
Distributions declared per common share	$	0.3469		$	0.1812		$	1.0219		$	0.1812
(1)    Net investment income attribution:
	For the three months ended March 31,						For the nine months ended March 31,
	2015			2014			2015			2014
Net investment income attributable to CM Finance LLC	$	—		$	2,382,530		$	—		$	9,616,646
Net investment income attributable to CM Finance Inc	$	4,740,996		$	1,768,981		$	13,965,996		$	1,768,981

See notes to unaudited consolidated financial statements.

2

CM Finance Inc and subsidiaries

Consolidated Statements of Changes in Net Assets (Unaudited)

	For the nine months ended March 31,
	2015			2014
CM Finance LLC:
Members capital at beginning of period	$	—		$	87,250,637
Contributions from members		—			48,606,009
Distributions to members		—			(55,076,498	)
Net investment income		—			9,616,646
Net realized losses on investments		—			(946,608	)
Net change in unrealized appreciation (depreciation) on investments		—			549,814
Members’ capital, at end of period		—			90,000,000
CM Finance Inc:
Net assets at beginning of period		200,216,821			—
Capital transactions
Proceeds from shares sold		—			111,549,990
Common stock offering costs		—			(1,200,000	)
Net increase in net assets resulting from capital transactions		—			110,349,990
Total capital - CM Finance Inc (BDC conversion)		—			200,349,990
Increase (decrease) in net assets resulting from operations
Net investment income		13,965,996			1,768,981
Net realized gain (loss) on investments		(1,313,429	)		107,709
Net change in unrealized appreciation (depreciation) on investments and unfunded commitments		(1,885,315	)		186,834
Net increase in net assets from operations		10,767,252			2,063,524
Distributions from net investment income		(13,965,996	)		(2,476,851	)
Total decrease in net assets		(3,198,744	)		(413,327	)
Net assets at end of period (including accumulated net realized loss and distributions in excess of net investment income of $635,839 and $0, respectively)	$	197,018,077		$	199,936,663

See notes to unaudited consolidated financial statements.

3

CM Finance Inc and subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	For the nine months ended March 31,
	2015			2014
Cash Flows from Operating Activities
Net increase in net assets resulting from operations attributable to CM Finance LLC	$	—		$	9,219,852
Net increase in net assets resulting from operations attributable to CM Finance Inc		10,767,252			2,063,524
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Origination and purchases of investments		(152,401,186	)		(188,917,718	)
Payment in kind interest		(902,862	)		(1,231,371	)
Sales and repayments of investments		113,530,406			82,528,896
Net realized loss (gain) on investments in securities attributable to CM Finance LLC		—			946,608
Net realized loss (gain) on investments in securities attributable to CM Finance Inc		1,313,429			(107,709	)
Net change in unrealized (appreciation) depreciation on investments attributable to CM Finance LLC		—			(549,814	)
Net change in unrealized (appreciation) depreciation on investments attributable to CM Finance Inc		1,885,315			(186,834	)
Amortization of discount/premium on investments		(1,598,547	)		(241,464	)
Amortization of deferred debt issuance costs		854,072			280,828
Net (increase) decrease in operating assets:
Cash, restricted		2,049,654			6,900,941
Due from broker		—			22,884,729
Receivable for investments sold		(9,511,348	)		—
Interest receivable		(973,518	)		(808,266	)
Deferred debt issuance costs		—			(625,000	)
Prepaid expenses and other assets		(452,654	)		(384,987	)
Net increase (decrease) in operating liabilities:
Payable for investments purchased		(3,647,500	)		4,975,000
Interest payable		42,118			27,848
Directors’ fees payable		—			125,000
Accrued expenses and other liabilities		(113,869	)		372,848
Base management fees payable		1,056,683			—
Income-based incentive fees payable		548,286			—
Net Cash Used in Operating Activities		(37,554,269	)		(62,727,089	)
Cash Flows from Financing Activities
Proceeds from shares sold		—			111,549,990
Payment for deferred financing costs		(1,541,021	)		(1,102,827	)
Deferred offering costs		(186,513	)		—
Contributions from members of CM Finance LLC		—			48,606,009
Distributions to members of CM Finance LLC		—			(76,460,099	)
Distributions to shareholders		(13,837,500	)		(2,476,851	)
Proceeds from borrowing on term loan		25,500,000			—
Proceeds from borrowing on revolving credit facility		84,803,294			35,020,623
Repayments of borrowing on revolving credit facility		(67,602,050	)		—
Net Cash Provided by Financing Activities		27,136,210			115,136,845
Net Change in Cash		(10,418,059	)		52,409,756
Cash
Beginning of period		24,698,073			—
End of period	$	14,280,014		$	52,409,756
Supplemental cash flow information:
Cash paid for interest	$	2,580,246		$	1,873,239

See notes to unaudited consolidated financial statements.

4

CM Finance Inc and subsidiaries

Consolidated Schedule of Investments

(Unaudited)

March 31, 2015

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 + 9.50%(3)		1.00	%		12/19/2019	$	20,000,000	$	19,616,113	$	19,600,000			9.95	%
AAR Intermediate Holdings, LLC	Oilfield Services	1M L + 12.00%(3)		1.00	%		3/30/2019		19,257,426		17,838,518		17,716,832			8.99	%
AM General, LLC	Automobiles and Components	3M L + 9.00%(3)		1.25	%		3/22/2018		8,690,025		8,601,233		7,994,823			4.06	%
American Gaming Systems, Inc.	Entertainment and Leisure	3M L + 8.25%(3)		1.00	%		12/21/2020		14,812,500		14,449,297		14,664,375			7.44	%
Butler Burgher Group LLC(4)	Services	1M L + 13.25%(3)		0.25	%		6/30/2017		8,249,264		8,132,575		8,121,775			4.12	%
Capital Petroleum Group	Retail	11.00% cash, 3.00% PIK(2)(3)		—			9/30/2019		14,478,560		14,107,887		14,478,560			7.35	%
Crestwood Holdings, LLC	Pipelines	3M L + 6.00%(3)		1.00	%		6/19/2019		9,620,999		9,587,334		9,139,949			4.64	%
JAC Holdings Corp.	Automobiles and Components	11.50%(3)		—			10/1/2019		7,750,000		7,812,631		7,982,500			4.05	%
Lightsquared Inc.(5)	Telecommunications	9.00% PIK(2)		—			6/1/2015		4,784,288		4,775,181		4,784,014			2.43	%
Nathan’s Famous, Inc.	Food & Beverage	10.00%(3)					2/27/2020		4,000,000		4,000,000		4,160,000			2.11	%
New Standard Energy Texas LLC(6)	Oil and Gas	13.00%(7)		—			11/28/2016		6,903,718		6,726,609		5,828,160			2.96	%
PR Wireless, Inc.	Telecommunications	3M L + 9.00%(3)		1.00	%		6/27/2020		16,872,500		15,331,255		15,607,062			7.92	%
U.S. Well Services, LLC(8)	Oilfield Services	1M L + 11.50%		0.50	%		5/2/2019		6,638,909		6,520,071		6,486,131			3.29	%
YRC Worldwide, Inc.(9)	Trucking and Leasing	3M L + 7.25%(3)		1.00	%		1/1/2020		14,825,126		14,713,364		14,713,938			7.47	%
Total Senior Secured First Lien Debt Investments									156,883,315		152,212,068		151,278,119			76.78	%
Senior Secured Second Lien Debt Investments
AP NMT Acquisition BV(9)	Media	3M L + 9.00%(3)		1.00	%		8/13/2022		20,000,000		18,744,195		19,200,000			9.74	%
Bird Electric Enterprises, LLC	Utilities	3M L + 12.00%(3)		—			10/9/2020		15,000,000		14,716,086		14,700,000			7.46	%
Caelus Energy Alaska 03 LLC	Oil and Gas	3M L + 7.50%(3)		1.25	%		4/15/2020		24,000,000		21,795,429		19,440,000			9.87	%
North American Lifting Holdings, Inc.	Industrial	3M L + 9.00%(3)		1.00	%		11/27/2021		16,200,000		15,195,581		15,390,000			7.81	%
RCHP, Inc.	Healthcare- Products/Services	3M L + 9.50%(3)		1.00	%		10/23/2019		15,000,000		14,800,787		15,150,000			7.69	%
Road Infrastructure Investment, LLC	Construction & Building	3M L + 6.75%(3)		1.00	%		9/30/2021		5,000,000		4,978,409		4,625,000			2.35	%
Telecommunications Management, LLC	Cable	3M L + 8.00%(3)		1.00	%		10/30/2020		11,539,815		11,472,242		11,193,620			5.68	%
Telular Corp.	Telecommunications	3M L + 8.00%(3)		1.25	%		6/24/2020		7,500,000		7,416,462		7,481,250			3.80	%
TNS, Inc.	Telecommunications	3M L + 8.00%(3)		1.00	%		8/14/2020		15,725,000		15,729,811		15,646,375			7.94	%
Trident USA Health Services, Inc.	Healthcare- Products/Services	3M L + 9.00%(3)		1.25	%		7/31/2020		20,000,000		19,954,424		19,700,000			10.00	%
Total Senior Secured Second Lien Debt Investments									149,964,815		144,803,426		142,526,245			72.34	%
Investments(1)	Industry					Maturity Date		Principal Amount/ Shares(2)		Amortized Cost		Fair Value			% of Net Assets
Equity, Warrants and Other Investments
AAR Intermediate Holdings, LLC (Warrants)(10)	Oilfield Services						9/30/2024		1,251,058		1,251,058		1,251,058			0.64	%
Endeavour International Holding B.V., $3.01 strike (Warrants)(9)(10)	Oil and Gas						11/30/2017		160,000		160,000		1			—
PR Wireless, Inc., $0.01 strike (Warrants)(10)	Telecommunications						6/24/2024		201		1,374,009		254,766			0.13	%
Virgin America, Inc. (Common Stock)(9)(10)(11)	Airlines								570,917		11,940,457		16,573,721			8.41	%
Total Equity, Warrants and Other Investments									1,982,176		14,725,524		18,079,546			9.18	%
Total Non-Controlled/Non-Affiliates								$	308,830,306	$	311,741,018	$	311,883,910			158.30	%
Liabilities in excess of other assets													(114,865,833	)		(58.30	%)
Net Assets												$	197,018,077			100.00	%

See notes to unaudited consolidated financial statements.

5

CM Finance Inc and subsidiaries

Consolidated Schedule of Investments (continued)

(Unaudited)

March 31, 2015

	Industry	Interest Rate			Maturity Date		Notional Amount		Amortized Cost		Fair Value			% of Net Assets
Derivatives
Assets
Embedded derivative - Notes Payable(12)	Diversified Financial Services						$	102,000,000	$	—	$	1,458,918			0.74	%
Embedded derivative - Notes Payable(12)	Diversified Financial Services							50,000,000		—		374,797			0.19	%
Total Assets								152,000,000		—		1,833,715			0.93	%
Liabilities
Total Return Swap(12)	Diversified Financial Services		L + 2.75	%		12/5/2017		102,000,000		—		(1,458,918	)		(0.74	%)
Total Return Swap(12)	Diversified Financial Services		0.50	%		12/4/2016		50,000,000		—		(374,797	)		(0.19	%)
Total Liabilities								152,000,000		—		(1,833,715	)		(0.93	%)
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 and is net of repayments and unfunded commitments.

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

⁽⁴⁾  Does not include $250,000 of unfunded commitment with a fair value of ($3,750).

⁽⁵⁾  Does not include $5,320,197 of unfunded commitment with a fair value of $0.

⁽⁶⁾  Does not include $800,000 of unfunded commitment with a fair value of ($40,000).

⁽⁷⁾  In addition to interest, the borrower pays an overriding royalty interest of 1.25% of gross sales proceeds, subject to certain maximum amounts.

⁽⁸⁾  Does not include $2,916,667 of unfunded commitment with a fair value of ($20,000).

⁽⁹⁾  The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 15.4% of assets.

⁽¹⁰⁾  Security is non-income producing.

⁽¹¹⁾  The shares are subject to a six month “lock-up” period that expires on May 18, 2015.

⁽¹²⁾  Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives—Notes Payable.

1M L -	1 month LIBOR (0.18% as of March 31, 2015)
3M L -	3 month LIBOR (0.27% as of March 31, 2015)
PIK -	Payment-In-Kind

See notes to unaudited consolidated financial statements.

6

CM Finance Inc and subsidiary

Consolidated Schedule of Investments

June 30, 2014

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 Term Loans
Active Media Services, Inc.	Commercial Services	1M L + 9.00% (3)		—			2/1/2018	$	5,000,000	$	4,888,563	$	4,925,000		2.46	%
AM General, LLC	Automobiles and Components	3M L + 9.00% (3)		1.25	%		3/22/2018		14,400,000		14,234,958		12,960,000		6.47	%
American Gaming Systems, Inc.	Entertainment and Leisure	3M L + 8.25% (3)		1.00	%		12/21/2020		14,925,000		14,511,107		14,775,750		7.38	%
Butler Burgher Group LLC	Services	1M L + 11.75%		0.25	%		6/30/2017		8,750,000		8,592,500		8,596,876		4.29	%
Crestwood Holdings, LLC	Pipelines	3M L + 6.00% (3)		1.00	%		6/19/2019		9,898,788		9,857,978		9,997,775		4.99	%
Endeavour International Holding B.V. (4)	Oil and Gas	3M L + 7.00% (3)		1.25	%		11/30/2017		4,930,716		4,864,519		4,807,448		2.40	%
		3M L + 7.00% (3)		1.25	%		11/30/2017		6,860,064		6,767,964		6,688,562		3.34	%
Total									11,790,780		11,632,483		11,496,010		5.74	%
MF Global Holdings, Ltd. (4)	Diversified Financial Services	3M L + 6.50% (3)		2.00	%		12/4/2014		5,976,129		5,965,083		5,976,129		2.99	%
New Standard Energy Texas LLC	Oil and Gas	7.00% cash, 6.00% PIK (2)(5)		—			11/28/2016		4,524,411		4,524,411		4,524,411		2.26	%
PR Wireless, Inc. (6)	Telecommunications	3M L + 9.00%		1.00	%		6/27/2020		17,000,000		15,285,991		15,285,991		7.64	%
U.S. Well Services, LLC	Oilfield Services	1M L + 11.50%		0.50	%		5/2/2019		8,752,841		8,540,885		8,577,783		4.29	%
YRC Worldwide, Inc. (4)	Trucking and Leasing	3M L + 7.00% (3)		1.00	%		2/13/2019		14,925,000		14,787,021		14,962,313		7.47	%
Total Senior Secured First Lien Term Loans									115,942,949		112,820,980		112,078,038		55.98	%
Senior Secured Second Lien Term Loans
Bennu Oil & Gas, LLC	Oil and Gas	3M L + 7.50% (7)		1.25	%		11/1/2018		14,912,125		14,840,295		15,061,246		7.52	%
Caelus Energy Alaska 03 LLC	Oil and Gas	3M L + 7.50%		1.25	%		4/15/2020		14,000,000		13,726,110		13,720,000		6.85	%
CT Technologies Intermediate Holdings, Inc.	Healthcare- Products/Services	3M L + 8.00% (3)		1.25	%		10/5/2020		12,000,000		11,839,053		12,000,000		5.99	%
Ikaria Acquisition, Inc.	Healthcare- Products/Services	3M L + 7.75% (3)		1.00	%		2/12/2022		2,000,000		1,985,880		2,034,000		1.02	%
North American Lifting Holdings, Inc.	Industrial	3M L + 9.00% (3)		1.00	%		11/27/2021		15,000,000		13,888,676		14,775,000		7.38	%
RCHP, Inc.	Healthcare- Products/Services	3M L + 9.50%		1.00	%		10/23/2019		15,000,000		14,780,919		14,775,000		7.38	%
Road Infrastructure Investment, LLC	Construction & Building	3M L + 6.75% (3)		1.00	%		9/30/2021		5,000,000		4,975,918		4,950,000		2.47	%
Telecommunications Management, LLC	Telecommunications	3M L + 8.00% (3)		1.00	%		10/30/2020		11,539,815		11,463,166		11,620,593		5.81	%
Telular Corp.	Telecommunications	3M L + 8.00% (3)		1.25	%		6/24/2020		7,500,000		7,404,490		7,387,500		3.69	%
TNS, Inc.	Telecommunications	1M L + 8.00% (3)		1.00	%		8/14/2020		17,112,500		17,118,479		17,283,625		8.63	%
Trident USA Health Services, Inc.	Healthcare- Products/Services	3M L + 9.00% (3)		1.25	%		7/31/2020		20,000,000		19,948,051		20,000,000		9.99	%
Total Senior Secured Second Lien Term Loans									134,064,440		131,971,037		133,606,964		66.73	%
Senior Secured Notes
Capital Petroleum Group	Retail	11.00% cash, 3.00% PIK (2)(3)		—			9/30/2019		14,152,936		13,726,001		14,152,936		7.07	%
Virgin America, Inc.	Airlines	17.00% PIK (2)		—			6/9/2016		5,924,520		5,808,385		5,924,520		2.96	%
		8.50% cash, 8.50% PIK (2)		—			6/9/2016		5,886,125		5,584,289		5,886,125		2.94	%
Total									11,810,645		11,392,674		11,810,645		5.90	%
Total Senior Secured Notes									25,963,581		25,118,675		25,963,581		12.97	%

See notes to unaudited consolidated financial statements.

7

CM Finance Inc and subsidiary

Consolidated Schedule of Investments (Continued)

June 30, 2014

Investments(1)	Industry	Maturity Date		Principal Amount/ Shares (2)		Amortized Cost		Fair Value			% of Net Assets
Warrants
Endeavour International Holding B.V., $3.01 strike (4)(8)	Oil and Gas		4/30/2018		160,000		160,000		50,000			0.02	%
PR Wireless, Inc., $0.01 strike (6)(8)	Telecommunications		6/19/2019		201		1,374,009		1,374,009			0.69	%
Virgin America, Inc., $2.50 strike (8)	Airlines		5/10/2043	$	513,333	$	184,116	$	424,116			0.21	%
Virgin America, Inc., $3.50 strike (8)	Airlines		12/9/2041		385,000		53,441		213,757			0.11	%
Total Warrants					1,058,534		1,771,566		2,061,882			1.03	%
Total Non-Controlled/Non-Affiliates				$	277,029,504	$	271,682,258	$	273,710,465			136.71	%
Liabilities in excess of other assets									(73,493,644	)		(36.71	%)
Net Assets								$	200,216,821			100.00	%

	Industry	Interest Rate			Maturity Date		Notional Amount		Amortized Cost		Fair Value			% of Net Assets
Derivatives
Assets
Total Return Swap (9)	Diversified Financial Services		L + 2.85	%		5/22/2016	$	76,500,000	$	—	$	471,137			0.23	%
Total Return Swap (9)	Diversified Financial Services		0.50	%		12/4/2015		50,000,000		—		92,729			0.05	%
Total Assets								126,500,000		—		563,866			0.28	%
Liabilities
Embedded derivative — Notes Payable (9)	Diversified Financial Services							76,500,000		—		(471,137	)		(0.23	%)
Embedded derivative — Notes Payable (9)	Diversified Financial Services							50,000,000		—		(92,729	)		(0.05	%)
Total Liabilities								126,500,000		—		(563,866	)		(0.28	%)
Total Derivatives							$	253,000,000	$	—	$	—			—

(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 and is net of repayments and unfunded commitments.

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

(4) The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 10.6% of total assets.

(5) In addition to interest, the borrower pays an overriding royalty interest of 1.25% of gross sales proceeds, subject to certain maximum amounts.

(6) Position or portion thereof unsettled as of June 30, 2014.

(7) $10,972,500 held by the Company indirectly through CM Finance SPV, Ltd. and pledged as collateral for the Total Return Swaps.

(8) Security is non-income producing.

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

1M L -	1 month LIBOR (as of June 30, 2014 this rate was 0.15%)
3M L -	3 month LIBOR (as of June 30, 2014 this rate was 0.23%)
PIK -	Payment-In-Kind

See notes to unaudited consolidated financial statements.

8

CM Finance Inc and subsidiaries

Notes to Consolidated Financial Statements (unaudited )

March 31, 2015

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 5, 2014, CM Finance Inc priced 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 “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 also 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 “Investment Manager”) as its investment manager and administrator, respectively.

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

As a BDC, the Company is required to comply with certain regulatory requirements. For instance, as a BDC, the Company must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant 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 subsidiary, CM Finance SPV, Ltd. (“SPV”), a special purpose vehicle used to finance certain investments.

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

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The Company has formed and expects to continue to form certain taxable subsidiaries (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.

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 United States 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. During the three and nine months ended March 31, 2015, $18,937 and $1,077,885 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively. During the three and nine months ended March 31, 2014, $0 in prepayment penalties and unamortized discounts were included in interest income.

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 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 reserved 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 the Investment Manager may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

The Company may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company earned PIK interest of $179,010 and $902,862 during the three and nine months ended March 31, 2015, respectively. The Company earned PIK interest of $412,587 and $1,231,371 during the three and nine months ended March 31, 2014, respectively.

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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 stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is 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 distributed at least 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 stockholders, unless a stockholder 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 stockholders 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. 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. 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.

Organizational expenses consist principally of legal and accounting fees incurred in connection with the organization of the Company and were expensed 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.

h. 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.

11

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 March 31, 2015 or June 30, 2014.

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 derivatives in the Notes Payable 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 Investment Manager, 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 of the Investment Manager 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 Investment Manager. On a periodic basis

12

and at least once annually, independent valuation firm(s) engaged by the Company conduct independent appraisals and review the Investment Manager’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 Investment Manager and that of the independent valuation firm. 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 Investment Manager and the independent valuation firm. Upon recommendation by the Valuation Committee and a review of the valuation materials of the Investment Manager and the third party independent valuation firm, the board of directors of the Company determines 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 Consolidated Statements of Assets and Liabilities.

i. Income Taxes

The Company has elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Internal Revenue 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 makes 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 at least 98% of net ordinary income, 98.2% of any 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 GAAP. During the three and nine months ended March 31, 2015, the Company declared ordinary distributions of $4.7 million and $14.0 million, respectively. The tax character of these distributions is expected to be 100% ordinary income.

During the period from February 6, 2014 through March 31, 2014, the Company declared distributions of $1.8 million.

During the period from January 1, 2014 through February 5, 2014, $33.1 million in distributions were made to members.

During the period from July 1, 2013 through February 5, 2014, $55.1 million in distributions were made to members.

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.

j. Unrealized Gains Incentive Fee

Under GAAP, the Company calculates the unrealized gains incentive fee payable to the Investment Manager as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional unrealized gains incentive fee taking into account any unrealized gains or losses. As the provisional incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional unrealized gains incentive fee accrued at a reporting date may vary from the incentive fee that is ultimately realized and the differences could be material.

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

13

k. Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Note 3. New Accounting Pronouncements

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. Prior to the issuance of this ASU, debt issuance costs were required to be presented in the balance sheet as an asset. Upon adoption, the standard requires prior period financial statements to be retrospectively adjusted. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted in certain circumstances. The Company expects to adopt this standard on or before the effective date.

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” or ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. We do not anticipate that the adoption of ASU 2014-15 will have a material impact on our consolidated financial statements.

During the twelve months ended June 30, 2014, the Company adopted ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The amendments in ASU 2011-11 are intended to create a converged offsetting model that would eliminate a significant quantitative difference between statements of assets and liabilities prepared under U.S. GAAP and IFRS. ASU 2011-11 requires additional disclosures for recognized financial and derivative instruments that are either offset on the Consolidated Statements of Assets and Liabilities or are subject to an enforceable master netting agreement. The adoption of ASU 2011-11 did not have a material impact on the Company’s disclosures.

In June 2013, the FASB issued ASU 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 amends the criteria that define an investment company, clarifies the measurement guidance and requires certain additional disclosures, including (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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.

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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 contracts are executed pursuant to an International Swaps and Derivatives Association (“ISDA”) master agreement that the Company currently has in place with UBS. At March 31, 2015, 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.

b. Investments

Investment purchases, sales and principal payments/paydowns are summarized below for the three and nine months ended March 31, 2015 and March 31, 2014. These purchase and sale amounts exclude derivative instruments.

	Three Months Ended March 31,				Nine Months Ended March 31,
	2015		2014		2015		2014
Investment purchases, at cost (including PIK interest)	$	49,208,409	$	86,053,450	$	153,304,048	$	190,149,089
Investment sales and repayments		47,141,894		16,140,384		113,530,406		82,528,896

The composition of the Company’s investments as of March 31, 2015, 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(1)	$	152,212,068		48.83	%	$	151,278,119			48.50	%
Senior Secured Second Lien Debt Investments(1)		144,803,426		46.45			142,526,245			45.70
Equity, Warrants and Other Investments		14,725,524		4.72			18,079,546			5.80
Embedded derivative - Notes Payable		—		—			1,833,716			0.59
Total Return Swap		—		—			(1,833,716	)		(0.59	)
Total	$	311,741,018		100.00	%	$	311,883,910			100.00	%

(1) Includes assets previously classified as Senior Secured Notes.

The composition of the Company’s investments as of June 30, 2014, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:

	Investments at					Investments at
	Amortized Cost		Percentage			Fair Value			Percentage
Senior Secured First Lien Term Loans	$	112,820,980		41.53	%	$	112,078,038			40.95	%
Senior Secured Second Lien Term Loans		131,971,037		48.57			133,606,964			48.81
Senior Secured Notes		25,118,675		9.25			25,963,581			9.49
Warrants		1,771,566		0.65			2,061,882			0.75
Total Return Swaps		—		—			563,866			0.21
Embedded derivatives - Notes Payable		—		—			(563,866	)		(0.21	)
Total	$	271,682,258		100.00	%	$	273,710,465			100.00	%

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The following table shows the portfolio composition by industry grouping at fair value at March 31, 2015:

	Investments at Fair Value		Percentage of Total Portfolio
Telecommunications	$	43,773,467		14.04	%
Healthcare-Products/Services		34,850,000		11.17
Oilfield Services		25,454,021		8.16
Oil and Gas		25,268,161		8.10
Construction & Building		24,225,000		7.77
Media		19,200,000		6.16
Airlines		16,573,721		5.32
Automobiles and Components		15,977,323		5.12
Industrial		15,390,000		4.94
Trucking and Leasing		14,713,938		4.72
Utilities		14,700,000		4.71
Entertainment and Leisure		14,664,375		4.70
Retail		14,478,560		4.64
Cable		11,193,620		3.59
Pipelines		9,139,949		2.93
Services		8,121,775		2.60
Food & Beverage		4,160,000		1.33
Total	$	311,883,910		100.00	%

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2014:

	Investments at		Percentage of
	Fair Value		Total Portfolio
Telecommunications	$	52,951,718		19.35	%
Healthcare-Products/Services		48,809,000		17.83
Oil and Gas		44,851,667		16.39
Trucking and Leasing		14,962,313		5.47
Entertainment and Leisure		14,775,750		5.40
Industrial		14,775,000		5.40
Retail		14,152,936		5.17
Automobiles and Components		12,960,000		4.73
Airlines		12,448,518		4.55
Pipelines		9,997,775		3.65
Services		8,596,876		3.14
Oilfield Services		8,577,783		3.13
Diversified Financial Services		5,976,129		2.18
Construction & Building		4,950,000		1.81
Commercial Services		4,925,000		1.80
Total	$	273,710,465		100.00	%

The following table shows the portfolio composition by geographic grouping at fair value at March 31, 2015:

	Fair Value		Percentage Total Portfolio
U.S. West	$	77,803,386		24.95	%
U.S. Midwest		68,966,131		22.11
U.S. Mid-Atlantic		49,824,935		15.97
U.S. Southwest		42,368,667		13.58
U.S. Southeast		35,636,828		11.43
Europe		19,200,000		6.16
U.S. Northeast		18,083,963		5.80
Total	$	311,883,910		100.00	%

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The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2014:

	Investments at		Percentage of
	Fair Value		Total Portfolio
U.S. Southwest	$	69,260,200		25.30	%
U.S. Mid-Atlantic		64,371,690		23.52
U.S. Southeast		48,385,000		17.68
U.S. Midwest		46,930,406		17.15
U.S. West		34,765,394		12.70
U.S. Northeast		9,997,775		3.65
Total	$	273,710,465		100.00	%

The Company’s 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. During the nine months ended March 31, 2015, the Company made investments in new and existing portfolio companies of approximately $121.4 million and $18.4 million, respectively, to which it was not previously contractually committed to provide the financial support. During the nine months ended March 31, 2015, the Company made investments of $1.1 million in companies to which it was previously committed to provide the 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 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 Consolidated Statements of Operations.

In connection with the TRS transactions the Company entered into an International Swaps and Derivatives Association, Inc. Master Agreements (“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 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 Consolidated Statements of Operations.

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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 March 31, 2015.

	Assets		Liabilities		Notional		Contracts
Credit Risk:
Total Return Swaps	$	—	$	1,833,716		152,000,000		2
Embedded derivatives Notes Payable		1,833,716		—		152,000,000		2
Gross fair value of derivative contracts	$	1,833,716	$	1,833,716
Counterparty netting		—		—
Net fair value of derivative contracts		1,833,716		1,833,716
Collateral not offset		—		—
Net amount	$	1,833,716	$	1,833,716

On September 26, 2014, the notional size of the Company’s derivative contract was increased from $126.5 million to $152.0 million.

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 June 30, 2014.

	Assets		Liabilities		Notional		Contracts
Credit Risk:
Total Return Swaps	$	563,866	$	—	$	126,500,000		2
Embedded derivatives
Note Payable		—		563,866	$	126,500,000		2
Gross fair value of derivative contracts		563,866		563,866
Counterparty netting		—		—
Net fair value of derivative contracts		563,866		563,866
Collateral not offset		—		—
Net amount	$	563,866	$	563,866

The following table reflects the amount of gains (losses) on derivatives included in the Consolidated Statements of Operations for the three and nine months ended March 31, 2015 and March 31, 2014, respectively. None of the derivatives were designated as hedging instruments under U.S. GAAP.

	Included in net change in unrealized (depreciation) appreciation on investments and derivatives
	For the three months ended March 31,						For the nine months ended March 31,
	2015			2014			2015			2014
Total Return Swaps	$	(177,501	)	$	975,185		$	(2,397,582	)	$	(77,474	)
Embedded derivatives Notes Payable		177,501			(975,185	)		2,397,582			77,474
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.

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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 in 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.

The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of March 31, 2015:

	Level 1		Level 2		Level 3			Total
Assets
Investments
Senior Secured First Lien Debt Investments(1)	$	—	$	—	$	151,278,119		$	151,278,119
Senior Secured Second Lien Debt Investments(1)		—		—		142,526,245			142,526,245
Equity, Warrants and Other Investments		—		16,573,721		1,505,825			18,079,546
Total Investments		—		16,573,721		295,310,189			311,883,910
Derivatives
Embedded derivative Notes Payable		—		—		1,833,716			1,833,716
Total Derivatives		—		—		1,833,716			1,833,716
Total Assets	$	—	$	16,573,721	$	297,143,905			313,717,626
Liabilities
Derivatives
Total Return Swaps		—		—		(1,833,716	)		(1,833,716	)
Total Derivatives		—		—		(1,833,716	)		(1,833,716	)
Total Liabilities	$	—	$	—	$	(1,833,716	)		(1,833,716	)

(1) Includes assets previously classified as Senior Secured Notes.

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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, 2014:

	Fair Value Measurements as of June 30, 2014
	Level 1		Level 2		Level 3		Total
Assets
Investments
Senior Secured First Lien Term Loans	$	—	$	—	$	112,078,038	$	112,078,038
Senior Secured Second Lien Term Loans		—		—		133,606,964		133,606,964
Senior Secured Notes		—		—		25,963,581		25,963,581
Warrants		—		—		2,061,882		2,061,882
Total Investments		—		—		273,710,465		273,710,465
Derivatives
Total Return Swaps		—		—		563,866		563,866
Total Derivatives		—		—		563,866		563,866
Total Assets	$	—	$	—	$	274,274,331	$	274,274,331
Liabilities
Derivatives
Embedded derivative
Note Payable		—		—		563,866		563,866
Total Derivatives		—		—		563,866		563,866
Total Liabilities	$	—	$	—	$	563,866	$	563,866

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended March 31, 2015:

	Senior Secured First Lien Debt Investments (1)			Senior Secured Second Lien Debt Investments (1)			Equity, Warrants and Other Investments			Total Investments
Balance as of June 30, 2014	$	132,117,098		$	139,531,485		$	2,061,882		$	273,710,465
Purchases (including PIK interest)		96,542,685			42,631,499			2,189,406			141,363,590
Sales		(71,488,338	)		(29,163,262	)		(938,348	)		(101,589,948	)
Amortization		1,055,913			542,634			—			1,598,547
Net realized gains (losses)		157,117			(1,870,862	)		400,316			(1,313,429	)
Transfers in		—			—			—			—
Transfers out		(6,186,613	)		(5,115,972	)		(637,873	)		(11,940,458	)
Net change in unrealized (depreciation) appreciation		(919,743	)		(4,029,277	)		(1,569,558	)		(6,518,578	)
Balance as of March 31, 2015		151,278,119			142,526,245			1,505,825			295,310,189
Change in unrealized gains (losses) relating to assets and liabilities still held as of March 31, 2015	$	(681,176	)	$	(3,485,492	)	$	(1,169,242	)	$	(5,335,910	)

⁽¹⁾  Includes assets previously classified as Senior Secured Notes.

	Total			Embedded
	Return			derivatives - Notes			Total
	Swaps			Payable			Derivatives
Balance as of June 30, 2014	$	563,866		$	(563,866	)	$	—
Net change in unrealized (depreciation) appreciation		(2,397,582	)		2,397,582			—
Balance as of March 31, 2015	$	(1,833,716	)	$	1,833,716		$	—
Change in unrealized gains (losses) relating to assets and liabilities still held as of March 31, 2015	$	(2,397,582	)	$	2,397,582		$	—

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The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended March 31, 2014:

	Senior Secured First Lien Term Loans			Senior Secured Second Lien Term Loans			Senior Secured Notes		Unsecured Debt			Warrants		Total Investments
Balance as of June 30, 2013	$	74,807,541		$	23,448,281		$	20,397,491	$	—		$	555,971	$	119,209,284
Purchases (including PIK interest)		91,027,982			80,257,994			4,050,613		14,812,500			—		190,149,089
Sales		(82,495,537	)		(33,359	)		—		—			—		(82,528,896	)
Amortization		(52,952	)		88,946			182,684		22,786			—		241,464
Net realized (losses) gains		(839,205	)		306			—		—			—		(838,899	)
Net change in unrealized (depreciation) appreciation		(851,678	)		1,308,715			27,008		(4,299	)		256,902		736,648
Balance as of March 31, 2014	$	81,596,151		$	105,070,883		$	24,657,796	$	14,830,987		$	812,873	$	226,968,690
Change in unrealized gains (losses) relating to assets and liabilities still held as of March 31, 2014	$	(854,122	)	$	1,308,713		$	27,008	$	(4,299	)	$	256,902	$	734,202

	Total		Embedded
	Return		derivatives - Notes			Total
	Swaps		Payable			Derivatives
Balance as of June 30, 2013	$	843,864	$	(843,864	)	$	—
Net change in unrealized (depreciation) appreciation		77,474		(77,474	)		—
Balance as of March 31, 2014	$	921,338	$	(921,338	)	$	—
Change in unrealized gains (losses) relating to assets and liabilities still held as of March 31, 2014	$	77,474	$	(77,474	)	$	—

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 Consolidated Statements of Operations.

During the nine months ended March 31, 2015 and March 31, 2014, 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 March 31, 2015 and June 30, 2014. 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
	March 31, 2015			Methodology		Input(s)		Average		Range
Senior Secured First Lien Debt Investments	$	151,278,119			Yield Analysis		Market Yields		13.2%	8.0% - 27.2%
Senior Secured Second Lien Debt Investments		142,526,245			Yield Analysis		Market Yields		11.4%	8.6% - 15.0%
Equity, Warrants and Other Investments		1,505,825			EV Multiple		LTM EBITDA		5.4x	5.0x - 7.5x
Total Return Swaps		(1,833,716	)		Other Approach		Intrinsic value		N/A	N/A
Embedded derivatives - Note Payable		1,833,716			Other Approach		Intrinsic value		N/A	N/A

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	Fair Value as of			Valuation	Unobservable	Weighted
	June 30, 2014			Methodology	Input(s)	Average		Range
Senior Secured First Lien Term Loans	$	112,078,038		Yield Analysis	Market Yields		12.7%	9.9% - 14.5%
Senior Secured Second Lien Term Loans		133,606,964		Yield Analysis	Market Yields		11.4%	9.6% - 12.4%
Senior Secured Notes		25,963,581		Yield Analysis	Market Yields		16.4%	15.0% - 18.1%
Warrants		2,061,882		EV Multiple Option Analysis	LTM EBITDA Asset Volatility Equity Volatility Illiquidity Discount		7.6x 25% 87% 21%	7.5x - 7.8x N/A N/A 9% - 50%
Total Return Swaps		563,866		Other Approach	Intrinsic value		N/A	N/A
Embedded derivatives - Note Payable		(563,866	)	Other Approach	Intrinsic value		N/A	N/A

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair value measurements. Significant increases in implied volatility would result in significantly higher fair value measurements.

Note 5. Notes Payable

On May 23, 2013, as amended on June 6, 2013 and September 26, 2014, the Company, through SPV, entered into a $102.0 million financing transaction (the “Term Facility”) due December 5, 2017 with UBS. The Financing 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 Financing 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 Financing Facility at a rate of one month LIBOR plus a spread of 2.85% per annum.

On December 5, 2013, as modified on September 26, 2014, the Company amended the terms of the Term Facility to add a $50.0 million revolving financing (the “Revolving Financing” and together with the Term Facility, the “Financing Facility”), which expires on December 4, 2016. The Revolving Financing bears interest at a fixed rate of 2.00% per annum on drawn amounts and 0.50% per annum on any undrawn portion. Prior to September 26, 2014, the rate on drawn amounts was 2.10% per annum through December 4, 2014, and 1.60% thereafter. As of March 31, 2015 and June 30, 2014, $26.3 and $9.1 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 “Notes”) to UBS and the Company and (ii) the transfer of cash to the Company. UBS purchased Notes with a face value of $76.5 million, which represent 51% of the Notes issued and outstanding, for $76.5 million in cash. The Company purchased Notes with a face value of $73.5 million (which are eliminated in consolidation), which represent 49% of the Notes issued and outstanding. Under the terms of the indenture under which the Notes were issued (the “Indenture”), the holders of the 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 Notes”) This represents the embedded derivative in the Note 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 Notes with a face value of $25.5 million for $25.5 million in cash. The Company also purchased additional 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 Notes purchased by UBS and pay the Financing Rate.

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Third, SPV issued and sold an additional $50.0 million notes (the “Revolving 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”). This represents the embedded derivative in the Note Payable from SPV to UBS.

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.

The fair value of the Company’s notes payable is estimated based on the rate at which similar facilities would be priced. At March 31, 2015, the fair value of the notes payable was estimated at $128.3 million, which the Company concluded was a Level 3 fair value.

Cash, restricted (as shown on the Consolidated Statements of Assets and Liabilities) is held by the trustee of the Financing Facility and is restricted to purchases of investments by SPV that must meet certain eligibility criteria identified by the Indenture. As of March 31, 2015, SPV had assets of $267.7 million, which included $251.1 million of the Company’s portfolio investments at fair value, $11.5 million of accrued interest receivable and $5.1 million in cash held by the trustee of the Financing Facility. At March 31, 2015 and June 30, 2014, the carrying amount of the Notes approximates the fair value. For the three and nine months ended March 31, 2015, the weighted average outstanding debt balance and the weighted average stated interest rate was $135.2 million and 2.77% and $116.2 million and 2.91%, respectively. For the three and nine months ended March 31, 2014, the weighted average outstanding debt balance and the weighted average stated interest rate was $81.6 million and 2.06% and $78.2 million and 2.49%, respectively.

Note 6. Indemnification, Guarantees, Commitments and Contingencies

In the normal course of business, the Company enters into contracts which provide a variety of representations and warranties, and that provide 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.

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. As of March 31, 2015, the Company held unfunded commitments in the amount of approximately $9.3 million and, as of June 30, 2014, the Company held unfunded commitments in the amount of approximately $1.4 million.

The following table details the unfunded commitments as of March 31, 2015:

Investments	Unfunded Commitment		Fair Value			Annual Non-use Fee			Expiration Date
Butler Burgher Group, LLC	$	250,000	$	(3,750	)		0.50	%		June 30, 2017
Lightsquared Inc.		5,320,197		—			—			June 1, 2015
New Standard Energy Texas LLC		800,000		(40,000	)		—			June 30, 2015
U.S. Well Services, LLC		2,916,667		(20,000	)		0.50	%		May 19, 2015
Total Unfunded Commitments	$	9,286,864	$	(63,750	)

The following table details the unfunded commitments as of June 30, 2014:

Investments	Amount		Annual Non-use Fee
Butler Burgher Group LLC	$	250,000		0.50	%
U.S. Well Services, LLC		1,136,364		0.50	%
Total Unfunded Commitments	$	1,386,364

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Note 7. Agreements and Related Party Transactions

Related Party Transactions

Mr. Michael C. Mauer, the Company’s Chief Executive Officer, and Mr. Christopher E. Jansen, the Company’s President and Secretary and members of the Company’s board of directors together own 1.2% of the Company’s outstanding common stock, and Messrs. Mauer and Jansen also hold a 42.0% economic interest in the Investment Manager.

Stifel Venture Corp. (“Stifel”) owns 16.0% of the Company’s outstanding common stock, and also holds a 20.0% economic interest in the Investment Manager, and Mr. Stephan Kuppenheimer, an employee of Stifel, is a member of the Company’s board of directors and a member of the investment committee of the Investment Manager. Mr. Kuppenheimer owns 0.2% of the Company’s outstanding common stock.

The Cyrus Funds own 27.9% of the Company’s outstanding common stock and a 38.0% economic interest in the Investment Manager.

In connection with the Offering, the Investment Manager, paid $3.45 million or 50% of the total underwriting costs, and offering costs in excess of the $1.2 million paid by Company.

Investment Advisory Agreement

On February 5, 2014, upon the Company’s election to be regulated as a BDC, the Company entered into an Investment Advisory Agreement with the Investment Manager. Pursuant to this agreement, the Company has agreed to pay to the Investment Manager 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, 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 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 Investment Manager 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, 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. Fees permanently waived by the Investment Manager are not subject to future repayment by the Company.

For the three and nine months ended March 31, 2015, $1,369,920 and $3,748,061 in base management fees were earned by the Investment Manager, respectively, of which $1,369,920 was payable at March 31, 2015. For the period from February 6, 2014 through March 31, 2014, $455,934 in base management fees were earned by the Investment Manager, of which $455,934 were waived and none was payable at March 31, 2014.

For the three and nine months ended March 31, 2015, the Company incurred $1,018,817 and $3,148,287, respectively, of incentive fees related to pre-incentive fee net investment income, of which $591,826 and $1,174,655, respectively, was waived. As of March 31, 2015, $388,414 of such incentive fees are currently payable to the Investment Manager and $159,872 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. No incentive fees were payable prior to March 31, 2014.

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The realized gains incentive fee consists of fees related to both realized gains and unrealized gains. As of March 31, 2015, there was $0 of realized gains incentive fee payable to the Investment Manager under the Investment Advisory Agreement.

With respect to the incentive fee expense accrual relating to the unrealized gains incentive fee, 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 Investment Advisory Agreement.

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

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

Administration Agreement

The Company entered into an administration agreement with the Investment Manager pursuant to which the Investment Manager 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 Investment Manager 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 stockholders and reports filed with the SEC. Under an administration agreement with the Investment Manager, the Investment Manager provides the Company with the Company’s chief financial officer, 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 through a services agreement with Cyrus Funds to assist the Investment Manager in fulfilling certain of its obligations to the Company under the administration agreement. There were $37,154 and $381,992 of such costs incurred under the administration agreement for the three and nine months ended March 31, 2015, respectively. For the period from February 6, 2014 through March 31, 2014, $165,457 was incurred under the administration agreement and included in professionl fees and other expenses on the Consolidated Statement of Operations. Prior to February 6, 2014, no allocations of expenses were made by the Investment Manager.

As of March 31, 2015 and March 31, 2014, the Company recorded $44,250 and $45,988, respectively, in accrued expenses and other liabilities on its Consolidated Statements of Assets and Liabilities for reimbursement of expenses owed to the Investment Manager.

License Agreement

The Company has entered into a license agreement with the Investment Manager under which the Investment Manager 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 Investment Manager or one of its affiliates remains the Investment Manager. 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 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 Company’s Investment Manager.

Six of the investment professionals employed by the Investment Manager as part of the investment team are also employees of Stifel. Although these investment professionals dedicate a majority of their time to the business and activities of the Investment Manager, they are dual employees of both Stifel and the Investment Manager, and as a result, may continue to engage in investment advisory activities for Stifel.

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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 received 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 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 nine months ended March 31, 2015, the Company recorded directors’ fees of $106,750 and $318,250, respectively, of which none were payable at March 31, 2015. For three and nine months ended March 31, 2014, the Company recorded directors’ fees of $125,000 and $125,000, of which $125,000 was payable at March 31, 2014.

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
	Three Months Ended March 31, 2015			Nine Months Ended March 31, 2015		For the period from February 6, 2014 through March 31, 2014
Net increase in net assets resulting from operations attributable to CM Finance Inc	$	(1,910,132	)	$	10,767,252	$	2,063,524
Weighted average shares outstanding		13,666,666			13,666,666		13,666,666
Basic/diluted net increase in net assets from operations per share	$	(0.14	)	$	0.79	$	0.15

Note 10. Distributions

The following table reflects the cash distributions per share that the Company declared or paid to its stockholders since it commenced operations in February 2014. Stockholders of record as of each respective record date were entitled to receive the distribution:

Declaration Date	Record Date	Payment Date	Amount Per Share
March 14, 2014	March 24, 2014	March 31, 2014	$	0.1812
May 14, 2014	June 16, 2014	July 1, 2014	$	0.3375
September 4, 2014	September 18, 2014	October 1, 2014	$	0.3375
November 6, 2014	December 18, 2014	January 5, 2015	$	0.3375
January 28, 2015	March 18, 2015	April 2, 2015	$	0.3469

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The following table reflects the sources of the cash distributions that the Company has paid on its common stock during the nine months ended March 31, 2015 and March 31, 2014:

	Nine Months Ended March 31,
	2015					2014
	Distribution Amount		Percentage			Distribution Amount		Percentage
Net investment income	$	13,965,996		100	%	$	2,476,851		100	%
Short-term capital gains		—		—			—		—
Long-term capital gains		—		—			—		—
Total	$	13,965,996		100	%	$	2,476,851		100	%

Note 11. Share Transactions

There were no changes to the Company’s shares issued or proceeds received for the nine months ended March 31, 2015.

As of March 31, 2015, the Company had 13,666,666 shares of common stock issued and outstanding.

Note 12. Financial Highlights

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

	Nine months ended March 31, 2015			For the period from February 6, 2014 through March 31, 2014
Per Share Data:(1)
Net asset value, beginning of period	$	14.65		$	15.00
Net investment income		1.02			0.13
Net realized and unrealized gains (losses)		(0.23	)		0.02
Net increase in net assets resulting from operations		0.79			0.15
Distributions from net investment income(2)		(1.02	)		(0.18	)
Offering costs		—			(0.09	)
Sales load		—			(0.25	)
Net decrease in net assets resulting from capital share transactions		—			(0.34	)
Net asset value, end of period	$	14.42		$	14.63
Market value per share, end of period	$	13.26		$	15.59
Total return based on net asset value(3)(4)		5.26	%		0.41	%
Total return based on market value(3)(4)		(1.29	)%		5.16	%
Shares outstanding at end of period		13,666,666			13,666,666
Ratio/Supplemental Data:
Net assets, at end of period	$	197,018,077		$	199,936,663
Ratio of total expenses to average net assets(5)		8.38	%		5.60	%
Ratio of net expenses to average net assets(5)		7.60	%		4.06	%
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net assets(5)		2.26	%		1.31	%
Ratio of net investment income before fee waiver to average net assets(5)		8.51	%		4.43	%
Ratio of net investment income after fee waiver to average net assets(5)		9.29	%		5.97	%
Total Notes Payable		128,292,558			111,520,623
Asset Coverage Ratio(6)		2.54			2.79
Portfolio Turnover Rate(4)		38	%(7)		49	%(8)

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

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

⁽³⁾  Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions, if any, reinvested. 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.

⁽⁷⁾  For the nine months ended March 31, 2015.

⁽⁸⁾  For the nine months ended March 31, 2014.

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Total return is calculated based on a time-weighted rate of return methodology for the members, and is not annualized. Total return is reflected after all investment-related and operating expenses. An individual member’s return may vary from these returns based on the timing of capital transactions. The ratios to average members’ capital are calculated based on the monthly average members’ capital during the period.

The ratios to average members’ capital are calculated based on the monthly average members’ capital during the period. Credit facility related expenses include interest expense and amortization of deferred debt issuance costs.

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 nine months ended March 31, 2015 and March 31, 2014:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2015		2014		2015		2014
Loan Structuring Fee	$	—	$	170,000	$	300,000	$	170,000
Loan Amendment/Consent Fee		41,520		43,382		192,594		431,590
Royalty Income		22,592		—		95,280		—
Other Fee Income	$	64,112	$	213,382	$	587,874	$	601,590

Note 14. Tax Information

As of March 31, 2015, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:

Tax cost	$	312,649,658
Gross unrealized appreciation		6,808,494
Gross unrealized depreciation		(7,574,242	)
Net unrealized investment depreciation	$	(765,748	)

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.

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On May 6, 2015, the Company’s Board of Directors declared a second calendar quarter distribution of $0.3469 per share payable on July 5, 2015 to shareholders of record as of June 18, 2015.

Subsequent to the quarter ended March 31, 2015, the Company invested $23.9 million in new and existing portfolio companies and received repayment or sales proceeds of $1.1 million.

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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 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 RIC and as a BDC;

• our ability to obtain exemptive relief from the SEC;

• our ability to obtain an SBIC 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 quarterly 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 business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and intends to elect 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.

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

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On February 5, 2014, CM Finance Inc priced 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 (the “Original Investors” or “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 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 also 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 “Investment Manager”) as its investment manager and administrator, respectively.

The Company consolidates the operations of its wholly-owned subsidiaries, CM Finance SPV, Ltd. (“SPV”), 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 generally accepted accounting principles (“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.

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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 investment professionals of the Investment Manager responsible for the portfolio investment;

• preliminary valuation conclusions are then documented and discussed our senior management and the Investment Manager;

• 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 these preliminary valuations; and

• the board of directors then discusses these preliminary valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the Investment Manager, 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 in the circumstances.

Our investments are categorized based on the types of inputs used in their valuation. The level in the 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 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 March 31, 2015, one of our investments was classified as a Level II investment and the remaining were classified as Level 3 investments, determined based on valuations by our board of directors. As of June 30, 2014, 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.    

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.

The Company 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. 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 March 31, 2015 and June 30, 2014, there were no investments on which we had ceased the accrual of cash or PIK interest income.

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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.

Financing Facility

On May 23, 2013, as amended on June 6, 2013, December 4, 2013 and September 26, 2014, we, through CM Finance SPV Ltd. (“SPV”), our wholly owned subsidiary, entered into a financing facility (the “Financing Facility”) with UBS AG, London Branch (together with its affiliates, “UBS”). The Financing Facility includes a $102.0 million term securitized financing facility (the “Term Financing”), which expires on December 4, 2017 and a $50.0 million revolving financing (the “Revolving Financing”), which expires on December 4, 2016. As of March 31, 2015, the Term Financing bears interest at LIBOR plus 2.75% per annum and the Revolving Financing at a fixed rate of 2.00% on the drawn portion and at 0.50% per annum on the undrawn portion.

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.

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 shareholders.

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.

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 under the investment advisory agreement (the “Investment Advisory Agreement”) between us and the Investment Manager, and administration fees and the allocable portion of overhead under the administration agreement (“Administration Agreement”) between us and the Investment Manager. The base management fee and incentive compensation remunerates the Investment Manager 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);

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• 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 Investment Manager’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our chief compliance officer, chief financial officer and their respective staffs);

• 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 shareholders;

• 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 Investment Manager in connection with administering our business.

Portfolio and investment activity

Portfolio composition

At March 31, 2015, our investment portfolio of $311.9 million (at fair value) consisted of investments in 26 portfolio companies, of which 48.5% were first lien investments, 45.7% were second lien investments, and 5.8% were equity and warrant positions. At March 31, 2015, our average and largest portfolio company investment at fair value was $12.0 million and $19.7 million, respectively.

As of March 31, 2015 and June 30, 2014, 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 11.20% and 11.59%, respectively, and our weighted average total yield of debt and income producing securities at fair value (which includes interest income and amortization of fees and discounts) was 11.95% and 10.44%, respectively.

The industry composition of our portfolio at fair value at March 31, 2015 was as follows:

	Percentage of Total Portfolio
Telecommunications		14.04	%
Healthcare-Products/Services		11.17
Oilfield Services		8.16
Oil and Gas		8.10
Construction & Building		7.77
Media		6.16
Airlines		5.32
Automobiles and Components		5.12
Industrial		4.94
Trucking and Leasing		4.72
Utilities		4.71
Entertainment and Leisure		4.70
Retail		4.64
Cable		3.59
Pipelines		2.93
Services		2.60
Food & Beverage		1.33
Total		100.00	%

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During the nine months ended March 31, 2015, we added 10 new investments and funded one pre-existing commitment, totaling approximately $141.4 million. Seven of these investments were in new portfolio companies. Of these new investments, 70.7% consisted of first lien investments, 27.5% second lien investments, and 1.8% in warrants.

At June 30, 2014, our investment portfolio of $273.7 million (at fair value) consisted of investments in 24 portfolio companies, of which 40.9% were first lien investments, 48.8% were second lien investments, 9.5% were senior secured notes, and 0.8% were warrant positions. At June 30, 2014, our average and largest portfolio company investment at fair value was $11.4 million and $20.0 million, respectively.

At March 31, 2015, 87.6% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 12.4% bore interest at fixed rates. At June 30, 2014, 89.0% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 11.0% bore interest at fixed rates.

The industry composition of our portfolio at fair value at June 30, 2014 was as follows:

	Percentage of Total Portfolio
Telecommunications		19.35	%
Oil and Gas		16.39
Healthcare-Products/Services		17.83
Trucking and Leasing		5.47
Entertainment and Leisure		5.40
Industrial		5.40
Retail		5.17
Automobiles and Components		4.73
Airlines		4.55
Pipelines		3.65
Services		3.14
Oilfield Services		3.13
Diversified Financial Services		2.18
Construction & Building		1.81
Commercial Services		1.80
Total		100.0	%

Asset Quality

In addition to various risk management and monitoring tools, we use the Investment Manager’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.

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If the Investment Manager determines that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, the Investment Manager 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 Investment Manager’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 March 31, 2015							As of June 30, 2014
	Fair Value		% of Portfolio			Number of Investments		Fair Value		% of Portfolio			Number of Investments
1	$	—		—	%		—	$	4,925,000		1.8	%		1
2		279,854,703		95.2			22		255,227,578		94.0			22
3		8,121,775		2.8			1		11,496,010		4.2			1
4		5,828,160		2.0			1		—		—			—
5		—		—			—		—		—			—
Total	$	293,804,638		100.0	%		23	$	271,648,588		100.0	%		24

Results of Operations

Comparison of the three months ended March 31, 2015 and March 31, 2014

Investment income

Investment income, attributable primarily to interest and fees on our debt investments, for the three months ended March 31, 2015 increased to $8.3 million from $5.5 million for the three months ended March 31, 2014, primarily due to the growth of our investment portfolio from the comparable period.

Expenses

Total expenses for the three months ended March 31, 2015 increased to $3.3 million from $1.8 million for the three months ended March 31, 2014, due primarily to base and incentive management fees payable to our Investment Manager, interest expense on the additional borrowings under our Financing Facility and increased operating expenses due to growth in our investment portfolio and operating as a public company.

Net investment income

Net investment income increased to $4.7 million for the three months ended March 31, 2015 from $4.2 million for the three months ended March 31, 2014, primarily due to an increase in investment income resulting from the increase in invested assets over the prior period.

Net realized gain or loss

The net realized loss on investments totaled $2.2 million for the three months ended March 31, 2015, primarily attributable to the sale of our investment in Bennu Oil & Gas, LLC.

The net realized loss on investments totaled $0.2 million for the three months ended March 31, 2014, due to gains or losses on sales activity during the period.

Net change in unrealized (depreciation) appreciation on investments

We recorded a net change in unrealized depreciation of $4.4 million for the three months ended March 31, 2015, due to a decline in fair value of our investment in Virgin America, Inc. and Caelus Energy Alaska 03 LLC of $5.9 million and $1.4 million, respectively, partially offset by $2.8 million in a transfer to realized loss on Bennu Oil & Gas, LLC.

During the three months ended March 31, 2014, we recorded an unrealized gain of $1.3 million due to increase in the fair value of several portfolio company investments.

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Comparison of the nine months ended March 31, 2015 and March 31, 2014

Investment income

Investment income, attributable primarily to interest and fees on our debt investments, for the nine months ended March 31, 2015 increased to $25.4 million from $14.5 million for the nine months ended March 31, 2014, primarily due to the growth of our investment portfolio from the comparable period.

Expenses

Total expenses for the nine months ended March 31, 2015 increased to $11.4 million from $3.1 million for the nine months ended March 31, 2014, due primarily to base and incentive management fees payable to our Investment Manager, interest expense on the additional borrowings under our Financing Facility and increased operating expenses due to growth in our investment portfolio and operating as a public company.

Net investment income

Net investment income increased to $14.0 million for the nine months ended March 31, 2015 from $11.4 million for the nine months ended March 31, 2014, primarily due to an increase in investment income resulting from the increase in invested assets over the prior period.

Net realized gain or loss

The net realized loss on investments totaled $1.3 million for the nine months ended March 31, 2015, compared to a net realized loss of $0.8 million for the nine months ended March 31, 2014, due to gains or losses on sales activity during the periods.

Net change in unrealized (depreciation) appreciation on investments

We recorded a net change in unrealized depreciation of $1.9 million for the nine months ended March 31, 2015, compared to net unrealized appreciation of $0.6 million for the nine months ended March 31, 2014, which reflects the net change in the fair value of our investment portfolio relative to its cost basis over this period.

Liquidity and capital resources

Cash flows

For the nine months ended March 31, 2015, our cash balance decreased by $10.4 million. During that period, we used $37.6 million in cash towards operating activities, primarily due to investments in portfolio companies of $159.9 million, paid $13.1 million for unsettled transactions, partially offset by $122.1 million in repayments and sales of investments in portfolio companies. During the same period, we generated $27.1 million from financing activities, consisting primarily of proceeds from borrowings under our Financing Facility partially offset by distributions to our shareholders.

Capital Resources

As of March 31, 2015, we had $14.2 million of cash as well as $5.1 million in restricted cash, $23.7 million of capacity under our revolving credit facility and our net assets totaled $197.0 million. We intend to generate additional cash primarily from future offerings of securities, future borrowings under the Financing Facility 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 Facility, our unfunded loan commitments, investments in portfolio companies, dividend distributions to our shareholders and operating expenses.

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

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To qualify for RIC tax treatment, we must, among other things, distribute to our shareholders, 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 shareholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Financing Facility may prohibit us from making distributions to our shareholders, 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 shareholders. If we do this, our shareholders 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 shareholders 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 shareholders.

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 Facility. We cannot assure shareholders 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 stockholder may elect 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 shareholders must be at least 20% of the aggregate declared distribution. If too many shareholders elect to receive cash, each stockholder 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 stockholder, 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

On February 5, 2014, upon our election to be regulated as a BDC, we entered into an Investment Advisory Agreement with the Investment Manager. Pursuant to this agreement, we have agreed to pay to the Investment Manager a base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and fair value of derivatives associated with 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 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 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 Investment Manager 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 Offering, and (ii) all or portions of the incentive fee for calendar years 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 our common stock in of the Offering.

For the three and nine months ended March 31, 2015, $1,369,920 and $3,748,061, respectively in base management fees were earned by the Investment Manager, of which $1,369,920 was payable at March 31, 2015. The Investment Manager did not waive any base management fees for the three and nine months ended March 31, 2015. For the three and nine months ended March 31, 2015, the

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Company incurred $1,018,817 and $3,148,287, respectively, of incentive fees related to pre-incentive fee net investment income, of which $591,826 and $1,174,655, respectively, was waived. As of March 31, 2015, $388,414 of such incentive fees are currently payable to the Investment Manager and $159,872 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 realized gains incentive fee consists of fees related to both realized gains and unrealized gains. As of March 31, 2015, there was no of realized gains incentive fee payable to the Investment Manager under the Investment Advisory Agreement.

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 March 31, 2015, our off-balance sheet arrangements consisted of $9.3 million in unfunded commitments to four portfolio companies. As of June 30, 2014, our off-balance sheet arrangements consisted of $1.4 million of unfunded commitments to two of our portfolio companies.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We are subject to financial market risks, including changes in interest rates. At March 31, 2015, 87.6% 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 in-place portfolio with certain interest rate floors and our financing at March 31, 2015, a 1.00% increase in interest rates would decrease our net interest income by approximately 0.4% and a 2.00% increase in interest rates would increase our net interest income by approximately 6.3%. 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 March 31, 2015, 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 March 31, 2015 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.

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Item 1A. Risk Factors

There have been no material changes to the information provided under the heading “Risk Factors” in our Annual Report on Form 10-K as of June 30, 2014. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, financial condition and/or operating results.

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:

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

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.

	CM FINANCE INC
Dated: May 11, 2015
	By:	/s/ Michael C. Mauer
	Name:	Michael C. Mauer
	Title:	Chief Executive Officer
	By:	/s/ Jai Agarwal
	Name:	Jai Agarwal
	Title:	Chief Financial Officer

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