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EX-32.2 - EXHIBIT 32.2 - WhiteHorse Finance, Inc.v465115_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - WhiteHorse Finance, Inc.v465115_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - WhiteHorse Finance, Inc.v465115_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - WhiteHorse Finance, Inc.v465115_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2017

or

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

 

For the transition period from  ______________ to ______________

Commission file number: 814-00967

 

WHITEHORSE FINANCE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 45-4247759
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

 

1450 Brickell Avenue, 31st Floor
Miami, Florida
33131
(Address of Principal Executive Offices) (Zip Code)

 

(305) 381-6999

(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”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer       ¨ Accelerated filer   x
           
Non-accelerated filer   ¨ Smaller reporting company   ¨
           
      Emerging growth company       x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x

 

As of May 9, 2017 the Registrant had 18,318,104 shares of common stock, $0.001 par value, outstanding.

 

 

 

 

WHITEHORSE FINANCE, INC.

 

TABLE OF CONTENTS

 

    Page
Part I. Financial Information 3
Item 1. Financial Statements 3
  Consolidated Statements of Assets and Liabilities as of March 31, 2017 (Unaudited) and December 31, 2016 3
  Consolidated Statements of Operations for the three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited) 4
  Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited) 5
  Consolidated Statements of Cash Flows for the three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited) 6
  Consolidated Schedules of Investments as of March 31, 2017 (Unaudited) and December 31, 2016 7
  Notes to the Consolidated Financial Statements (Unaudited) 14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 45
Part II. Other Information 46
Item 1. Legal Proceedings 46
Item 1A. Risk Factors 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 3. Defaults Upon Senior Securities 46
Item 4. Mine Safety Disclosures 46
Item 5. Other Information 46
Item 6. Exhibits 47

 

 2 

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

WhiteHorse Finance, Inc.

Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share data)

 

   March 31, 2017   December 31, 2016 
   (Unaudited)     
Assets          
Investments, at fair value          
Non-controlled/non-affiliate company investments  $405,310   $385,216 
Non-controlled affiliate company investments   26,355    26,498 
Total investments, at fair value (amortized cost $444,556 and $427,689, respectively)   431,665    411,714 
Cash and cash equivalents   15,577    17,036 
Restricted cash and cash equivalents   4,537    11,858 
Receivables for unsettled transactions   104    881 
Interest receivable   5,661    3,891 
Prepaid expenses and other receivables   894    854 
Total assets  $458,438   $446,234 
           
Liabilities          
Debt  $192,142   $182,338 
Distributions payable   6,498    6,498 
Management fees payable   5,561    5,476 
Payables for investments purchased       995 
Accounts payable and accrued expenses   1,223    1,058 
Interest payable   494    480 
Total liabilities  $205,918   $196,845 
           
Commitments and contingencies (See Note 7)          
           
Net assets          
Common stock, 18,303,890 shares issued and outstanding, par value $0.001 per share and 100,000,000 authorized   18    18 
Paid-in capital in excess of par   272,242    272,242 
Accumulated overdistributed net investment income   (5,399)   (5,423)
Accumulated realized losses on investments   (819)   (842)
Accumulated unrealized depreciation on investments   (13,522)   (16,606)
Total net assets  $252,520   $249,389 
Total liabilities and total net assets  $458,438   $446,234 
           
Number of shares outstanding   18,303,890    18,303,890 
Net asset value per share  $13.80   $13.63 

 

See notes to the consolidated financial statements

 

 3 

 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

  

   Three months ended March 31, 
    2017    2016 
Investment income          
From non-controlled/non-affiliate company investments          
Interest income  $12,018   $12,020 
Fee income   767    676 
From non-controlled affiliate company investments          
Dividend income   790    714 
Total investment income   13,575    13,410 
           
Expenses          
Interest expense   2,444    1,916 
Base management fees   2,262    2,252 
Performance-based incentive fees   1,631    1,691 
Administrative service fees   134    210 
General and administrative expenses   582    579 
Total expenses   7,053    6,648 
Net investment income   6,522    6,762 
           
Realized and unrealized gains (losses) on investments          
Net realized gains          
Non-controlled/non-affiliate company investments   23     
Net realized gains   23     
Net change in unrealized appreciation (depreciation)          
Non-controlled/non-affiliate company investments   3,227    (230)
Non-controlled affiliate company investments   (143)   (1,000)
Net change in unrealized appreciation (depreciation)   3,084    (1,230)
Net realized and unrealized gains (losses) on investments   3,107    (1,230)
Net increase in net assets resulting from operations  $9,629   $5,532 
           
Per Common Share Data          
Basic and diluted earnings per common share  $0.53   $0.30 
Dividends and distributions declared per common share  $0.36   $0.36 
Basic and diluted weighted average common shares outstanding   18,303,890    18,303,890 

 

See notes to the consolidated financial statements

 

 4 

 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Changes in Net Assets (Unaudited)

(in thousands, except share and per share data)

 

   Common Stock   Paid-in
Capital in
   Accumulated
Overdistributed Net
Investment
   Accumulated
Realized
Gains (Losses)
on
   Accumulated
Unrealized
Depreciation
   Total Net 
   Shares   Par amount   Excess of Par   Income   Investments   on Investments   Assets 
Balance at December 31, 2015   18,303,890   $18   $271,679   $(7,419)  $1,176   $(21,402)  $244,052 
                                    
Net increase in net assets resulting from operations               6,762        (1,230)   5,532 
                                    
Distributions declared               (6,498)           (6,498)
                                    
Balance at March 31, 2016   18,303,890   $18   $271,679   $(7,155)  $1,176   $(22,632)  $243,086 
                                    
Balance at December 31, 2016   18,303,890   $18   $272,242   $(5,423)  $(842)  $(16,606)  $249,389 
                                    
Net increase in net assets resulting from operations               6,522    23    3,084    9,629 
                                    
Distributions declared               (6,498)           (6,498)
                                    
Balance at March 31, 2017   18,303,890   $18   $272,242   $(5,399)  $(819)  $(13,522)  $252,520 

 

See notes to the consolidated financial statements

 

 5 

 

  

WhiteHorse Finance, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

   Three months
ended March 31,
 
   2017   2016 
Cash flows from operating activities          
Net increase in net assets resulting from operations  $9,629   $5,532 
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:          
Paid-in-kind income   (154)   (305)
Net realized gains on investments   (23)    
Net unrealized (appreciation) depreciation on investments   (3,084)   1,230 
Accretion of discount   (837)   (567)
Amortization of deferred financing costs   214    214 
Acquisition of investments   (46,046)   (20,550)
Proceeds from principal payments and sales of portfolio investments   30,193    18,385 
Net changes in operating assets and liabilities:          
Restricted cash and cash equivalents   7,321    (6,596)
Interest receivable   (1,770)   (945)
Prepaid expenses and other receivables   (40)   51 
Receivable for unsettled transactions   777     
Payables for investments purchased   (995)   (2,865)
Management fees payable   85    1,760 
Accounts payable and accrued expenses   165    (108)
Interest payable   14     
Net cash used in operating activities   (4,551)   (4,764)
           
Cash flows from financing activities          
Borrowings   33,395    3,000 
Repayment of debt   (23,805)    
Distributions paid to common stockholders, net of distributions reinvested   (6,498)   (6,498)
Net cash provided by (used in) financing activities   3,092    (3,498)
           
Net change in cash and cash equivalents   (1,459)   (8,262)
Cash and cash equivalents at beginning of period   17,036    22,769 
Cash and cash equivalents at end of period  $15,577   $14,507 
           
Supplemental disclosure of cash flow information:          
Interest paid  $2,216   $1,482 

 

See notes to the consolidated financial statements

 

 6 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited)

March 31, 2017

(in thousands) 

 

Investment Type(1)  Spread Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
of Net
Assets
 
North America                             
Debt Investments                             
Advertising                             
Outcome Health                             
First Lien Secured Term Loan  L+ 6.50%  7.50%  12/22/21  $18,269   $16,534   $17,574    6.96%
   (1.00% Floor)                          
Fluent, LLC (f/k/a Fluent Acquisition II, LLC)                             
First Lien Secured Term Loan  L+ 11.50%  12.44%  12/08/20   26,613    26,225    26,214    10.38 
   (0.50% Floor)  (1.00% PIK)                       
Intersection Acquisition, LLC                             
First Lien Secured Term Loan  L+ 12.00%  13.15%  09/15/20   15,144    15,039    14,625    5.79 
   (1.00% Floor)  (2.00% PIK)                       
             60,026    57,798    58,413    23.13 
Application Software                             
Intermedia Holdings, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%  10.54%  02/03/25   18,000    17,646    17,643    6.99 
   (1.00% Floor)                          
Auto Parts & Equipment                             
Crowne Group, LLC                             
First Lien Secured Term Loan  L+ 9.25%  10.30%  05/26/21   12,313    11,957    12,214    4.84 
   (1.00% Floor)                          
Broadcasting                             
Multicultural Radio Broadcasting, Inc.                             
First Lien Secured Term Loan  L+ 10.50%  11.50%  06/27/19   14,850    14,850    14,776    5.85 
   (1.00% Floor)                          
Consumer Finance                             
Golden Pear Funding III, LLC(5)                             
Second Lien Secured Term Loan  L+ 10.25%  11.28%  06/25/20   25,000    24,812    24,897    9.86 
   (1.00% Floor)                          
Second Lien Secured Revolving Loan  L+ 10.25%  11.28%  06/25/20   5,000    4,963    4,979    1.97 
   (1.00% Floor)                          
Oasis Legal Finance, LLC(5)                             
Second Lien Secured Term Loan  L+ 10.75%  11.75%  03/09/22   20,000    19,641    19,952    7.90 
   (1.00% Floor)                          
Sigue Corporation(4)                             
Second Lien Secured Term Loan  L+ 11.00%  12.15%  12/27/18   25,000    24,827    24,400    9.66 
   (1.00% Floor)                          
             75,000    74,243    74,228    29.39 
Data Processing & Outsourced Services                             
FPT Operating Company, LLC/                             
TLabs Operating Company, LLC                             
First Lien Secured Term Loan  L+ 8.25%  9.25%  12/23/21   23,750    23,350    23,631    9.36 
   (1.00% Floor)                          
Department Stores                             
Mills Fleet Farm Group, LLC                             
Second Lien Secured Term Loan  L+ 9.75%  10.75%  02/26/23   7,146    7,023    7,146    2.83 
   (1.00% Floor)                          
Diversified Support Services                             
Climate Pros, Inc.                             
First Lien Secured Revolving Loan  L+ 9.00%  10.05%  02/27/19   952    175    175    0.07 
   (1.00% Floor)                          
First Lien Secured Term Loan  L+ 9.00%  10.05%  02/28/22   4,000    3,921    3,926    1.55 
   (1.00% Floor)                          
Sitel Worldwide Corporation                             
Second Lien Secured Term Loan  L+ 9.50%  10.56%  09/18/22   8,670    8,535    8,501    3.37 
   (1.00% Floor)                          
             13,622    12,631    12,602    4.99 
Electronic Equipment & Instruments                             
AP Gaming I, LLC                             
First Lien Secured Term Loan  L+ 8.25%  9.25%  12/20/20   9,675    9,519    9,675    3.83 
   (1.00% Floor)                          
Food Retail                             
AG Kings Holdings, Inc.                             
First Lien Secured Term Loan  L+ 9.95%  10.95%  08/10/21   13,860    13,337    13,920    5.51 
   (1.00% Floor)                          
Crews of California, Inc.                             
First Lien Secured Term Loan  L+ 11.00%  12.00%  11/20/19   17,367    17,191    17,259    6.83 
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Revolving Loan  L+ 11.00%  12.00%  11/20/19   5,081    5,011    5,049    2.00 
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Delayed Draw Term Loan  L+ 11.00%  12.00%  11/20/19   5,033    4,969    5,002    1.98 
   (1.00% Floor)  (1.00% PIK)                       
             41,341    40,508    41,230    16.32 
Health Care Facilities                             
Coastal Sober Living, LLC(4)                             
First Lien Secured Term Loan  L+ 12.75%  13.79%  06/30/19   22,837    22,642    23,065    9.13 
   (1.00% Floor)                          
Grupo HIMA San Pablo, Inc.                             
First Lien Secured Term Loan  L+ 9.00%  10.50%  01/31/18   14,400    14,352    12,643    5.01 
   (1.50% Floor)                          
Second Lien Secured Term Loan  N/A  15.75%  07/31/18   1,000    988    588    0.23 
                              
             38,237    37,982    36,296    14.37 

  

See notes to the consolidated financial statements

 

 7 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

March 31, 2017

(in thousands)

 

Investment Type(1)  Spread Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
of Net
Assets
 
Internet Retail                             
Clarus Commerce, LLC                             
First Lien Secured Term Loan  L+ 10.52%  11.52%  03/17/21  $6,000   $5,905   $5,927    2.35 
   (1.00% Floor)                          
Internet Software & Services                             
StackPath, LLC & Highwinds Capital, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%  10.85%  02/02/24   18,000    17,560    17,615    6.98 
   (1.00% Floor)                          
IT Consulting & Other Services                             
AST-Applications Software Technology LLC                             
First Lien Secured Term Loan  L+ 7.83%  8.84%  01/10/23   4,900    4,787    4,508    1.79 
   (1.00% Floor)                          
Office Services & Supplies                             
Katun Corporation                             
Second Lien Secured Term Loan  L+ 11.25%  12.25%  01/25/21   5,000    4,972    4,930    1.95 
   (1.00% Floor)                          
Oil & Gas Exploration & Production                             
Caelus Energy Alaska O3, LLC                             
Second Lien Secured Term Loan  L+ 7.50%  8.75%  04/15/20   13,000    12,906    10,616    4.20 
   (1.25% Floor)                          
Other Diversified Financial Services                             
The Pay-O-Matic Corp.                             
First Lien Secured Term Loan  L+ 11.00%  12.00%  04/02/18   10,809    10,732    10,776    4.27 
   (1.00% Floor)                          
Research & Consulting Services                             
Project Time & Cost, LLC                             
First Lien Secured Term Loan  L+ 12.00%  12.98%  10/09/20   9,805    9,667    9,555    3.78 
   (0.50% Floor)                          
Specialized Consumer Services                             
Pre-Paid Legal Services, Inc.                             
Second Lien Secured Term Loan  L+ 9.00%  10.25%  07/01/20   19,000    18,885    19,144    7.58 
   (1.25% Floor)                          
Trucking                             
Fox Rent A Car, Inc.                             
First Lien Secured Term Loan  L+ 12.00%  12.78%  09/29/17   7,425    7,380    7,351    2.91 
                              
Sunteck / TTS Holdings, LLC                             
Second Lien Secured Term Loan  L+ 9.00%  10.13%  06/15/22   3,500    3,442    3,447    1.37 
   (1.00% Floor)                          
             10,925    10,822    10,798    4.28 
                              
Total Debt Investments            411,399    403,743    401,723    159.08 
                              
Equity Investments                             
Advertising                             
Cogint, Inc. (f/k/a IDI, Inc.) Warrants(4)  N/A  N/A  12/08/25   -    -    147    0.06 
                              
Food Retail                             
Crews of California, Inc. Warrants(4)  N/A  N/A  12/31/24   -    -    2,008    0.80 
Nicholas & Associates, LLC Warrants(4)  N/A  N/A  12/31/24   -    -    336    0.13 
Pinnacle Management Group, LLC Warrants(4)  N/A  N/A  12/31/24   -    -    719    0.28 
RC3 Enterprises, LLC Warrants(4)  N/A  N/A  12/31/24   -    -    187    0.07 
             -    -    3,250    1.28 
Other Diversified Financial Services                             
Aretec Group, Inc. (4)(5)(6)  N/A  N/A  N/A   -    20,693    7,505    2.97 
                              
Specialized Finance                             
NMFC Senior Loan Program I LLC Units (4)(5)(6)  N/A  N/A  06/13/20   -    20,120    18,850    7.46 
                              
Trucking                             
Fox Rent A Car, Inc. Warrants(4)  N/A  N/A  N/A   -    -    190    0.08 
                              
Total Equity Investments            -    40,813    29,942    11.85 
                              
Total Investments           $411,399   $444,556   $431,665    170.93 

  

See notes to the consolidated financial statements 

 

 8 

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

March 31, 2017

(in thousands)

  

(1) Except as otherwise noted, all investments are non-controlled/non-affiliate investments as defined by the Investment Company Act of 1940, as amended (the “1940 Act”), and provide collateral for the Company’s credit facility.

 

(2) The investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”), which resets monthly, quarterly or semiannually.

 

(3) The interest rate is the “all-in-rate” including the current index and spread, the fixed rate, and the payment-in-kind (“PIK”) interest rate, as the case may be.

 

(4) The investment or a portion of the investment does not provide collateral for the Company’s credit facility.

 

(5) Not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of total assets. Qualifying assets represent 83% of total assets.

 

(6) Investment is a non-controlled/affiliate investment as defined by the 1940 Act.

 

See notes to the consolidated financial statements 

 

 9 

 

 

WhiteHorse Finance, Inc. 
Consolidated Schedule of Investments
December 31, 2016
(in thousands)

  

Investment Type (1)  Spread Above
Index (2)
  Interest
Rate (3)
   Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net
Assets
 
North America                               
Debt Investments                               
Advertising                               
Outcome Health                               
First Lien Secured Term Loan  L+6.50%
(1.00% Floor)
   7.50%   12/22/21  $18,500   $16,652   $16,872    6.77%
Fluent Acquisition II, LLC                               
First Lien Secured Term Loan  L+11.50%
(0.50% Floor)
   12.19%
(1.00% PIK)
   12/8/20   26,885    26,466    26,745    10.72 
Intersection Acquisition, LLC                               
First Lien Secured Term Loan  L+10.00%
(1.00% Floor)
   11.00%   9/15/20   16,149    16,029    15,597    6.25 
               61,534    59,147    59,214    23.74 
Auto Parts & Equipment                               
Crowne Group, LLC                               
First Lien Secured Term Loan  L+9.25%
(1.00% Floor)
   10.25%   5/26/21   12,406    12,027    12,282    4.92 
Broadcasting                               
Multicultural Radio Broadcasting, Inc.                               
First Lien Secured Term Loan  L+10.50%
(1.00% Floor)
   11.50%   6/27/19   14,850    14,850    14,776    5.92 
Consumer Finance                               
Golden Pear Funding III, LLC (5)                               
Second Lien Secured Term Loan  L+10.25%
(1.00% Floor)
   11.25%   6/25/20   25,000    24,797    24,732    9.92 
Second Lien Secured Revolving Loan  L+10.25%
(1.00% Floor)
   11.25%   6/25/20   5,000    4,959    4,947    1.98 
Oasis Legal Finance, LLC (5)                               
Second Lien Secured Term Loan  L+10.75%
(1.00% Floor)
   11.75%   3/1/22   20,000    19,623    19,650    7.88 
Sigue Corporation (4)                               
Second Lien Secured Term Loan  L+11.00%
(1.00% Floor)
   12.00%   12/27/18   25,000    24,801    24,200    9.70 
               75,000    74,180    73,529    29.48 
Data Processing & Outsourced Services                               
FPT Operating Company, LLC/
TLabs Operating Company, LLC
                               
First Lien Secured Term Loan  L+8.25%
(1.00% Floor)
   9.25%   12/23/21   23,750    23,329    23,370    9.37 
Department Stores                               
Mills Fleet Farm Group, LLC                               
Second Lien Secured Term Loan  L+9.75%
(1.00% Floor)
   10.75%   2/26/23   7,146    7,017    7,146    2.87 

 

See notes to consolidated financial statements

 

 10 

 

 

WhiteHorse Finance, Inc.
Consolidated Schedule of Investments – (continued)
December 31, 2016
(in thousands)

 

Investment Type (1)  Spread Above
Index (2)
  Interest
Rate (3)
   Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net
Assets
 
Distributors                               
360 Holdings III Corp.                               
First Lien Secured Term Loan  L+9.00%
(1.00% Floor)
   10.00%   10/1/21  $9,875   $9,549   $9,875    3.96%
Diversified Support Services                               
Sitel Worldwide Corporation                               
Second Lien Secured Term Loan  L+9.50%
(1.00% Floor)
   10.50%   9/18/22   8,670    8,528    8,462    3.39 
Electronic Equipment & Instruments                               
AP Gaming I, LLC (4)                               
First Lien Secured Term Loan  L+8.25%
(1.00% Floor)
   9.25%   12/20/20   9,700    9,533    9,523    3.82 
Food Retail                               
AG Kings Holdings, Inc.                               
First Lien Secured Term Loan  L+9.95%
(1.00% Floor)
   10.95%   8/10/21   13,930    13,375    13,610    5.46 
Crews of California, Inc.                               
First Lien Secured Term Loan  L+11.00%
(1.00% Floor)
   12.00%
(1.00% PIK)
   11/20/19   17,538    17,343    17,461    7.00 
First Lien Secured Revolving Loan  L+11.00%
(1.00% Floor)
   12.00%
(1.00% PIK)
   11/20/19   5,068    4,992    5,046    2.02 
First Lien Secured Delayed Draw Term Loan  L+11.00%
(1.00% Floor)
   12.00%
(1.00% PIK)
   11/20/19   5,083    5,012    5,061    2.03 
       `        41,619    40,722    41,178    16.51 
Health Care Facilities                               
Coastal Sober Living, LLC                               
First Lien Secured Term Loan  L+10.25%
(1.00% Floor)
   11.25%   6/30/19   23,183    22,964    23,183    9.30 
Grupo HIMA San Pablo, Inc.                               
First Lien Secured Term Loan  L+9.00%
(1.50% Floor)
   10.50%   1/31/18   14,438    14,375    12,569    5.04 
Second Lien Secured Term Loan  N/A   15.75%   7/31/18   1,000    986    594    0.24 
               38,621    38,325    36,346    14.58 
Integrated Telecommunication Services                               
Securus Technologies Holdings, Inc.                               
Second Lien Secured Term Loan  L+7.75%
(1.25% Floor)
   9.00%   4/30/21   9,090    9,067    8,841    3.55 
Internet Retail                               
Clarus Commerce, LLC                               
First Lien Secured Term Loan  L+11.14%
(1.00% Floor)
   12.14%   3/17/21   6,000    5,899    5,895    2.36 

 

See notes to consolidated financial statements

 

 11 

 

 

WhiteHorse Finance, Inc. 
Consolidated Schedule of Investments – (continued)
December 31, 2016
(in thousands)

 

Investment Type (1)  Spread Above
Index (2)
  Interest
Rate (3)
   Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net
Assets
 
Office Service & Supplies                               
Katun Corporation                               
Second Lien Secured Term Loan  L+11.25%
(1.00% Floor)
   12.25%   1/25/21  $5,000   $4,970   $4,930    1.98%
Oil & Gas Drilling                               
ProPetro Services, Inc. (4)                               
First Lien Secured Term Loan  L+6.25%
(1.00% Floor)
   7.25%   9/30/19   8,284    8,246    7,189    2.88 
Oil & Gas Exploration & Production                               
Caelus Energy Alaska O3, LLC                               
Second Lien Secured Term Loan  L+7.50%
(1.25% Floor)
   8.75%   4/15/20   13,000    12,898    9,939    3.99 
Other Diversified Financial Services                               
The Pay-O-Matic Corp.                               
First Lien Secured Term Loan  L+11.00%
(1.00% Floor)
   12.00%   4/2/18   8,934    8,860    8,904    3.57 
Research & Consulting Services                               
Project Time & Cost, LLC (4)                               
First Lien Secured Term Loan  L+12.00%
(0.50% Floor)
   12.74%   10/9/20   10,105    9,953    9,845    3.95 
Specialized Consumer Services                               
Pre-Paid Legal Services, Inc. (4)                               
Second Lien Secured Term Loan  L+9.00%
(1.25% Floor)
   10.25%   7/1/20   19,000    18,882    19,000    7.62 
Trucking                               
Fox Rent A Car, Inc.                               
First Lien Secured Term Loan  L+12.00%
(0.62% Floor)
   12.62%   9/30/17   7,500    7,455    7,410    2.97 
Sunteck/TSS Holdings, LLC                               
Second Lien Secured Term Loan  L+9.00%
(1.00% Floor)
   10.00%   6/15/22   3,500    3,439    3,454    1.39 
               11,000    10,894    10,864    4.35 
Total Debt Investments             393,584    386,876    381,108    152.88 
Equity Investments                               
Advertising                               
IDI, Inc. Warrants (4)  N/A   N/A   12/8/25                

 

See notes to consolidated financial statements

 

 12 

 

 

WhiteHorse Finance, Inc. 
Consolidated Schedule of Investments – (continued)
December 31, 2016
(in thousands)

 

Investment Type (1)  Spread Above
Index (2)
  Interest
Rate (3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net
Assets
 
Food Retail                             
Crews of California, Inc. Warrants (4)  N/A  N/A  12/31/24  $   $   $2,426    0.97%
Nicholas & Associates, LLC Warrants (4)  N/A  N/A  12/31/24           417    0.17 
Pinnacle Management Group, LLC Warrants (4)  N/A  N/A  12/31/24           871    0.35 
RC3 Enterprises, LLC Warrants (4)  N/A  N/A  12/31/24           232    0.09 
                     3,946    1.58 
Other Diversified Financial Services                             
Aretec Group, Inc. (4) (5) (6)  N/A  N/A  N/A       20,693    7,505    3.01 
Specialized Finance                             
NMFC Senior Loan Program I LLC Units (5) (6)  N/A  N/A  6/10/19       20,120    18,993    7.62 
Trucking                             
Fox Rent A Car, Inc. Warrants (4)  N/A  N/A  N/A           162    0.06 
Total Equity Investments                40,813    30,606    12.21 
Total Investments           $393,584   $427,689   $411,714    165.09%

 

(1) Except as otherwise noted, all investments are non-controlled/non-affiliate investments as defined by the 1940 Act and provide collateral for the Company’s credit facility.

 

(2) The investments bear interest at a rate that may be determined by reference to the LIBOR, which resets monthly, quarterly or semiannually.

 

(3) The interest rate is the “all-in-rate” including the current index and spread, the fixed rate, and the PIK interest rate, as the case may be.

 

(4) The investment or a portion of the investment does not provide collateral for the Company’s credit facility.

 

(5) Not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of total assets. Qualifying assets represent 83% of total assets.

 

(6) Investment is a non-controlled/affiliate investment as defined by the 1940 Act.

 

See notes to consolidated financial statements

 

 13 

 

 

WhiteHorse Finance, Inc.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2017

(in thousands, except share and per share data)

 

NOTE 1 – ORGANIZATION

 

WhiteHorse Finance, Inc. (“WhiteHorse Finance” and, together with its subsidiaries, the “Company”) is an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, WhiteHorse Finance elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). WhiteHorse Finance’s common stock trades on the NASDAQ Global Select Market under the symbol “WHF.”

 

The Company’s investment objective is to generate attractive risk-adjusted returns primarily by originating and investing in senior secured loans, including first lien and second lien facilities, to performing lower middle market companies across a broad range of industries that typically carry a floating interest rate based on the London Interbank Offered Rate (“LIBOR”) and have a term of three to six years. While the Company focuses principally on originating senior secured loans to lower middle market companies, it may also opportunistically make investments at other levels of a company’s capital structure, including mezzanine loans or equity interests and may receive warrants to purchase common stock in connection with its debt investments.

 

WhiteHorse Finance’s investment activities are managed by H.I.G. WhiteHorse Advisers, LLC (“WhiteHorse Advisers”). H.I.G. WhiteHorse Administration, LLC (“WhiteHorse Administration”) provides administrative services necessary for the Company to operate.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of WhiteHorse Finance, Inc. and its wholly owned subsidiaries, WhiteHorse Finance Credit I, LLC (“WhiteHorse Credit”) and WhiteHorse Finance Warehouse, LLC (“WhiteHorse Warehouse”), and its subsidiary, Bayside Financing S.A.R.L. The Company meets the definition of an investment company under Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies, and therefore applies the accounting and reporting guidance discussed therein to its consolidated financial statements. All significant intercompany balances and transactions have been eliminated.

 

Additionally, the accompanying consolidated financial statements and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, certain disclosures accompanying the annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. This Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2016. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the year ending December 31, 2017.

 

Reclassifications: Certain reclassifications have been made to prior fiscal year amounts or balances to conform to the presentation in the current fiscal year. These reclassifications had no effect on the consolidated results of operations or financial position for any period presented.

  

Principles of Consolidation: Under the investment company rules and regulations pursuant to ASC Topic 946, WhiteHorse Finance is precluded from consolidating any entity other than another investment company. As provided under ASC Topic 946, WhiteHorse Finance generally consolidates any investment company when it owns 100% of its partners’ or members’ capital or equity units.

 

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates.

 

 14 

 

  

Fair Value of Financial Instruments: The Company determines the fair value of its financial instruments in accordance with Accounting Standards Codification (“ASC”) Topic 820 — Fair Value Measurements and Disclosures. ASC Topic 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC Topic 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument. 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.

 

Investments are measured at fair value as determined in good faith by the Company’s investment committee, generally on a quarterly basis, and such valuations are reviewed by the audit committee of the board of directors and ultimately approved by the board of directors, based on, among other factors, consistently applied valuation procedures on each measurement date. Any changes to the valuation methodology are reviewed by management and the Company’s board of directors to confirm that the changes are justified. The Company continues to review and refine its valuation procedures in response to market changes.

 

The Company engages independent external valuation firms to periodically review material investments. These external reviews are used by the board of directors to review the Company’s internal valuation of each investment over the year.

 

Investment Transactions: The Company records investment transactions on a trade date basis. These transactions may settle subsequent to the trade date depending on the transaction type. Certain expenses related to legal and tax consultation, due diligence, rating fees, valuation expenses and independent collateral appraisals may arise when the Company makes certain investments. These expenses are recognized in the consolidated statements of operations as they are incurred.

 

Revenue Recognition: The Company’s revenue recognition policies are as follows:

 

Sales: Realized gains or losses on the sales of investments are calculated by using the specific identification method.

 

Investment Income: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. The Company may also receive closing, commitment, prepayment, amendment and other fees from portfolio companies in the ordinary course of business.

 

Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.

 

Closing fees associated with investments in portfolio companies are deferred and recognized as interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any unamortized loan closing fees are recorded as part of fee income. Commitment fees are based upon the undrawn portion committed by the Company and are recorded as interest income on an accrual basis. Prepayment, amendment and other fees are recognized when earned, generally when such fees are receivable, and are included in fee income on the consolidated statements of operations.

 

The Company may invest in loans that contain a payment-in-kind (“PIK”) interest rate provision. PIK interest is accrued at the contractual rates and added to loan principal on the reset dates to the extent such amounts are expected to be collected.

 

 15 

 

 

Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. The Company may conclude that non-accrual status is not required if the loan has sufficient collateral value and is in the process of collection. 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. 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.

 

Cash and Cash Equivalents: Cash and cash equivalents include cash, deposits with financial institutions, and short-term liquid investments in money market funds with original maturities of three months or less.

 

Restricted Cash and Cash Equivalents: Restricted cash and cash equivalents include amounts that are collected and held by the trustee appointed as custodian of the assets securing the Company’s revolving credit facility. Restricted cash is held by the trustee for the payment of interest expense and principal on the outstanding borrowings or reinvestment into new assets. Restricted cash that represents interest or fee income is transferred to unrestricted cash accounts by the trustee once a quarter after the payment of operating expenses and amounts due under the Company’s revolving credit facility.

 

Offering Costs: The Company may incur legal, accounting, regulatory, investment banking and other costs in relation to equity offerings. Offering costs are deferred and charged against paid-in capital in excess of par on completion of the related offering.

 

Deferred Financing Costs: Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These amounts are amortized using the effective interest method and are included in interest expense in the consolidated statements of operations over the estimated life of the borrowings. Deferred financing costs are presented in the consolidated statements of assets and liabilities as a direct reduction from the carrying amount of the related debt liability.

 

Income Taxes: The Company elected to be treated as a RIC under Subchapter M of the Code. In order to maintain its status as a RIC, among other requirements, the Company is required to distribute at least 90% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, the Company will incur a nondeductible excise tax equal to 4% of the amount by which (1) 98% of ordinary income for the calendar year (taking into account certain deferrals and elections), (2) 98.2% of capital gains in excess of capital losses, adjusted for certain ordinary losses, for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and capital gain income for preceding years that were not distributed during such years and on which the Company incurred no U.S. federal income tax exceed distributions for the year. The Company accrues estimated excise tax on the amount, if any, that estimated taxable income is expected to exceed the level of stockholder distributions described above.

 

The Company’s tax returns are subject to examination by federal, state and local taxing authorities. Because many types of transactions are susceptible to varying interpretations under U.S. federal and state income tax laws and regulations, the amounts reported in the accompanying consolidated financial statements may be subject to change at a later date by the respective taxing authorities.

 

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statement is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has concluded that it did not have any uncertain tax positions as of March 31, 2017 and December 31, 2016.

 

Penalties or interest that may be assessed related to any income taxes would be classified as general administrative expenses on the consolidated statements of operations. The Company had no amounts accrued for interest or penalties as of March 31, 2017 or December 31, 2016. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months. Tax returns for each of the federal tax years since 2013 remain subject to examination by the Internal Revenue Service.

 

 16 

 

 

Dividends and Distributions: Dividends and distributions to common stockholders are recorded on the ex-dividend date. Quarterly distribution payments are determined by the board of directors and are paid from taxable earnings estimated by management and may include a return of capital and/or capital gains. 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 maintains an “opt out” dividend reinvestment plan for common stockholders. As a result, if the Company declares a dividend or other distribution, stockholders’ cash distributions will be automatically reinvested in additional shares of common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.

 

Earnings per Share: The Company calculates earnings per share as earnings available to stockholders divided by the weighted average number of shares outstanding during the period.

 

Risks and Uncertainties: In the normal course of business, the Company encounters primarily two significant types of economic risks: credit and market. Credit risk is the risk of default on the Company’s investments that result from an issuer’s, borrower’s or derivative counterparty’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments due to changes in interest rates, spreads or other market factors, including the value of the collateral underlying investments held by the Company. Management believes that the carrying value of its investments are fairly stated, taking into consideration these risks along with estimated collateral values, payment histories and other market information.

 

Newly Adopted Accounting Standards: As permitted by Section 7(a)(2)(B) of the Securities Act of 1933, as amended, the Company has elected to defer the adoption of new and revised accounting standards applicable to public companies until they are also applicable to private companies. There are currently no such standards being deferred that will, in management’s opinion, have a material impact on the consolidated financial statements.

 

Recent Accounting Pronouncements: During March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, to amend the amortization period for certain purchased callable debt securities held at a premium. Under current guidance, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new guidance shortened the amortization period for the premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this guidance are effective for annual periods beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

 

During January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is expected to reduce the number of transactions that need to be further evaluated as businesses. This guidance is effective for annual periods beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for certain types of transactions. The Company is currently evaluating the impact that ASU 2017-01 will have on its consolidated financial statements and related disclosures.

 

During November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. The Company is currently evaluating the impact that ASU 2016-18 would have on its consolidated financial statements and related disclosures.

 

During August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues including, among other things, the classification of debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-15 would have on its consolidated financial statements and related disclosures.

  

During March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts and requires that an entity assess the embedded call (put) options solely in accordance with the four-step decision sequence in ASC Topic 815. ASU 2016-06 is effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that ASU 2016-06 would have on its consolidated financial statements and related disclosures.

  

During January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which, among other things, requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, this ASU changes the disclosure requirements for financial instruments. This guidance is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2018. Early adoption is permitted for certain provisions. The Company is currently evaluating the impact that ASU 2016-01 would have on its consolidated financial statements and related disclosures.

  

 17 

 

 

NOTE 3 — INVESTMENTS

 

Investments consisted of the following:

 

   March 31, 2017   December 31, 2016 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
First lien secured loans  $237,543   $237,865   $246,909   $245,213 
Second lien secured loans   166,200    163,858    139,967    135,895 
Equity   40,813    29,942    40,813    30,606 
Total  $444,556   $431,665   $427,689   $411,714 

 

The following table shows the portfolio composition by industry grouping at fair value:

 

   March 31, 2017   December 31, 2016 
Advertising  $58,560    13.58%  $59,214    14.38%
Application Software   17,643    4.09         
Auto Parts & Equipment   12,214    2.83    12,282    2.98 
Broadcasting   14,776    3.42    14,776    3.59 
Consumer Finance   74,228    17.20    73,529    17.86 
Data Processing & Outsourced Services   23,631    5.47    23,370    5.68 
Department Stores   7,146    1.66    7,146    1.74 
Distributors           9,875    2.40 
Diversified Support Services   12,602    2.92    8,462    2.06 
Electronic Equipment & Instruments   9,675    2.24    9,523    2.31 
Food Retail   44,480    10.30    45,124    10.96 
Health Care Facilities   36,296    8.41    36,346    8.83 
Integrated Telecommunication Services           8,841    2.15 
Internet Retail   5,927    1.37    5,895    1.43 
Internet Software & Services   17,615    4.08         
IT Consulting & Other Services   4,508    1.04         
Office Services & Supplies   4,930    1.14    4,930    1.20 
Oil & Gas Drilling           7,189    1.75 
Oil & Gas Exploration & Production   10,616    2.46    9,939    2.41 
Other Diversified Financial Services   18,281    4.23    16,409    3.99 
Research & Consulting Services   9,555    2.21    9,845    2.39 
Specialized Consumer Services   19,144    4.43    19,000    4.61 
Specialized Finance   18,850    4.37    18,993    4.61 
Trucking   10,988    2.55    11,026    2.68 
Total  $431,665    100.00%  $411,714    100.00%

 

The portfolio companies underlying the investments are located in the United States. As of each of March 31, 2017 and December 31, 2016, the weighted average remaining term of the Company’s debt investments was approximately 3.7 years, respectively.

 

As of March 31, 2017 and December 31, 2016, the Company had no non-accrual loans. 

 

The following table presents the schedule of investments in and advances to affiliated persons (as defined by the 1940 Act) as of March 31, 2017:

 

Affiliated Person(1)  Type of
Asset
   Amount of
dividends and
interest
included in
income
   Beginning
Fair Value at
December 31,
2016
   Purchases   Sales   Realized
Gain (Loss)
   Change in
Unrealized
Appreciation
(Depreciation)
   Ending Fair
Value at
March 31,
2017
 
Aretec Group, Inc.   Equity   $-   $7,505   $-   $-   $-   $-   $7,505 
NMFC Senior Loan Program I LLC Units   Equity    790    18,993    -    -    -    (143)   18,850 
Total       $790   $26,498   $-   $-   $-   $(143)  $26,355 

 

(1)Refer to the consolidated schedule of investments for the principal amount, industry classification and other security detail of each portfolio company.

 

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NOTE 4 – FAIR VALUE MEASUREMENTS

 

Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active public markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about what market participants would use in pricing an asset or liability.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the financial instrument.

 

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. During the three months ended March 31, 2017 and 2016, there were no changes in the observability of valuation inputs that would have resulted in a reclassification of assets between any levels.

 

 19 

 

 

Fair value for each investment is derived using a combination of valuation methodologies that, in the judgment of the investment committee of WhiteHorse Advisers are most relevant to such investment, including, without limitation, being based on one or more of the following: (i) market prices obtained from market makers for which the investment committee has deemed there to be enough breadth (number of quotes) and depth (firm bids) to be indicative of fair value, (ii) the price paid or realized in a completed transaction or binding offer received in an arms’-length transaction, (iii) a discounted cash flow analysis, (iv) the guideline public company method, (v) the similar transaction method or (vi) the option pricing method.

 

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of March 31, 2017:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $   $   $237,865   $237,865 
Second lien secured loans           163,858    163,858 
Equity           29,942    29,942 
Total investments  $   $   $431,665   $431,665 

 

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of December 31, 2016:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $   $   $245,213   $245,213 
Second lien secured loans           135,895    135,895 
Equity           30,606    30,606 
Total investments  $   $   $411,714   $411,714 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended March 31, 2017:

 

   First Lien
Secured
Loans
   Second
Lien Secured
Loans
   Equity   Total
Investments
 
Fair value, beginning of period  $245,213   $135,895   $30,606   $411,714 
Acquisition of investments   10,856    35,190        46,046 
Paid-in-kind income   154            154 
Accretion of discount   727    110        837 
Proceeds from principal payments and sales of portfolio investments   (21,103)   (9,090)       (30,193)
Net realized gains (losses)       23        23 
Net unrealized appreciation (depreciation)   2,018    1,730    (664)   3,084 
Fair value, end of period  $237,865    163,858    29,942    431,665 
Change in unrealized appreciation (depreciation) on investments still held as of March 31, 2017  $1,287   $1,504   $(664)  $2,127 

  

 20 

 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended March 31, 2016:

 

   First Lien
Secured
Loans
   Second
Lien Secured
Loans
   Equity   Total
Investments
 
Fair value, beginning of period  $215,641   $178,196   $21,506   $415,343 
Acquisition of investments   8,080    12,470        20,550 
Paid-in-kind income   213    92        305 
Accretion of discount   366    201        567 
Proceeds from principal payments and sales of portfolio investments   (12,385)   (6,000)       (18,385)
Net unrealized (depreciation) appreciation   (999)   1,124    (1,355)   (1,230)
Fair value, end of period  $210,916   $186,083   $20,151   $417,150 
Change in unrealized (depreciation) appreciation on investments still held as of March 31, 2016  $(966)  $1,120   $(1,355)  $(1,201)

 

The significant unobservable inputs used in the fair value measurement of the Company’s investments are the discount rate, market quotes and exit multiples. An increase or decrease in the discount rate in isolation may result in significantly lower or higher fair value measurement, respectively. An increase or decrease in the market quote for an investment may in isolation result in significantly higher or lower fair value measurement, respectively. An increase or decrease in the exit multiple may in isolation result in significantly higher or lower fair value measurement, respectively. As the fair value of a debt investment diverges from par, which would generally be the case for non-accrual loans, the fair value measurement of that investment is more susceptible to volatility from changes in exit multiples as a significant unobservable input.

 

Quantitative information about Level 3 fair value measurements is as follows:

 

Investment Type  Fair Value at
March 31, 2017
   Valuation
Techniques
  Unobservable
Inputs
  Range
(Weighted Average)
 
First lien secured loans  $156,321   Discounted cash flows  Discount rate   11.5% – 16.0% (13.8%) 
           Exit multiple   5.0x – 9.0x (7.3x) 
    81,544   Weighting of discounted cash  Discount rate   8.8% – 23.1% (12.4%) 
        flows and consensus pricing  Market quotes   72.0 – 101.0 (93.1) 
           Exit multiple   3.5x – 8.0x (6.2x) 
   $237,865            
                 
Second lien secured loans  $66,940   Discounted cash flows  Discount rate   12.3% – 79.1% (14.7%) 
           Exit multiple   3.8x – 5.5x (5.2x) 
    96,918   Weighting of discounted cash  Discount rate   11.2% – 15.3% (12.7%) 
        flows and consensus pricing  Market quotes   89.0 – 101.1 (97.2) 
           Exit multiple   5.0x – 9.0x (7.6x) 
   $163,858            
                 
Common equity  $18,850   Discounted cash flows  Discount rate   12.3% 
   $7,505   Weighting of discounted cash  Discount rate   19.4% 
        flows, market multiple and  Exit Multiple   7.0x 
        consensus pricing  Market quotes   $14.5/s 
   $26,355            
                 
Warrant  $3,587   Discounted cash flows,  Discount rate   18.0% 
         Option-pricing method  Exit multiple   7.3x – 7.5x (7.3x) 
           Volatility   25.0% 
   $3,587            
                 
Total Level 3 Investments  $431,665            

 

 

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Investment Type  Fair Value at
December 31, 2016
   Valuation
Techniques
  Unobservable
Inputs
  Range
(Weighted Average)
First lien secured loans  $162,078   Discounted cash flows  Discount rate  11.8% – 15.7% (13.3%)
           Exit multiple  5.0x – 16.6x (6.9x)
    83,135   Weighting of discounted cash  Discount rate  8.5% – 23.2% (13.0%)
        flows and consensus pricing  Market quotes  77.3 – 98.9 (92.5)
           Exit multiple  3.5x – 8.0x (5.9x)
   $245,213          
               
Second lien secured loans  $66,549   Discounted cash flows  Discount rate  12.1% – 66.8% (14.6%)
           Exit multiple  2.8x – 4.5x (4.2x)
    69,346   Weighting of discounted cash  Discount rate  11.0% – 19.2% (13.5%)
        flows and consensus pricing  Market quotes  83.8 – 100.0 (95.7)
           Exit multiple  5.0x – 8.5x (6.4x)
   $135,895          
               
Equity  $18,993   Discounted cash flows  Discount rate  11.8%
    7,505   Weighting of discounted cash  Discount rate  20.2%
        flows, market multiple and  Exit Multiple  7.0x
        consensus pricing  Market quotes  $14.5/s
   $26,498          
               
Warrants   4,108   Discounted cash flows,  Discount rate  18.0% – 25.0% (18.0%)
        Option-pricing method  Exit Multiple  6.0x – 16.6x (6.4x)
           Volatility  25.0%
Total Level 3 investments  $411,714          

 

Valuation of investments may be determined by weighting various valuation techniques. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments. The valuation methods selected for a particular investment are based on the circumstances and on the sufficiency of data available to measure fair value. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

 

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the nature of the instrument, whether the instrument is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires a greater degree of judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3.

 

 22 

 

 

The determination of fair value using the selected methodologies takes into consideration a range of factors including the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public and private exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment, compliance with agreed upon terms and covenants, and assessment of credit ratings of an underlying borrower. These valuation methodologies involve a significant degree of judgment to be exercised.

 

As it relates to investments which do not have an active public market, there is no single standard for determining the estimated fair value. Valuations of privately held investments are inherently uncertain, and they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed.

 

In some cases, fair value for such investments is best expressed as a range of values derived utilizing different methodologies from which a single estimate may then be determined. Consequently, fair value for each investment may be derived using a combination of valuation methodologies that, in the judgment of the investment professionals, are most relevant to such investment. The selected valuation methodologies for a particular investment are consistently applied on each measurement date. However, a change in a valuation methodology or its application from one measurement date to another is possible if the change results in a measurement that is equally or more representative of fair value in the circumstances.

 

The following table presents the amortized cost and fair values of the Company’s borrowings as of March 31, 2017 and December 31, 2016. The amortized cost disclosed below excludes debt issuance costs. The fair value of the Credit Facility (as defined in Note 5) was estimated by discounting remaining payments using applicable market rates or market quotes for similar instruments at the measurement date, if available. The fair value of the Company’s 6.50% senior notes due 2020 (the “Senior Notes”) was estimated using the unadjusted quoted price as of the valuation date.

 

       March 31, 2017   December 31, 2016 
   Fair Value Level  

Amortized Cost

   Fair Value  

Amortized Cost

   Fair Value 
Credit Facility   3   $164,590   $167,460   $155,000   $156,786 
Senior Notes   2    30,000    30,753    30,000    30,727 
        $194,590   $198,214   $185,000   $187,513 

 

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NOTE 5 – BORROWINGS

 

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after giving effect to such borrowing. As of March 31, 2017, the Company’s asset coverage for borrowed amounts was 229.8%.

 

Total borrowings outstanding and undrawn as of March 31, 2017, was as follows:

 

   Maturity   Rate   Face Amount   Undrawn 
Credit Facility   2019    L+2.90%  $164,590   $35,410 
Senior Notes   2020    6.50%   30,000     
Total debt             194,590   $35,410 
Debt issuance cost             (2,448)     
Total debt net issuance cost            $192,142      

  

Total borrowings outstanding and undrawn as of December 31, 2016, was as follows:

 

   Maturity   Rate   Face Amount   Undrawn 
Credit Facility   2019    L+2.90%   $155,000   $45,000 
Senior Notes   2020    6.50%   30,000     
Total debt             185,000   $45,000 
Debt issuance cost             (2,662)     
Total debt net issuance cost            $182,338      

  

Credit Facility: On December 23, 2015, WhiteHorse Credit entered into a $200,000 revolving credit and security agreement with JPMorgan Chase Bank, National Association, as administrative agent and lender (the “Credit Facility”). On June 27, 2016, the Credit Facility was amended and restated to clarify certain terms.

 

The Credit Facility bears interest at LIBOR plus 2.90% on outstanding borrowings. The Company is required to pay a non-usage fee which accrued at 0.50% per annum through September 22, 2016, and at 1.00% per annum thereafter, on the average daily unused amount of the financing commitments to the extent the aggregate principal amount available under the Credit Facility has not been borrowed. The commitment fee was waived through September 22, 2016 while borrowings under the Credit Facility exceeded $100,000. In connection with the Credit Facility, WhiteHorse Credit pledged securities with a fair value of approximately $374,020 as of March 31, 2017 as collateral. The Credit Facility has a final maturity date of December 23, 2019. Under the Credit Facility, the Company has made certain customary representations and warranties and is required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. As of March 31, 2017, the Company had $164,590 in outstanding borrowings and $35,410 undrawn under the Credit Facility. Weighted average outstanding borrowings were $171,608 at a weighted average interest rate of 3.88% for the three months ended March 31, 2017. At March 31, 2017, the interest rate in effect was 4.00%. The Company’s ability to draw down undrawn funds under the Credit Facility is determined by collateral and portfolio quality requirements stipulated in the credit and security agreement. At March 31, 2017, approximately $23,706 was available to be drawn by the Company based on these requirements.

  

Senior Notes: On July 23, 2013, the Company completed a public offering of $30,000 of aggregate principal amount of the Senior Notes, the net proceeds of which were used to reduce outstanding obligations under the Company’s unsecured term loan, which was repaid in full on June 30, 2016. Interest on the Senior Notes is paid quarterly on March 31, June 30, September 30 and December 31, at an annual rate of 6.50%. The Senior Notes mature on July 31, 2020. The Senior Notes are the Company’s direct senior unsecured obligations and are structurally subordinate to borrowings under the Credit Facility. The Senior Notes are listed on the NASDAQ Global Select Market under the symbol “WHFBL.”

 

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NOTE 6 – RELATED PARTY TRANSACTIONS

 

Investment Advisory Agreement: WhiteHorse Advisers serves as the Company’s investment adviser in accordance with the terms of an investment advisory agreement (the “Investment Advisory Agreement”). Subject to the overall supervision of the Company’s board of directors, WhiteHorse Advisers manages the day-to-day operations of, and provides investment management services to, the Company. Under the terms of the Investment Advisory Agreement, WhiteHorse Advisers:

 

  determines the composition of the investment portfolio, the nature and timing of the changes to the portfolio and the manner of implementing such changes;

 

  identifies, evaluates and negotiates the structure of the investments the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and

 

  closes, monitors and administers the investments the Company makes, including the exercise of any voting or consent rights.

 

In addition, WhiteHorse Advisers provides the Company with access to personnel and an investment committee. Under the Investment Advisory Agreement, the Company pays WhiteHorse Advisers a fee for investment management services consisting of a base management fee and an incentive fee. The Investment Advisory Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.

 

Base Management Fee

 

The base management fee is calculated at an annual rate of 2.0% of consolidated gross assets, including cash and cash equivalents and assets purchased with borrowed funds, at the end of the two most recently completed calendar quarters, and is payable quarterly in arrears. Base management fees for any partial month or quarter is appropriately pro-rated.

 

During the three months ended March 31, 2017 and 2016, the Company incurred base management fees of $2,262 and $2,252, respectively.

 

Performance-based Incentive Fee

 

The performance-based incentive fee consists of two components that are independent of each other, except as provided by the Incentive Fee Cap and Deferral Mechanism discussed below.

 

The calculations of these two components have been structured to include a fee limitation such that no incentive fee will be paid to the investment adviser for any quarter if, after such payment, the cumulative incentive fees paid to the investment adviser for the period that includes the current fiscal quarter and the 11 full preceding fiscal quarters, referred to as the “Incentive Fee Look-back Period,” would exceed 20.0% of the Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period. Each quarterly incentive fee is subject to the Incentive Fee Cap (as defined below) and a deferral mechanism through which the investment adviser may recap a portion of such deferred incentive fees, which is referred to together as the “Incentive Fee Cap and Deferral Mechanism.”

 

 25 

 

 

This limitation is accomplished by subjecting each incentive fee payable to a cap, which is referred to as the “Incentive Fee Cap.” The Incentive Fee Cap in any quarter is equal to (a) 20.0% of Cumulative Pre-Incentive Fee Net Return (as defined below) during the Incentive Fee Look-back Period less (b) cumulative incentive fees of any kind paid to the investment adviser during the Incentive Fee Look-back Period. To the extent the Incentive Fee Cap is zero or a negative value in any quarter, the Company will pay no incentive fee to its investment adviser in that quarter. The Company will only pay incentive fees to the extent allowed by the Incentive Fee Cap and Deferral Mechanism. To the extent that the payment of incentive fees is limited by the Incentive Fee Cap and Deferral Mechanism, the payment of such fees may be deferred and paid in subsequent quarters up to three years after their date of deferment, subject to applicable limitations included in the Investment Advisory Agreement. The deferral component of the Incentive Fee Cap and Deferral Mechanism may cause incentive fees that accrued during one fiscal quarter to be paid to the investment adviser at any time during the 11 full fiscal quarters following such initial full fiscal quarter.

 

The Incentive Fee Look-back Period commenced on January 1, 2013. Prior to January 1, 2016, the Incentive Fee Look-back Period consisted of fewer than 12 full fiscal quarters.

 

The “Cumulative Pre-Incentive Fee Net Return” refers to the sum of (a) Pre-Incentive Fee Net Investment Income for each period during the Incentive Fee Look-back Period and (b) the sum of cumulative realized capital gains, cumulative realized capital losses, cumulative unrealized capital depreciation and cumulative unrealized capital appreciation during the applicable Incentive Fee Look-back Period.

 

The first component, which is income-based, is calculated and payable quarterly in arrears, commenced with the quarter beginning January 1, 2013, and is determined based on Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter, subject to the Incentive Fee Cap and Deferral Mechanism. For this purpose, “Pre-Incentive Fee Net Investment Income” means, in each case on a consolidated basis, interest income, distribution income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement (the “Administration Agreement”), any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

 

The operation of the first component of the incentive fee for each quarter is as follows:

 

  no incentive fee is payable to the Company’s investment adviser in any calendar quarter in which Pre-Incentive Fee Net Investment Income does not exceed the “Hurdle Rate” of 1.75% (7.00% annualized);

 

  100% of Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the Hurdle Rate but is less than 2.1875% in any calendar quarter (8.75% annualized) is payable to the investment adviser. This portion of the Company’s Pre-Incentive Fee Net Investment Income (which exceeds the Hurdle Rate but is less than 2.1875%) is referred to as the “catch-up.” The effect of the catch-up is that, if such Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter, the investment adviser will receive 20% of such Pre-Incentive Fee Net Investment Income as if the Hurdle Rate did not apply; and

 

  20% of the amount of such Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to our investment adviser (once the Hurdle Rate is reached and the catch-up is achieved, 20% of all Pre-Incentive Fee Net Investment Income).

 

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The portion of such incentive fee that is attributable to deferred interest (such as PIK interest or original issue discount) will be paid to the investment adviser, together with interest from the date of deferral to the date of payment, only if and to the extent that the Company actually receives such interest in cash, and any accrual will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such amounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and would result in a reduction and possibly elimination of the incentive fees for such quarter.

 

There is no accumulation of amounts on the Hurdle Rate from quarter to quarter and, accordingly, there is no clawback of amounts previously paid if subsequent quarters are below the quarterly Hurdle Rate and there is no delay of payment if prior quarters are below the quarterly Hurdle Rate. Since the Hurdle Rate is fixed, as interest rates rise, it will be easier for the investment adviser to surpass the Hurdle Rate and receive an incentive fee based on Pre-Incentive Fee Net Investment Income.

 

Net investment income used to calculate this component of the incentive fee is also included in the amount of consolidated gross assets used to calculate the 2.0% base management fee. These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.

 

The second component, the capital gains component of the incentive fee, which is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), commenced on January 1, 2013, and equals 20% of cumulative aggregate realized capital gains from January 1 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 each year, less the aggregate amount of any previously paid capital gains incentive fees and subject to the Incentive Fee Cap and Deferral Mechanism. If such amount is negative, then no capital gains incentive fee will be payable for the year. Additionally, if the Investment Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee. The capital gains component of the incentive fee is not subject to any minimum return to stockholders.

 

Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter where it incurs a loss subject to the Incentive Fee Cap and Deferral Mechanism. For example, if the Company receives Pre-Incentive Fee Net Investment Income in excess of the Hurdle Rate, it will pay the applicable incentive fee even after incurring a loss in that quarter due to realized and unrealized capital losses.

 

During the three months ended March 31, 2017 and 2016, the Company incurred performance-based incentive fees of $1,631 and $1,691, respectively.

 

Administration Agreement: Pursuant to the Administration Agreement, WhiteHorse Administration furnishes the Company with office facilities, equipment and clerical, bookkeeping and record keeping services to enable the Company to operate. Under the Administration Agreement, WhiteHorse Administration performs, or oversees the performance of, the Company’s required administrative services, which include being responsible for the financial records which the Company is required to maintain and preparing reports to its stockholders and reports filed with the Securities and Exchange Commission (the “SEC”). In addition, WhiteHorse Administration assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Payments under the Administration Agreement equal an amount based upon the Company’s allocable portion of WhiteHorse Administration’s overhead in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the cost of its chief financial officer and chief compliance officer along with their respective staffs. Under the Administration Agreement, WhiteHorse Administration also provides on the Company’s behalf managerial assistance to those portfolio companies to which the Company is required to provide such assistance. The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party. To the extent that WhiteHorse Administration outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without any profit to WhiteHorse Administration.

 

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Substantially all the Company’s payments of operating expenses to third parties were made by a related party, for which such third party received reimbursement from the Company.

 

During the three months ended March 31, 2017 and 2016, the Company incurred allocated administrative service fees of $134 and $210, respectively.

 

Co-investments with Related Parties: At March 31, 2017 and December 31, 2016, certain officers or employees affiliated with or employed by WhiteHorse Advisers and its related entities maintained co-investments in the Company’s investments of $27 and $27, respectively.

 

At March 31, 2017 and December 31, 2016, certain funds affiliated with WhiteHorse Advisers and its related entities maintained co-investments in the Company’s investments of $347,083 and $243,627, respectively.

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

Commitments: In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its borrowers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of assets and liabilities. The Company attempts to limit its credit risk by conducting extensive due diligence and obtaining collateral where appropriate.

 

The balance of unfunded commitments to extend credit was $762 and $0 as of March 31, 2017 and December 31, 2016, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. These commitments are often subject to financial or non-financial milestones and other conditions to borrow that must be achieved before the commitment can be drawn. In addition, the commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

Indemnification: In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not occurred. The Company expects the risk of any future obligation under these indemnifications to be remote.

 

Legal Proceedings: In the normal course of business, the Company, the investment adviser and the administrator may be subject to legal and regulatory proceedings that are generally incidental to its ongoing operations. While there can be no assurance of the ultimate disposition of any such proceedings, the Company does not believe any such disposition will have a material adverse effect on the Company’s consolidated financial statements.

 

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NOTE 8 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights:

 

   Three months ended 
March 31,
 
   2017   2016 
Per share data:(1)        
Net asset value, beginning of period  $13.63   $13.33 
           
Net investment income   0.36    0.37 
Net realized and unrealized gains (losses) on investments   0.17    (0.06)
Net increase in net assets resulting from operations   0.53    0.31 
           
Distributions declared from net investment income   (0.36)   (0.36)
Net asset value, end of period  $13.80   $13.28 
           
Total annualized return based on market value(2)   54.32%   (38.54)%
Total annualized return based on net asset value   15.41%   9.04%
Net assets, end of period  $252,520   $243,086 
Per share market value at end of period  $13.80   $10.38 
Shares outstanding end of period   18,303,890    18,303,890 
           
Ratios/Supplemental data: (3)          
Ratio of expenses before incentive fees to average net assets   8.68%   8.10%
Ratio of incentive fees to average net assets   2.61%   2.76%
Ratio of total expenses to average net assets   11.29%   10.86%
Ratio of net investment income to average net assets   10.44%   11.05%
Portfolio turnover ratio   7.16%   4.42%

 

(1)Calculated using the average shares outstanding method.

 

(2)Total return is based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with the dividend reinvestment plan.

 

(3)With the exception of the portfolio turnover rate, ratios are reported on an annualized basis.

 

Financial highlights are calculated for each securities class taken as a whole. An individual stockholder’s return and ratios may vary based on the timing of capital transactions.

 

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NOTE 9 – CHANGE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

 

The following information sets forth the computation of the basic and diluted per share net increase in net assets resulting from operations:

 

   Three months ended
March 31,
 
   2017   2016 
Net increase in net assets resulting from operations  $9,629   $5,532 
Weighted average shares outstanding   18,303,890    18,303,890 
Basic and diluted per share net increase in net assets resulting from operations  $0.53   $0.31 

 

NOTE 10 – SUBSEQUENT EVENTS

 

The Company has evaluated events that have occurred after the balance sheet date but before the consolidated financial statements are issued and has determined that there were no additional subsequent events requiring adjustment or disclosure in the consolidated financial statements.

 

 

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

 

The information contained in this section should be read in conjunction with our Consolidated Financial Statements appearing elsewhere in this quarterly report on Form 10-Q. In this quarterly report on Form 10-Q, "we", "us", "our" and "WhiteHorse Finance" refer to WhiteHorse Finance, Inc. and its consolidated subsidiaries.

 

Forward-Looking Statements

 

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 ability to consummate new investments and the impact of such investments;

 

  our business prospects and the prospects of our prospective portfolio companies;

 

  the ability of our portfolio companies to achieve their objectives;

 

  our contractual arrangements and relationships with third parties;

 

  changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes to the value of our assets;

 

  the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

  the impact of increased competition;

 

  the ability of our investment adviser to locate suitable investments for us and to monitor our investments;

 

  our expected financings and investments and the rate at which our investments are refunded by portfolio companies;

 

  our ability to pay dividends or make distributions;

 

  the adequacy of our cash resources and working capital;

 

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

 

  the impact of future acquisitions and divestitures.

 

We use words such as “may,” “might,” “will,” “intends,” “should,” “could,” “can,” “would,” “expects,” “believes,” “estimates,” “anticipates,” “predicts,” “potential,” “plan” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in “Item 1A—Risk Factors” in our annual report on Form 10-K and elsewhere in this quarterly report on Form 10-Q.

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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, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, 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 U.S. Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

You should understand that under Sections 27A(b)(2)(B) and (D) of the Securities Act of 1933, as amended, or the Securities Act, and Sections 21E(b)(2)(B) and (D) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended, do not apply to statements made in connection with this quarterly report on Form 10-Q or any periodic reports we file under the Exchange Act.

 

Overview

 

We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for tax purposes, we elected 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.

 

We were formed on December 28, 2011 and commenced operations on January 1, 2012. We were originally capitalized with approximately $176.3 million of contributed assets from H.I.G. Bayside Debt & LBO Fund II, L.P. and H.I.G. Bayside Loan Opportunity Fund II, L.P., or Loan Fund II, each of which is an affiliate of H.I.G. Capital, L.L.C., or H.I.G. Capital. These assets were contributed as of January 1, 2012 in exchange for 11,752,383 units in WhiteHorse Finance, LLC. On December 4, 2012, we converted from a Delaware limited liability company into a Delaware corporation and elected to be treated as a business development company under the 1940 Act. In this quarterly report on Form 10-Q, we refer to this conversion as the “BDC Conversion” and, where applicable, “shares” refer to our units prior to the BDC Conversion and to shares of common stock in our corporation after the BDC Conversion. As part of the BDC Conversion, all outstanding units in WhiteHorse Finance, LLC were converted to 7,826,284 shares of common stock of WhiteHorse Finance, Inc.

 

On December 4, 2012, we priced our initial public offering, or the IPO, selling 6,666,667 shares. Concurrent with the IPO, certain of our directors and officers, the managers of our investment adviser and their immediate family members or entities owned by, or family trusts for the benefit of, such persons, purchased an additional 472,673 shares through a private placement exempt from registration under the Securities Act. Our shares are listed on the NASDAQ Global Select Market under the symbol “WHF.”

 

On November 20, 2015, we completed a non-transferable subscription rights offering, or the Rights Offering, to our stockholders of record as of October 23, 2015. The rights entitled record stockholders to subscribe for up to an aggregate of 3,321,033 shares of our common stock at a price equal to $13.55 per share, the closing price of the Company’s stock as of October 16, 2015. Record stockholders received one right for each share of common stock owned on the record date. The rights entitled the holders to purchase one new share of common stock for every 4.511505 rights held, and record stockholders who fully exercised their rights were entitled to subscribe, subject to certain limitations and allotment, for additional shares that remained unsubscribed as a result of any unexercised rights. The rights offering was fully subscribed, and net proceeds, after payment of the dealer manager fees and other offering expenses, was approximately $44.0 million.

 

We are a direct lender targeting debt investments in privately held, lower middle market companies located in the United States. We define the lower middle market as those companies with enterprise values between $50 million and $350 million. Our investment objective is to generate attractive risk-adjusted returns primarily by originating and investing in senior secured loans, including first lien and second lien facilities, to performing lower middle market companies across a broad range of industries. Such loans typically carry a floating interest rate based on the London Interbank Offered Rate, or LIBOR, and have a term of three to six years. While we focus principally on originating senior secured loans to lower middle market companies, we may also opportunistically make investments at other levels of a company’s capital structure, including mezzanine loans or equity interests, and in companies outside of the lower middle market, to the extent we believe the investment presents an opportunity to achieve an attractive risk-adjusted return. We also may receive warrants to purchase common stock in connection with our debt investments. We expect to generate current income through the receipt of interest payments, as well as origination and other fees, capital appreciation and dividends.

 

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Our investment activities are managed by H.I.G. WhiteHorse Advisers, LLC, or WhiteHorse Advisers, and supervised by our board of directors, a majority of whom are independent of us, WhiteHorse Advisers and its affiliates. Under our investment advisory agreement with WhiteHorse Advisers, or the Investment Advisory Agreement, we have agreed to pay WhiteHorse Advisers an annual base management fee based on our average consolidated gross assets as well as an incentive fee based on our investment performance. We have also entered into an administration agreement, or the Administration Agreement, with H.I.G. WhiteHorse Administration, LLC, or WhiteHorse Administration. Under our Administration Agreement, we have agreed to reimburse WhiteHorse Administration for our allocable portion (subject to the review and approval of our independent directors) of overhead and other expenses incurred by WhiteHorse Administration in performing its obligations under the Administration Agreement.

 

As of March 31, 2017, our investment portfolio consisted primarily of senior secured loans across 39 positions in 30 companies, with an aggregate fair value of $431.7 million. As of December 31, 2016, our investment portfolio consisted primarily of senior secured loans across 37 positions in 29 companies, with an aggregate fair value of approximately $411.7 million. At both dates, the majority of our portfolio comprised senior secured loans to lower middle market borrowers.

 

Revenues

 

We generate revenue in the form of interest payable on the debt securities that we hold and capital gains and distributions, if any, on the portfolio company investments that we originate or acquire. Our debt investments, whether in the form of senior secured loans or mezzanine loans, typically have terms of three to six years and bear interest at a fixed or floating rate based on a spread over LIBOR. Interest on debt securities is generally payable monthly or quarterly, with the amortization of principal generally being deferred for several years from the date of the initial investment. In some cases, we may also defer payments of interest for the first few years after our investment. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees. We capitalize loan origination fees, original issue discount and market discount, and we then amortize such amounts as interest income. Upon the prepayment of a loan or debt security, we record any unamortized loan origination fees as fee income. We record prepayment premiums on loans and debt securities as fee income when earned. Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.

 

Expenses

 

Our primary operating expenses include (1) investment advisory fees to WhiteHorse Advisers; (2) the allocable portion of overhead under the Administration Agreement; (3) the interest expense on our outstanding debt; and (4) other operating costs as detailed below. Our investment advisory fees compensate our investment adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments.

 

We bear all other costs and expenses of our operations and transactions, including:

 

  our organization;

  calculating our net asset value and net asset value per share (including the costs and expenses of independent valuation firms);

  fees and expenses, including travel expenses, incurred by WhiteHorse Advisers or payable to third parties in performing due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights;

  the costs of all future offerings of common shares and other securities, and other incurrences of debt;

  the base management fee and any incentive fee;

  distributions on our shares;

 

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  transfer agent and custody fees and expenses;

  amounts payable to third parties relating to, or associated with, evaluating, making and disposing of investments;

  brokerage fees and commissions;

  registration fees;

  listing fees;

  taxes;

  independent directors’ fees and expenses;

  costs associated with our reporting and compliance obligations under the 1940 Act and applicable U.S. federal and state securities laws;

  the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;

  costs of holding stockholder meetings;

  our fidelity bond;

  directors and officers/errors and omissions liability insurance and any other insurance premiums;

  litigation, indemnification and other non-recurring or extraordinary expenses;

  direct costs and expenses of administration and operation, including audit and legal costs;

  fees and expenses associated with marketing efforts, including deal sourcing and marketing to financial sponsors;

  dues, fees and charges of any trade association of which we are a member; and

  all other expenses reasonably incurred by us or WhiteHorse Administration in connection with administering our business, including rent and our allocable portion of the costs and expenses of our chief financial officer and chief compliance officer along with their respective staffs.

 

Recent Developments

 

On May 1, 2017, upon the recommendation of our nominating and corporate governance committee, our board of directors appointed each of Stuart Aronson and Kevin Burke to serve as a member of our board of directors with immediate effect. Mr. Aronson was designated as a Class II director and will serve for the remainder of the current Class II term, which expires at the annual meeting of stockholders to be held in August 2017. Mr. Burke was designated as a Class I director and will serve for the remainder of the current Class I term, which expires at the annual meeting of stockholders to be held in 2019. Mr. Burke was also elected to serve as a member of each of our audit, compensation and nominating and corporate governance committees with immediate effect. Mr. Burke is an “independent director” within the meaning of NASDAQ Stock Market Marketplace Rule 5605(a)(2) and Section 10A of the Exchange Act.

 

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Consolidated Results of Operations

 

The consolidated results of operations described below may not be indicative of the results we report in future periods. Net investment income and net increase in net assets can vary substantially from period to period due to various reasons, including the level of new investments and the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, quarterly comparisons of net increases in net assets resulting from operations may not be meaningful.

 

Investment Income

 

Investment income for the three months ended March 31, 2017 totaled $13.6 million, and was primarily attributable to interest, dividends and fees earned from investments in portfolio companies. This compares to investment income for the three months ended March 31, 2016 of $13.4 million. Investment income increased primarily as a result of an increase in the average balance of earning investments. Investment income for the three months ended March 31, 2017 and 2016 included $0.5 million and $0.5 million of non-recurring fee income, respectively. We expect to generate some level of non-recurring fee income during most quarters from prepayments, amendments and other sources.

 

Operating Expenses

 

Expenses totaled $7.1 million and $6.6 million for the three months ended March 31, 2017 and 2016, respectively.

 

Interest expense totaled $2.4 million and $1.9 million for the three months ended March 31, 2017 and 2016, respectively. The increase was due to higher interest rates and the higher spread on our revolving credit facility over the comparable periods during the prior year.

 

Base management fees totaled $2.3 m