Investcorp Credit Management BDC, Inc. - Quarter Report: 2013 December (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2013

OR

COMMISSION FILE NUMBER: 1-36300

CM FINANCE INC

(Exact Name of Registrant as Specified in Its Charter)

601 Lexington Ave

Floor 26 Suite C

New York, NY 10022

(Address of Principal Executive Offices) (Zip Code)

(212) 257-5199

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of March 13, 2014 was 13,666,666.

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CM FINANCE INC

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PART I — FINANCIAL INFORMATION

CM Finance LLC and subsidiary

Consolidated Statements of Financial Condition

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CM Finance LLC and subsidiary

Consolidated Schedule of Investments

(Unaudited)

December 31, 2013

See accompanying notes to consolidated financial statements.

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CM Finance LLC and subsidiary

Consolidated Schedule of Investments (continued)

(Unaudited)

December 31, 2013

See accompanying notes to consolidated financial statements.

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CM Finance LLC and subsidiary

Consolidated Schedule of Investments (continued)

(Unaudited)

December 31, 2013

See accompanying notes to consolidated financial statements.

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CM Finance LLC and subsidiary

Consolidated Schedule of Investments

June 30, 2013

See accompanying notes to consolidated financial statements.

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CM Finance LLC and subsidiary

Consolidated Schedule of Investments (continued)

June 30, 2013

See accompanying notes to consolidated financial statements.

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CM Finance LLC and subsidiary

Consolidated Statements of Operations

(Unaudited)

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CM Finance LLC and subsidiary

Consolidated Statements of Changes in Members’ Capital

(Unaudited)

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CM Finance LLC and subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to consolidated financial statements.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements

December 31, 2013

CM Finance LLC (the “Company”) is a limited liability company organized under the laws of the state of Maryland that commenced operations on March 7, 2012. The Company was formed to invest primarily in the debt of U.S. middle-market companies, maximizing the total return to stockholders in the form of current income and capital appreciation through debt and related equity investments by targeting investment opportunities with favorable risk-adjusted returns.

CM Investment Partners, L.P. (the “Investment Manager”) served as the investment manager for the Company, and in such capacity, provided investment advisory and certain administrative services for the Company. The Investment Manager was also the Managing Member of the Company and was responsible for the management and control of the Company until the merger with CM Finance Inc (“CMFN”) as discussed below.

On February 5, 2014, the Company merged with and into CMFN, an affiliated corporation organized under the laws of the state of Maryland. CMFN is an externally managed, non-diversified closed-end management investment company that has filed an election to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. Upon CMFN’s election to be regulated as a business development company, it entered in an investment advisory agreement with CM Investment Partners LLC (the “Adviser”), as its investment manager. On February 11, 2014, CMFN completed its initial public offering with gross proceeds of $115.0 million. See Note 10. Subsequent Events for more information. CMFN also intends to elect to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes.

Pursuant to a services arrangement, the Investment Manager uses Cyrus Capital Partners, L.P. (“Cyrus”), a Delaware limited partnership, for services including, but not limited to, trading, execution, research, transaction-related analytical support, operations, finance and accounting, legal and compliance, technology and investor services and certain other administrative and clerical services. Pursuant to a Services Agreement dated as of December 17, 2013, CM Investment Partners LLC as investment adviser and administrator for CMFN, will also use the services of Cyrus.

The Company has been capitalized with capital commitments from funds (the “Cyrus Funds”) managed by Cyrus.

The Company has consolidated its investments in CM Finance SPV, Ltd (“SPV”), a special purpose vehicle that is used to warehouse certain investments, in accordance with its consolidation policy as discussed in Note 2.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

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

The accompanying 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 interim period as required by U.S. GAAP. These adjustments are normal and recurring in nature. The results for the interim periods are not necessarily reflective of results for the full year.

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 and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of purchase discounts or premiums is calculated by the effective interest method 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 loan origination, closing and commitment fees are recorded as interest income.

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

Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by 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 (depreciation) appreciation 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

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

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.

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

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 the Company does not expect the issuer to be able to pay all principal and interest when due. For the six months ended December 31, 2013 and December 31, 2012, the Company earned $818,784 and $22,951 in PIK, respectively. For the three months ended December 31, 2013 and December 31, 2012, the Company earned $410,292 and $22,951 in PIK, respectively.

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 Note Payable. For more information on the Note Payable, see Note 6.

Purchases of bank debt, 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 have been expensed as incurred.

Deferred debt issuance costs, incurred in connection with our notes payable, are amortized using the straight line method over the life of the notes.

Offering costs will be charged to paid-in capital upon sale of shares in the initial public offering of CMFN.

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

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

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 5. 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.

Securities that are traded on securities exchanges (including such securities traded in the afterhours market) are valued on the basis of the closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last “bid” and “ask” prices for such options, are valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last “bid” and “ask” prices are valued at the average of the last “bid” and “ask” prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. The Company did not hold any Level 1 investments as of December 31, 2013 or June 30, 2013.

Investments that are not traded on securities exchanges but are traded on the over-the-counter (“OTC”) markets (such as bank debt 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 counterparty, UBS, unsecured risk, 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 due to the monthly settlement of both the interest portion of the embedded derivatives referencing the Notes Payable and the TRS. If the Investment Manager 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 5 and Note 6 for more detail.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

Investments for which market quotations are not readily available or may be considered unreliable are fair valued by the Investment Manager, 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 Investment Manager will typically make changes in the valuation method 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 estimated 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. At December 31, 2013 and June 30, 2013, investments fair valued in good faith by the Investment Manager based on management developed models represented approximately 9% and 33% of Members’ Capital, respectively.

The Company’s valuation policies and procedures are developed by the Investment Manager, which was also responsible for ensuring that the valuation policies and procedures are consistently applied across all investments of the Company. The valuation process for Level 3 investments is completed on a monthly 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. The investment professionals prepare the 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 accordingly 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. Independent valuation firms engaged by the Investment Manager conduct independent appraisals and review the Investment Manager’s preliminary valuations and make their own independent assessment. The Investment Manager’s Valuation Committee (consisting of all of the partners of the Investment Manager) then reviews the preliminary valuations of the Investment Manager and that of the independent valuation firm and responds to the valuation recommendation of the independent valuation firm to reflect any comments. The Valuation Committee discusses the valuations and determines the fair value of each investment in good faith based on the input of the Investment Manager and the respective independent valuation firm. The Investment Manager has also engaged third party valuation service providers to provide independent valuations on a quarterly basis for all of the Level 3 investments reviewed by the Valuation Committee.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

For more information on the classification of the Company’s investments by major categories, see Note 5.

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 Statement of Financial Condition.

The preparation of 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 financial statements and accompanying notes. Management believes that the estimates utilized in preparing the Company’s financial statements are reasonable and prudent. Actual results could differ materially from these estimates.

The Company is not subject to federal, state or local income taxes. Members are individually liable for the taxes on their share of the Company’s income. As a result, no income tax liability or expense has been recorded in the accompanying financial statements.

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 Investment Manager has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for tax years that may be open for the periods ended December 31, 2013 and December 31, 2012. 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.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

The Company consolidates its controlled and wholly owned subsidiaries. Accordingly, the Company consolidated SPV, since the Company owns 100% of the equity of SPV. All material inter-company balances and transactions have been eliminated.

During the six months ended December 31, 2013, the Company adopted Accounting Standards Update 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 financial condition 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 Statement of Financial Condition 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.

Due from and due to brokers consists of cash in U.S. dollars held as collateral, and the amounts receivable or payable for securities transactions pending settlement at the end of the period.

The Company’s principal trading activities are primarily with brokers and other financial institutions located in North America.

The Company’s investments at any time may include securities and other financial instruments or other assets of any sort, including, without limitation, corporate and government bonds, convertible securities, collateralized loan obligations, bank loans, trade claims, equity securities, privately negotiated securities, direct placements, 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”).

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.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

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 invests in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or bankruptcy proceedings), which involves significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.

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

Credit risk is the potential loss the Company may incur from a failure of an issuer to make payments according to the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The Company’s exposure to credit risk on its investments is limited to the fair value of the investments. The Company’s TRS contracts are executed pursuant to an International Swaps and Derivatives Association (“ISDA”) master agreement that the Company currently has in place with UBS. At December 31, 2013, the Company had all of its counterparty credit risk associated with non-performance for swaps with UBS. With regard to derivatives, the Investment Manager attempts to limit the Company’s 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.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

The composition of the Company’s investments as of December 31, 2013 as a percentage of the total portfolio, at amortized cost and fair value are as follows:

The composition of the Company’s investments as of June 30, 2013 as a percentage of the total portfolio, at amortized cost and fair value are as follows:

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

The following table shows the portfolio composition by industry grouping at fair value at December 31, 2013:

The following table shows the portfolio composition by industry grouping at fair value at June 30, 2013:

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

The following table shows the portfolio composition by geographic grouping at fair value at December 31, 2013:

The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2013:

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 6) purchased by UBS and pay the Financing Rate and the Revolver Financing Rate (both as defined in Note 6). 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 Statement of Operations.

The Company has determined that each of the Notes Payable from SPV to UBS (discussed further in Note 6) contain an embedded derivative. SPV is obligated to pay UBS the net appreciation (depreciation) of the SPV Assets 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 Statement of Operations.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

The following table reflects the fair value and notional amount or number of contracts of the Company’s derivative contracts, none of which were designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at December 31, 2013.

In the preceding table, the number of contracts as of December 31, 2013 is reflective of the volume of derivatives activity during the period.

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, 2013.

In the preceding table, the number of contracts as of June 30, 2013 is reflective of the volume of derivatives activity during the period.

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

The following table reflects the amount of gains (losses) on derivatives included in the Consolidated Statement of Operations for the six months ended December 31, 2013. None of the derivatives were designated as hedging instruments under U.S. GAAP. The Company did not hold any derivative positions during the six months ended December 31, 2012.

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

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

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

Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at

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CM Finance LLC and subsidiary

Notes to Unaudited Consolidated Financial Statements (continued)

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.

The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of December 31, 2013: