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EX-31.1 - EXHIBIT 31.1 - WhiteHorse Finance, Inc.v471395_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - WhiteHorse Finance, Inc.v471395_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - WhiteHorse Finance, Inc.v471395_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - WhiteHorse Finance, Inc.v471395_ex31-2.htm
EX-10.1 - EXHIBIT 10.1 - WhiteHorse Finance, Inc.v471395_ex10-1.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 June 30, 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 August 7, 2017 the Registrant had 20,518,104 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 June 30, 2017 (Unaudited) and December 31, 2016 3
  Consolidated Statements of Operations for the three and six months ended June 30, 2017 (Unaudited) and 2016 (Unaudited) 4
  Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2017 (Unaudited) and 2016 (Unaudited) 5
  Consolidated Statements of Cash Flows for the six months ended June 30, 2017 (Unaudited) and 2016 (Unaudited) 6
  Consolidated Schedules of Investments as of June 30, 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)

 

   June 30, 2017   December 31, 2016 
   (Unaudited)     
Assets          
Investments, at fair value          
Non-controlled/non-affiliate company investments  $408,905   $385,216 
Non-controlled affiliate company investments   28,988    26,498 
Total investments, at fair value (amortized cost $450,440 and $427,689, respectively)   437,893    411,714 
Cash and cash equivalents   39,731    17,036 
Restricted cash and cash equivalents   3,987    11,858 
Receivables from investments sold   -    881 
Interest receivable   4,822    3,891 
Prepaid expenses and other receivables   840    854 
Total assets  $487,273   $446,234 
           
Liabilities          
Debt  $188,988   $182,338 
Distributions payable   6,503    6,498 
Management fees payable   5,961    5,476 
Payables for investments purchased   -    995 
Accounts payable and accrued expenses   1,533    1,058 
Interest payable   503    480 
Total liabilities   203,488    196,845 
           
Commitments and contingencies (See Note 7)          
           
Net assets          
Common stock, 20,518,104 and 18,303,890 shares issued and outstanding, par value $0.001 per share, respectively, and 100,000,000 authorized   20    18 
Paid-in capital in excess of par   302,733    272,242 
Accumulated overdistributed net investment income   (4,966)   (5,423)
Accumulated realized losses on investments   (819)   (842)
Accumulated unrealized depreciation on investments   (13,183)   (16,606)
Total net assets   283,785    249,389 
Total liabilities and total net assets  $487,273   $446,234 
           
Number of shares outstanding   20,518,104    18,303,890 
Net asset value per share  $13.83   $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 June 30,   Six months ended June 30, 
   2017    2016   2017    2016 
Investment income                    
From non-controlled/non-affiliate company investments                    
Interest income  $12,577   $12,106   $24,595   $24,126 
Fee income   1,058    256    1,825    932 
From non-controlled affiliate company investments                    
Dividend income   650    688    1,440    1,402 
Total investment income   14,285    13,050    27,860    26,460 
                     
Expenses                    
Interest expense   2,559    1,951    5,003    3,867 
Base management fees   2,390    2,248    4,652    4,500 
Performance-based incentive fees   1,734    1,609    3,365    3,300 
Administrative service fees   158    205    292    415 
General and administrative expenses   508    611    1,090    1,190 
Total expenses   7,349    6,624    14,402    13,272 
Net investment income   6,936    6,426    13,458    13,188 
                     
Realized and unrealized gains (losses) on investments                    
Net realized gains (losses)                    
Non-controlled/non-affiliate company investments   -    (1,138)   23    (1,138)
Net realized gains (losses)   -    (1,138)   23    (1,138)
Net change in unrealized appreciation (depreciation)                    
Non-controlled/non-affiliate company investments   (2,294)   2,439    933    2,209 
Non-controlled affiliate company investments   2,633    402    2,490    (598)
Net change in unrealized appreciation   339    2,841    3,423    1,611 
Net realized and unrealized gains on investments   339    1,703    3,446    473 
Net increase in net assets resulting from operations  $7,275   $8,129   $16,904   $13,661 
                     
Per Common Share Data                    
Basic and diluted earnings per common share  $0.39   $0.44   $0.91   $0.75 
Dividends and distributions declared per common share  $0.36   $0.36   $0.71   $0.71 
Basic and diluted weighted average common shares outstanding   18,341,967    18,303,890    18,323,034    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)

  

                      Accumulated     Accumulated        
                Accumulated     Realized     Unrealized        
    Common Stock     Paid-in     Overdistributed Net     Gains     Appreciation        
          Par      Capital in     Investment     (Losses) on     (Depreciation)     Total Net  
    Shares     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     -       -       -       13,188       (1,138 )     1,611       13,661  
                                                         
Distributions declared     -       -       -       (12,996 )     -       -       (12,996 )
                                                         
Balance at June 30, 2016     18,303,890     $ 18     $ 271,679     $ (7,227 )   $ 38     $ (19,791 )   $ 244,717  
                                                         
Balance at December 31, 2016     18,303,890     $ 18     $ 272,242     $ (5,423 )   $ (842 )   $ (16,606 )   $ 249,389  
                                                         
Stock issued in connection with public offering     2,200,000       2       30,294       -       -       -       30,296  
                                                         
Stock issued in connection with distribution reinvestment plan     14,214       -       197       -       -       -       197  
                                                         
Net increase in net assets resulting from operations     -       -       -       13,458       23       3,423       16,904  
                                                         
Distributions declared     -       -       -       (13,001 )     -       -       (13,001 )
                                                         
Balance at June 30, 2017     20,518,104     $ 20     $ 302,733     $ (4,966 )   $ (819 )   $ (13,183 )   $ 283,785  

 

See notes to the consolidated financial statements

 

 5 

 

  

WhiteHorse Finance, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

   Six months 
   ended June 30, 
   2017   2016 
Cash flows from operating activities          
Net increase in net assets resulting from operations  $16,904   $13,661 
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:          
Paid-in-kind income   (326)   (522)
Net realized (gains) losses on investments   (23)   1,138 
Net unrealized appreciation on investments   (3,423)   (1,611)
Accretion of discount   (1,689)   (1,075)
Amortization of deferred financing costs   428    428 
Acquisition of investments   (86,453)   (41,115)
Proceeds from principal payments and sales of portfolio investments   65,735    57,668 
Net changes in operating assets and liabilities:          
Restricted cash and cash equivalents   7,871    (25,196)
Interest receivable   (931)   (273)
Prepaid expenses and other receivables   14    104 
Receivables from investments sold   881    (661)
Payables for investments purchased   (995)   (2,865)
Management fees payable   485    2,126 
Accounts payable and accrued expenses   475    (134)
Interest payable   23     
Net cash (used in) provided by operating activities   (1,024)   1,673 
           
Cash flows from financing activities          
Proceeds from sales of common stock, net of offering costs   30,296     
Borrowings   102,567    78,250 
Repayment of debt   (95,317)   (70,750)
Deferred financing costs   (1,028)    
Distributions paid to common stockholders, net of distributions reinvested   (12,799)   (12,996)
Net cash provided by (used in) financing activities   23,719    (5,496)
           
Net change in cash and cash equivalents   22,695    (3,823)
Cash and cash equivalents at beginning of period   17,036    22,769 
Cash and cash equivalents at end of period  $39,731   $18,946 
           
Supplemental disclosure of cash flow information:          
Interest paid  $4,552   $3,210 
           
Supplemental non-cash disclosures:          
Distributions declared  $13,001    12,996 
Distributions reinvested   197    - 

See notes to the consolidated financial statements

 

 6 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited)

June 30, 2017

(in thousands) 

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal/
Share
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%  7.75%  12/22/21  $18,038   $16,415   $17,858    6.29%
   (1.00% Floor)                          
Fluent, LLC (f/k/a Fluent Acquisition II, LLC)                             
First Lien Secured Term Loan  L+ 11.50%  12.71%  12/08/20   26,292    25,935    26,095    9.20 
   (0.50% Floor)  (1.00% PIK)                       
Intersection Acquisition, LLC                             
First Lien Secured Term Loan  L+ 12.00%  13.30%  09/15/20   15,116    15,019    14,210    5.01 
   (1.00% Floor)  (2.00% PIK)                       
             59,446    57,369    58,163    20.50 
Application Software                             
Intermedia Holdings, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%  10.67%  02/03/25   18,000    17,657    17,759    6.26 
   (1.00% Floor)                          
Auto Parts & Equipment                             
Crowne Group, LLC                             
First Lien Secured Term Loan  L+ 9.25%  10.45%  05/26/21   12,219    11,887    12,215    4.30 
   (1.00% Floor)                          
Broadcasting                             
Multicultural Radio Broadcasting, Inc.                             
First Lien Secured Term Loan  L+ 10.50%  11.73%  06/27/19   14,850    14,850    14,776    5.21 
   (1.00% Floor)                          
Consumer Finance                             
Golden Pear Funding III, LLC(5)                             
Second Lien Secured Term Loan  L+ 10.25%  11.42%  06/25/20   25,000    24,826    24,898    8.77 
   (1.00% Floor)                          
Second Lien Secured Revolving Loan  L+ 10.25%  11.42%  06/25/20   5,000    4,965    4,979    1.75 
   (1.00% Floor)                          
Oasis Legal Finance, LLC(5)                             
Second Lien Secured Term Loan  L+ 10.75%  11.79%  03/09/22   20,000    19,659    20,000    7.05 
   (1.00% Floor)                          
Sigue Corporation(4)                             
Second Lien Secured Term Loan  L+ 11.50%  12.65%  12/27/18   25,000    24,851    24,400    8.60 
   (1.00% Floor)                          
             75,000    74,301    74,277    26.17 
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   23,602    23,225    23,484    8.28 
   (1.00% Floor)                          
Department Stores                             
Mills Fleet Farm Group, LLC                             
Second Lien Secured Term Loan  L+ 9.75%  10.98%  02/26/23   7,146    7,027    7,146    2.52 
   (1.00% Floor)                          
Diversified Support Services                             
Account Control Technology Holdings, Inc.                             
First Lien Secured Term Loan  L+ 8.50%  9.67%  04/28/22   18,384    17,872    17,876    6.30 
   (1.00% Floor)                          
Climate Pros, Inc.                             
First Lien Secured Revolving Loan  L+ 9.00%  10.20%  02/27/19   952    469    466    0.16 
   (1.00% Floor)                          
First Lien Secured Term Loan  L+ 9.00%  10.20%  02/28/22   3,990    3,916    3,939    1.39 
   (1.00% Floor)                          
Sitel Worldwide Corporation                             
Second Lien Secured Term Loan  L+ 9.50%  10.69%  09/18/22   8,670    8,540    8,504    3.00 
   (1.00% Floor)                          
             31,996    30,797    30,785    10.85 

 

See notes to the consolidated financial statements

 

 7 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

June 30, 2017

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
as a
Percentage
of Net
Assets
 
Food Retail                             
AG Kings Holdings, Inc.                             
First Lien Secured Term Loan  L+ 9.95%  10.95%  08/10/21  $13,790   $13,300   $13,653    4.81%
   (1.00% Floor)                          
Crews of California, Inc.                             
First Lien Secured Term Loan  L+ 11.00%  12.16%  11/20/19   17,196    17,038    17,111    6.03 
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Revolving Loan  L+ 11.00%  12.16%  11/20/19   5,093    5,031    5,068    1.79 
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Delayed Draw Loan  L+ 11.00%  12.16%  11/20/19   4,984    4,926    4,959    1.75 
   (1.00% Floor)  (1.00% PIK)                       
             41,063    40,295    40,791    14.38 
Heatlh Care Facilities                             
Grupo HIMA San Pablo, Inc.                             
First Lien Secured Term Loan  L+ 9.00%  10.50%  01/31/18   14,350    14,316    11,585    4.08 
   (1.50% Floor)                          
Second Lien Secured Term Loan  N/A  15.75%  07/31/18   1,000    991    329    0.12 
                              
             15,350    15,307    11,914    4.20 
Internet Retail                             
Clarus Commerce, LLC                             
First Lien Secured Term Loan  L+ 10.10%  11.33%  03/17/21   6,000    5,911    6,000    2.11 
   (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    17,576    17,667    6.23 
   (1.00% Floor)                          
Investment Banking & Brokerage                             
JVMC Holdings Corp. (f/k/a RJO Holdings Corp)                             
First Lien First Out Secured Term Loan  L+ 8.02%  9.25%  05/05/22   13,500    13,205    13,226    4.66 
   (1.00% Floor)                          
First Lien Last Out Secured Term Loan  L+ 12.00%  13.23%  05/05/22   5,000    4,891    4,899    1.73 
   (1.00% Floor)                          
             18,500    18,096    18,125    6.39 
IT Consulting & Other Services                             
AST-Applications Software Technology LLC                             
First Lien Secured Term Loan  L+ 9.00%  10.23%  01/10/23   4,910    4,803    4,517    1.59 
   (1.00% Floor)  (2.00% PIK)                       
Office Services & Supplies                             
Katun Corporation                             
Second Lien Secured Term Loan  L+ 11.25%  12.30%  01/25/21   4,422    4,399    4,391    1.55 
   (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    12,913    10,615    3.74 
   (1.25% Floor)                          
Other Diversified Financial Services                             
The Pay-O-Matic Corp.                             
First Lien Secured Term Loan  L+ 11.00%  12.08%  04/02/18   14,588    14,438    14,543    5.12 
   (1.00% Floor)                          
Research & Consulting Services                             
Project Time & Cost, LLC                             
First Lien Secured Term Loan  L+ 12.00%  13.21%  10/09/20   9,404    9,281    8,979    3.16 
   (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    18,894    19,144    6.75 
   (1.25% Floor)                          
Trucking                             
Fox Rent A Car, Inc.                             
First Lien Secured Term Loan  L+ 12.00%  13.05%  09/29/17   7,200    7,157    7,200    2.54 
                              
Sunteck / TTS Holdings, LLC                             
Second Lien Secured Term Loan  L+ 9.00%  10.25%  06/15/22   3,500    3,444    3,456    1.22 
   (1.00% Floor)                          
             10,700    10,601    10,656    3.76 
                              
Total Debt Investments            417,196    409,627    405,947    143.07 

  

See notes to the consolidated financial statements 

 

 8 

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

June 30, 2017

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
as a
Percentage
of Net
Assets
 
                          
Equity Investments                             
Advertising                             
Cogint, Inc. (f/k/a IDI, Inc.) Warrants(4)  N/A  N/A  12/08/25  $187   $-   $248    0.09%
                              
Food Retail                             
Crews of California, Inc. Warrants (4)  N/A  N/A  12/31/24   -    -    1,573    0.55 
Nicholas & Associates, LLC Warrants(4)  N/A  N/A  12/31/24   3    -    260    0.09 
Pinnacle Management Group, LLC Warrants(4)  N/A  N/A  12/31/24   3    -    563    0.20 
RC3 Enterprises, LLC Warrants(4)  N/A  N/A  12/31/24   3    -    144    0.05 
             9    -    2,540    0.89 
Other Diversified Financial Services                             
Aretec Group, Inc. (4)(5)(6)  N/A  N/A  N/A   536    20,693    10,238    3.61 
                              
Specialized Finance                             
NMFC Senior Loan Program I LLC Units (4)(5)(6)  N/A  N/A  06/13/20   20,000    20,120    18,750    6.61 
                              
Trucking                             
Fox Rent A Car, Inc. Warrants(4)  N/A  N/A  N/A   -    -    170    0.06 
                              
Total Equity Investments            20,732    40,813    31,946    11.26 
                              
Total Investments           $437,928   $450,440   $437,893    154.33 

 

(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 represented 84% of total assets as of the date of the consolidated schedule of investments.

 

(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 represented 83% of total assets as of the date of the consolidated schedule of investments.

 

(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)

June 30, 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.

 

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.

 

 14 

 

 

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. 

 

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.

 

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

 

Non-accrual loans: 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 generally 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 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.

 

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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 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 or expense that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. Any tax positions not deemed to satisfy the more likely than not threshold are reversed and recorded as tax benefit or tax expense, as appropriate, in the current year. Management has analyzed the Company’s tax positions, and the Company has concluded that the Company did not have any unrecognized tax benefits or unrecognized tax liabilities related to uncertain tax positions as of June 30, 2017 and December 31, 2016.

 

Penalties or interest that may be assessed related to any income taxes would be classified as general and administrative expenses on the consolidated statements of operations. The Company had no amounts accrued for interest or penalties as of June 30, 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.

 

As of June 30, 2017, the cost of investments for federal income tax purposes was $450,497, resulting in net unrealized depreciation of $12,603. This is comprised of gross unrealized appreciation of $6,935 and gross unrealized depreciation of $19,538 on a tax basis as of June 30, 2017.

 

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.

 

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” distribution reinvestment plan for common stockholders. As a result, if the Company declares a distribution or other dividend, stockholders’ cash distributions will be automatically reinvested in additional shares of common stock, unless they specifically “opt out” of the distribution 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.

 

 16 

 

 

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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. 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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. 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. Early adoption is permitted, including adoption in an interim period. For public filers that are not emerging growth companies, the guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company does not expect the adoption of this standard to have any material impact on its results of operations or cash flows.

  

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, 2017. 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.

 

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NOTE 3 - INVESTMENTS

 

Investments consisted of the following:

 

   June 30, 2017   December 31, 2016 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
First lien secured loans  $243,885   $242,659   $246,909   $245,213 
Second lien secured loans   165,742    163,288    139,967    135,895 
Equity   40,813    31,946    40,813    30,606 
Total  $450,440   $437,893   $427,689   $411,714 

 

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

 

   June 30, 2017   December 31, 2016 
Advertising  $58,411    13.33%  $59,214    14.38%
Application Software   17,759    4.06    -    - 
Auto Parts & Equipment   12,215    2.79    12,282    2.98 
Broadcasting   14,776    3.38    14,776    3.59 
Consumer Finance   74,277    16.97    73,529    17.86 
Data Processing & Outsourced Services   23,484    5.37    23,370    5.68 
Department Stores   7,146    1.63    7,146    1.74 
Distributors   -    -    9,875    2.40 
Diversified Support Services   30,785    7.03    8,462    2.06 
Electronic Equipment & Instruments   -    -    9,523    2.31 
Food Retail   43,331    9.90    45,124    10.96 
Health Care Facilities   11,914    2.72    36,346    8.83 
Integrated Telecommunication Services   -    -    8,841    2.15 
Internet Retail   6,000    1.37    5,895    1.43 
Internet Software & Services   17,667    4.03    -    - 
Investment Banking & Brokerage   18,125    4.14    -    - 
IT Consulting & Other Services   4,517    1.03    -    - 
Office Services & Supplies   4,391    1.00    4,930    1.20 
Oil & Gas Drilling   -    -    7,189    1.75 
Oil & Gas Exploration & Production   10,615    2.42    9,939    2.41 
Other Diversified Financial Services   24,781    5.66    16,409    3.99 
Research & Consulting Services   8,979    2.05    9,845    2.39 
Specialized Consumer Services   19,144    4.37    19,000    4.61 
Specialized Finance   18,750    4.28    18,993    4.61 
Trucking   10,826    2.47    11,026    2.68 
Total  $437,893    100.00%  $411,714    100.00%

 

The portfolio companies underlying the investments are located in the United States. As of each of June 30, 2017 and December 31, 2016, the weighted average remaining term of the Company’s debt investments was approximately 3.6 years and 3.7 years, respectively.

 

As of June 30, 2017 and December 31, 2016, the Company did not hold any 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 and for the six months ended June 30, 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

June 30,

2017

 
Aretec Group, Inc.  Equity  $-   $7,505   $-   $-   $-   $2,733   $10,238 
NMFC Senior Loan Program I LLC Units  Equity   1,440    18,993    -    -    -    (243)   18,750 
Total     $1,440   $26,498   $-   $-   $-   $2,490   $28,988 

 

(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 six months ended June 30, 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.

 

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 June 30, 2017:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $-   $-   $242,659   $242,659 
Second lien secured loans   -    -    163,288    163,288 
Equity   -    -    31,946    31,946 
Total investments  $-   $-   $437,893   $437,893 

 

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