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EX-32.2 - EXHIBIT 32.2 - WhiteHorse Finance, Inc.tv477361_ex32-2.htm
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EX-31.2 - EXHIBIT 31.2 - WhiteHorse Finance, Inc.tv477361_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - WhiteHorse Finance, Inc.tv477361_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Form 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 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 November 6, 2017 the Registrant had 20,531,948 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 September 30, 2017 (Unaudited) and December 31, 2016 3
  Consolidated Statements of Operations for the three and nine months ended September 30, 2017 (Unaudited) and 2016 (Unaudited) 4
  Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2017 (Unaudited) and 2016 (Unaudited) 5
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 (Unaudited) and 2016 (Unaudited) 6
  Consolidated Schedules of Investments as of September 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 44
Item 4. Controls and Procedures 44
Part II. Other Information 45
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 3. Defaults Upon Senior Securities 45
Item 4. Mine Safety Disclosures 45
Item 5. Other Information 45
Item 6. Exhibits 46

 

 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)

 

   September 30, 2017   December 31, 2016 
   (Unaudited)     
Assets          
Investments, at fair value          
Non-controlled/non-affiliate company investments  $404,752   $385,216 
Non-controlled affiliate company investments   30,571    26,498 
Total investments, at fair value (amortized cost $444,896 and $427,689, respectively)   435,323    411,714 
Cash and cash equivalents   37,103    17,036 
Restricted cash and cash equivalents   4,808    11,858 
Receivables from investments sold   1,562    881 
Interest receivable   4,538    3,891 
Prepaid expenses and other receivables   36    854 
Total assets  $483,370   $446,234 
           
Liabilities          
Debt  $181,928   $182,338 
Distributions payable   7,284    6,498 
Management fees payable   6,518    5,476 
Payables for investments purchased       995 
Accounts payable and accrued expenses   1,604    1,058 
Interest payable   488    480 
Total liabilities   197,822    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   302,724    272,242 
Accumulated overdistributed net investment income   (6,300)   (5,423)
Accumulated realized losses on investments   (686)   (842)
Accumulated unrealized depreciation on investments   (10,210)   (16,606)
Total net assets   285,548    249,389 
Total liabilities and total net assets  $483,370   $446,234 
           
Number of shares outstanding   20,518,104    18,303,890 
Net asset value per share  $13.92   $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 
September 30,
   Nine months ended 
September 30,
 
   2017    2016   2017    2016 
Investment income                    
From non-controlled/non-affiliate company investments                    
Interest income  $12,235   $12,507   $36,830   $36,633 
Fee income   161    683    1,986    1,615 
From non-controlled affiliate company investments                    
Dividend income   628    840    2,068    2,243 
Total investment income   13,024    14,030    40,884    40,491 
                     
Expenses                    
Interest expense   2,379    2,050    7,382    5,917 
Base management fees   2,481    2,250    7,133    6,749 
Performance-based incentive fees   1,487    1,817    4,852    5,116 
Administrative service fees   246    134    538    550 
General and administrative expenses   481    511    1,571    1,700 
Total expenses   7,074    6,762    21,476    20,032 
Net investment income   5,950    7,268    19,408    20,459 
                     
Realized and unrealized gains (losses) on investments                    
Net realized gains (losses)                    
Non-controlled/non-affiliate company investments   133    660    156    (478)
Net realized gains (losses)   133    660    156    (478)
Net change in unrealized appreciation (depreciation)                    
Non-controlled/non-affiliate company investments   1,390    1,856    2,323    3,466 
Non-controlled affiliate company investments   1,583    (1,190)   4,073    (1,190)
Net change in unrealized appreciation   2,973    666    6,396    2,276 
Net realized and unrealized gains on investments   3,106    1,326    6,552    1,798 
Net increase in net assets resulting from operations  $9,056   $8,594   $25,960   $22,257 
                     
Per Common Share Data                    
Basic and diluted earnings per common share  $0.45   $0.47   $1.36   $1.22 
Dividends and distributions declared per common share  $0.36   $0.36   $1.07   $1.07 
Basic and diluted weighted average common shares outstanding   20,518,104    18,303,890    19,062,764    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   -    -    -    20,459    (478)   2,276    22,257 
                                    
Distributions declared   -    -    -    (19,494)   -    -    (19,494)
                                    
Balance at September 30, 2016   18,303,890   $18   $271,679   $(6,454)  $698   $(19,126)  $246,815 
                                    
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    30,285    -    -    -    30,287 
                                    
Stock issued in connection with distribution reinvestment plan   14,214    -    197    -    -    -    197 
                                    
Net increase in net assets resulting from operations   -    -    -    19,408    156    6,396    25,960 
                                    
Distributions declared   -    -    -    (20,285)   -    -    (20,285)
                                    
Balance at September 30, 2017   20,518,104   $20   $302,724   $(6,300)  $(686)  $(10,210)  $285,548 

 

See notes to the consolidated financial statements

 

 5 

 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

   Nine months 
   ended September 30, 
   2017   2016 
Cash flows from operating activities          
Net increase in net assets resulting from operations  $25,960   $22,257 
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:          
Paid-in-kind income   (540)   (834)
Net realized (gains) losses on investments   (156)   478 
Net unrealized appreciation on investments   (6,396)   (2,276)
Accretion of discount   (2,323)   (2,284)
Amortization of deferred financing costs   623    642 
Acquisition of investments   (94,783)   (69,610)
Proceeds from principal payments and sales of portfolio investments   80,589    86,983 
Net changes in operating assets and liabilities:          
Restricted cash and cash equivalents   7,050    (5,913)
Interest receivable   (647)   (559)
Prepaid expenses and other receivables   818    (193)
Receivables from investments sold   (681)    
Payables for investments purchased   (995)   (2,865)
Management fees payable   1,042    2,063 
Accounts payable and accrued expenses   546    (8)
Interest payable   8    385 
Net cash provided by operating activities   10,115    28,266 
           
Cash flows from financing activities          
Proceeds from sales of common stock, net of offering costs   30,287     
Borrowings   102,567    101,505 
Repayment of debt   (102,567)   (115,250)
Deferred financing costs   (1,033)    
Distributions paid to common stockholders, net of distributions reinvested   (19,302)   (19,494)
Net cash provided by (used in) financing activities   9,952    (33,239)
           
Net change in cash and cash equivalents   20,067    (4,973)
Cash and cash equivalents at beginning of period   17,036    22,769 
Cash and cash equivalents at end of period  $37,103   $17,796 
           
Supplemental disclosure of cash flow information:          
Interest paid  $6,751   $4,890 
           
Supplemental non-cash disclosures:          
Distributions declared  $20,285    19,494 
Distributions reinvested   197    - 

 

See notes to the consolidated financial statements

 

 6 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited)

September 30, 2017

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value(7)
   Fair Value
As A
Percentage
of Net
Assets
 
North America                             
Debt Investments                             
Advertising                             
Fluent, LLC (f/k/a Fluent Acquisition II, LLC)                             
First Lien Secured Term Loan  L+ 11.50%
(0.50% Floor)
  12.74%
(1.00% PIK)
  12/08/20  $ 25,971   $ 25,644   $ 25,971   $ 9.10% 
Intersection Acquisition, LLC                             
First Lien Secured Term Loan  L+ 12.25%
(1.00% Floor)
  13.58%
(2.25% PIK)
  09/15/20   15,202    15,113    15,050    5.27 
Outcome Health                             
First Lien Secured Term Loan  L+ 6.50%
(1.00% Floor)
  7.75%  12/22/21   16,241   14,887  16,079    5.63
             57,414    55,644    57,100    20.00 
Application Software                             
Intermedia Holdings, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.81%  02/03/25   18,000    17,668    17,759    6.22 
                              
Auto Parts & Equipment                             
Crowne Group, LLC                             
First Lien Secured Term Loan  L+ 9.25%
(1.00% Floor)
  10.57%  05/26/21   12,125    11,818    12,121    4.24 
Broadcasting                             
Multicultural Radio Broadcasting, Inc.                             
First Lien Secured Term Loan  L+ 10.50%
(1.00% Floor)
  11.74%  06/27/19   13,820    13,820    13,752    4.82 
Data Processing & Outsourced Services                             
FPT Operating Company, LLC/                             
TLabs Operating Company, LLC                             
First Lien Secured Term Loan  L+ 8.25%
(1.00% Floor)
  9.49%  12/23/21   23,453    23,100    23,336    8.17 
Department Stores                             
Mills Fleet Farm Group, LLC                             
Second Lien Secured Term Loan  L+ 9.75%
(1.00% Floor)
  10.99%  02/26/23   7,146    7,033    7,145    2.50 
Diversified Support Services                             
Account Control Technology Holdings, Inc.                             
First Lien Secured Term Loan  L+ 8.50%
(1.00% Floor)
  9.81%  04/28/22   17,575    17,111    17,089    5.98 
Climate Pros, Inc.                             
First Lien Secured Term Loan  L+ 10.00%
(1.00% Floor)
  11.32%
(1.00% PIK)
  02/28/22   3,985    3,915    3,985    1.40 
Sitel Worldwide Corporation                             
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.81%  09/18/22   8,670    8,547    8,651    3.03 
             30,230    29,573    29,725    10.41 
Environmental & Facilities Services                             
Montrose Environmental Group, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%  10.74%  09/30/20   8,500    8,330    8,330    2.92 
                              
Food Retail                             
AG Kings Holdings, Inc.                             
First Lien Secured Term Loan  L+ 9.95%
(1.00% Floor)
  11.28%  08/10/21   13,720    13,262    13,583    4.76 
Crews of California, Inc.                             
First Lien Secured Term Loan  L+ 11.00%
(1.00% Floor)
  12.23%
(1.00% PIK)
  11/20/19   17,025    16,886    16,944    5.93 
First Lien Secured Revolving Loan  L+ 11.00%
(1.00% Floor)
  12.23%
(1.00% PIK)
  11/20/19   5,107    5,051    5,082    1.78 
First Lien Secured Delayed Draw Loan  L+ 11.00%
(1.00% Floor)
  12.23%
(1.00% PIK)
  11/20/19   4,934    4,883    4,910    1.72 
             40,786    40,082    40,519    14.19 

 

See notes to the consolidated financial statements

 

 7 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2017

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value(7)
   Fair Value
As A
Percentage
of Net
Assets
 
Health Care Facilities                             
Grupo HIMA San Pablo, Inc.                             
First Lien Secured Term Loan  L+ 9.00%
(1.50% Floor)
  10.50%  01/31/18  $14,300   $14,280   $12,474    4.37%
Second Lien Secured Term Loan  N/A  15.75%
(2.00% PIK)
  07/31/18   1,027    1,020    240    0.08 
             15,327    15,300    12,714    4.45 
Internet Retail                             
Clarus Commerce, LLC                             
First Lien Secured Term Loan  L+ 10.17%
(1.00% Floor)
  11.41%  03/17/21   6,000    5,917    6,000    2.10 
Internet Software & Services                             
StackPath, LLC & Highwinds Capital, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.81%  02/02/24   18,000    17,592    17,667    6.19 
Investment Banking and Brokerage                             
JVMC Holdings Corp. (f/k/a RJO Holdings Corp)                             
First Lien First Out Secured Term Loan  L+ 8.02%
(1.00% Floor)
  9.26%  05/05/22   13,331    13,055    13,198    4.62 
First Lien Last Out Secured Term Loan  L+ 12.00%
(1.00% Floor)
  13.24%  05/05/22   4,938    4,835    4,888    1.71 
             18,269    17,890    18,086    6.33 
IT Consulting & Other Services                             
AST-Applications Software Technology LLC                             
First Lien Secured Term Loan  L+ 9.00%
(1.00% Floor)
  10.24%
(2.00% PIK)
  01/10/23   4,919    4,817    4,526    1.59 
Office Services & Supplies                             
Katun Corporation                             
Second Lien Secured Term Loan  L+ 11.25%
(1.00% Floor)
  12.49%  01/25/21   4,422    4,400    4,390    1.54 
Oil & Gas Exploration & Production                             
Caelus Energy Alaska O3, LLC                             
Second Lien Secured Term Loan  L+ 7.50%
(1.25% Floor)
  8.82%  04/15/20   13,000    12,921    10,737    3.76 
Other Diversified Financial Services                             
Sigue Corporation(4)                             
Second Lien Secured Term Loan  L+ 11.50%
(1.00% Floor)
  12.83%  12/27/18   25,000    24,876    24,395    8.54 
The Pay-O-Matic Corp.                             
First Lien Secured Term Loan  L+ 11.00%
(1.00% Floor)
  12.23%  04/02/18   12,259    12,175    12,222    4.28 
             37,259   37,051    36,617    12.82 
Research & Consulting Services                             
Project Time & Cost, LLC                             
First Lien Secured Term Loan  L+ 12.00%
(0.50% Floor)
  13.24%  10/09/20   9,404    9,291    8,968    3.14 
Specialized Consumer Services                             
Pre-Paid Legal Services, Inc.                             
Second Lien Secured Term Loan  L+ 9.00%
(1.25% Floor)
  10.25%  07/01/20   19,000    18,903    19,144    6.70 
Specialized Finance                             
Golden Pear Funding III, LLC(5)                             
Second Lien Secured Term Loan  L+ 10.25%
(1.00% Floor)
  11.56%  06/25/20   25,000    24,841    24,797    8.68 
Second Lien Secured Revolving Loan  L+ 10.25%
(1.00% Floor)
  11.56%  06/25/20   5,000    4,968    4,959    1.74 
Oasis Legal Finance, LLC(5)                             
Second Lien Secured Term Loan  L+ 10.75%
(1.00% Floor)
  11.99%  03/09/22   20,000    19,677    20,000    7.00 
             50,000    49,486    49,756    17.42 
Trucking                             
Sunteck / TTS Holdings, LLC                             
Second Lien Secured Term Loan  L+ 9.00%
(1.00% Floor)
  10.32%  06/15/22   3,500    3,447    3,456    1.21 
Total Debt Investments            410,574    404,083    401,848    140.72 

 

See notes to the consolidated financial statements

 

 8 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2017

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value(7)
   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   $-   $243    0.09%
                              
Food Retail                             
Crews of California, Inc. Warrants (4)  N/A  N/A  12/31/24   -    -    1,544    0.54 
Nicholas & Associates, LLC Warrants(4)  N/A  N/A  12/31/24   3    -    248    0.09 
Pinnacle Management Group, LLC Warrants(4)  N/A  N/A  12/31/24   3    -    551    0.19 
RC3 Enterprises, LLC Warrants(4)  N/A  N/A  12/31/24   3    -    138    0.05 
             9    -    2,481    0.87 
Other Diversified Financial Services                             
Aretec Group, Inc. (4)(5)(6)  N/A  N/A  N/A   536    20,693    12,329    4.32 
                              
Specialized Finance                             
NMFC Senior Loan Program I LLC Units (4)(5)(6)  N/A  N/A  06/13/20   20,000    20,120    18,242    6.39 
                              
Trucking                             
Fox Rent A Car, Inc. Warrants(4)  N/A  N/A  N/A   -    -    180    0.06 
                              
Total Equity Investments            20,732    40,813    33,475    11.73 
                              
Total Investments           $431,306   $444,896   $435,323    152.45 

 

(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. The 1, 3 and 6-month LIBOR were 1.2%, 1.3% and 1.5%, respectively, as of September 30, 2017.

 

(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 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.

 

(7)Except as otherwise noted, the fair value of each investment was determined using significant unobservable inputs. See Note 4.

 

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 
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 
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 
             33,934    33,661    33,104    13.27 
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 
Specialized 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 
             50,000    49,379    49,329    19.78 
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)

September 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.

 

 15 

 

 

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 dividends for U.S. federal income tax purposes to its shareholders each taxable year generally of an amount at least equal to 90% of the sum 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 September 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 September 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. 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. Tax returns for each of the federal tax years since 2013 remain subject to examination by the Internal Revenue Service.

 

As of September 30, 2017, the cost of investments for federal income tax purposes was $444,953, resulting in net unrealized depreciation of $9,630. This is comprised of gross unrealized appreciation of $6,694 and gross unrealized depreciation of $16,324 on a tax basis as of September 30, 2017.

 

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. It is anticipated that the Company will maintain its status as an emerging growth company through December 31, 2017 (the last day of the fiscal year following the fifth anniversary date of the Company’s initial public offering). As a result, the Company will no longer defer the adoption of new and revised accounting standards applicable to public companies subsequent to December 31, 2017.

 

 

 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 and does not expect this guidance to have a material impact as the Company does not hold any material purchased callable debt securities at a premium.

 

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 and does not expect the adoption of this standard to have any material impact on its financial condition, results of operations or cash flows.

 

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 currently presents its restricted cash and changes in its restricted cash separately on its consolidated statements of assets and liabilities and consolidated statements of cash flows, respectively. The Company is currently evaluating the impact that ASU 2016-18 would have on its consolidated financial statements and related disclosures. Since the guidance only affects the presentation of its consolidated statements of cash flows, the Company does not expect this guidance to have any impact on its financial condition or its results of operations.

 

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. Since the guidance only affects the presentation of its consolidated statements of cash flows, the Company does not expect this guidance to have any impact on its financial condition or its results of operations.

 

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 and does not expect the guidance to have a material impact as the Company does not hold any investments at amortized cost.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods, including interim periods within those reporting periods, beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the guidance in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606). The amendments in this update are of a similar nature to the items typically addressed in the technical corrections and improvements project. Additionally, in February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, an update clarifying that a financial asset is within the scope of Subtopic 610-20 if it is deemed an “in-substance non-financial asset.” All of the guidance issued in conjunction with ASU 2014-09 have the same effective date as the original standard and should be adopted concurrent with the adoption of ASU 2014-09. The application of this guidance, which the Company will adopt for periods beginning after December 15, 2017, is not expected to have a material impact on the Company’s consolidated financial statements.

 

 17 

 

 

NOTE 3 - INVESTMENTS

 

Investments consisted of the following:

 

   September 30, 2017   December 31, 2016 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
First lien secured loans  $229,859   $230,178   $246,909   $245,213 
Second lien secured loans   174,224    171,670    139,967    135,895 
Equity   40,813    33,475    40,813    30,606 
Total  $444,896   $435,323   $427,689   $411,714 

 

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

 

   September 30, 2017   December 31, 2016 
Advertising  $57,343    13.17%  $59,214    14.38%
Application Software   17,759    4.08    -    - 
Auto Parts & Equipment   12,121    2.78    12,282    2.98 
Broadcasting   13,752    3.16    14,776    3.59 
Data Processing & Outsourced Services   23,336    5.36    23,370    5.68 
Department Stores   7,145    1.64    7,146    1.74 
Distributors   -    -    9,875    2.40 
Diversified Support Services   29,725    6.83    8,462    2.06 
Electronic Equipment & Instruments   -    -    9,523    2.31 
Environmental & Facilities Services   8,330    1.91    -    - 
Food Retail   43,000    9.88    45,124    10.96 
Health Care Facilities   12,714    2.92    36,346    8.83 
Integrated Telecommunication Services   -    -    8,841    2.15 
Internet Retail   6,000    1.38    5,895    1.43 
Internet Software & Services   17,667    4.06    -    - 
Investment Banking & Brokerage   18,086    4.15    -    - 
IT Consulting & Other Services   4,526    1.04    -    - 
Office Services & Supplies   4,390    1.01    4,930    1.20 
Oil & Gas Drilling   -    -    7,189    1.75 
Oil & Gas Exploration & Production   10,737    2.47    9,939    2.41 
Other Diversified Financial Services   48,946    11.24    40,609    9.86 
Research & Consulting Services   8,968    2.06    9,845    2.39 
Specialized Consumer Services   19,144    4.40    19,000    4.61 
Specialized Finance   67,998    15.62    68,322    16.59 
Trucking   3,636    0.84    11,026    2.68 
Total  $435,323    100.00%  $411,714    100.00%

 

The portfolio companies underlying the investments are located in the United States. As of each of September 30, 2017 and December 31, 2016, the weighted average remaining term of the Company’s debt investments was approximately 3.4 years and 3.7 years, respectively.

 

As of September 30, 2017 and December 31, 2016, the Company did not hold any non-accrual loans.

 

 18 

 

 

 

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 nine months ended September 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

September 30,

2017

 
Aretec Group, Inc.  Equity  $-   $7,505   $-   $-   $-   $4,824   $12,329 
NMFC Senior Loan Program I LLC Units  Equity   2,068    18,993    -    -    -    (751)   18,242 
Total     $2,068   $26,498   $-   $-   $-   $4,073   $30,571 

 

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

 

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 nine months ended September 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 September 30, 2017:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $-   $-   $230,178   $230,178 
Second lien secured loans   -    -    171,670    171,670 
Equity   -    -    33,475    33,475 
Total investments  $-   $-   $435,323   $435,323 

 

 19 

 

 

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 September 30, 2017:

 

  

First Lien

Secured

Loans

  

Second Lien

Secured

Loans

   Equity  

Total

Investments

 
Fair value, beginning of period  $242,659   $163,288   $31,946   $437,893 
Acquisition of investments   -   8,330    -    8,330 
Paid-in-kind income   186    28    -    214 
Accretion of discount   510    124    -    634 
Proceeds from principal payments and sales of portfolio investments   (14,854)   -    -    (14,854)
Net realized gains   133    -    -    133 
Net unrealized appreciation (depreciation)   1,544    (100)   1,529    2,973 
Fair value, end of period  $230,178    171,670    33,475    435,323 
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2017  $1,585  $(100)  $1,529   $3,014 

 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the nine months ended September 30, 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   51,263    43,520    -    94,783 
Paid-in-kind income   512    28    -    540 
Accretion of discount   1,964    359    -    2,323 
Proceeds from principal payments and sales of portfolio investments   (70,921)   (9,668)   -    (80,589)
Net realized gains    133    23    -    156 
Net unrealized appreciation   2,014    1,513    2,869    6,396 
Fair value, end of period  $230,178    171,670    33,475    435,323 
Change in unrealized appreciation on investments still held as of September 30, 2017  $1,448  $1,292   $2,869   $5,609 

 

 20 

 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended September 30, 2016:

 

  

First Lien

Secured

Loans

  

Second Lien

Secured

Loans

   Equity  

Total

Investments

 
Fair value, beginning of period  $208,600   $163,105   $29,155   $400,860 
Funding of investments   8,895    19,600    -    28,495 
Non-cash interest income   218    93    -    311 
Accretion of discount   751    499    (41)   1,209 
Proceeds from principal payments and sales of portfolio investments   (19,658)   (9,000)   (657)   (29,315)
Net realized gains   3         657    660 
Net unrealized appreciation (depreciation)   1,773    (1,721)   613    666 
Fair value, end of period  $200,582    172,577    29,727    402,886 
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2016  $1,797   $(1,696)  $565   $666 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the nine months ended September 30, 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 
Funding of investments   32,540    37,070    -    69,610 
Non-cash interest income   556    278    -    834 
Accretion of discount   1,323    1,002    (41)   2,284 
Proceeds from principal payments and sales of portfolio investments   (50,808)   (35,518)   (657)   (86,983)
Conversion from debt to equity   -    (7,263)   7,263    - 
Net realized (losses) gains   (1,135)   -    657    (478)
Net unrealized appreciation (depreciation)   2,465    (1,188)   999    2,276 
Fair value, end of period  $200,582    172,577    29,727    402,886 
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2016  $2,115   $(1,143)  $952   $1,924 

 

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.

 

 21 

 

 

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

 

Investment Type  Fair Value at
September 30, 2017
   Valuation
Techniques
  Unobservable
Inputs
  Range
(Weighted Average)
First lien secured loans  $166,702   Discounted cash flows  Discount rate  10.4% – 79.8% (19.1%)
           Exit multiple  2.6x – 8.0x (6.5x)
    63,476   Weighting of discounted cash  Discount rate  9.2% – 15.1% (11.3%)
        flows and consensus pricing  Market quotes  97.1 – 99.8 (98.0)
           Exit multiple  5.0x – 8.0x (5.8x)
   $230,178          
               
Second lien secured loans  $89,382   Discounted cash flows  Discount rate  11.7% – 112.2% (15.0%)
           Exit multiple  2.6x – 8.0x (5.4x)
    82,288   Weighting of discounted cash  Discount rate  11.2% – 15.4% (12.7%)
        flows and consensus pricing  Market quotes  87.5 – 101.1 (97.0)
           Exit multiple  5.0x – 9.0x (7.5x)
   $171,670          
               
Common Equity  $18,242   Discounted cash flows  Discount rate  11.6%
    12,329   Weighting of discounted cash  Discount rate  24.5%
        flows, market multiple and  Exit multiple  7.0x
        consensus pricing  Market quotes  $30.0/s
   $30,571          
               
Warrant  $2,904   Discounted cash flows,  Discount rate  18.5%
         Option-pricing method  Exit multiple  7.0x – 7.5x (7.0x)
           Volatility  18.0% - 25.0% (24.4%)
   $2,904          
               
Total Level 3 Investments  $435,323          

 

  

 22 

 

 

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.

 

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.

 

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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 September 30, 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 trailing 10-day volume-weighted average quoted price as of the valuation date.

 

       September 30, 2017   December 31, 2016 
   Fair Value Level   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
Credit Facility   3   $155,000   $156,401   $155,000   $156,786 
Senior Notes   2    30,000    30,768    30,000    30,727 
        $185,000   $187,169   $185,000   $187,513 

 

 

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 September 30, 2017, the Company’s asset coverage for borrowed amounts was 254.4%.

 

Total borrowings outstanding and undrawn as of September 30, 2017, was as follows:

 

   Maturity   Rate   Face Amount   Undrawn 
Credit Facility   2021    L+2.75%  $155,000   $45,000 
Senior Notes   2020    6.50%   30,000    - 
Total debt             185,000   $45,000 
Debt issuance cost             (3,072)     
Total debt net issuance cost            $181,928      

 

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 (“JPMorgan”), as administrative agent and lender (the “Credit Facility”). On June 27, 2016, the Credit Facility was amended and restated to clarify certain terms. On June 29, 2017, WhiteHorse Credit and JPMorgan further amended the terms of the Credit Facility to, among other things, (i) extend the maturity date to December 29, 2021, (ii) increase the amount contained within the accordion feature which allows for the expansion of the borrowing limit from $220,000 to $235,000 and (iii) reduce the interest rate spread applicable on outstanding borrowings to 2.75%.

 

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The Credit Facility bears interest at LIBOR plus 2.75% 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 (or 0.60% per annum with respect to any date in which the aggregated amount of outstanding borrowings is greater than 77.5% of the total commitments), 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. Prior to December 29, 2020, the Company, at its discretion and option, may increase the total borrowing limit under the Credit Facility from $200,000 to $235,000 (with the required minimum outstanding borrowings also increasing from $155,000 to $175,000) by submitting written notification of such intent and subject to consent from the lender and other terms provided for under the Credit Facility. In connection with the Credit Facility, WhiteHorse Credit pledged securities with a fair value of approximately $375,606 as of September 30, 2017 as collateral. The Credit Facility has a final maturity date of December 29, 2021. 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 September 30, 2017, the Company had $155,000 in outstanding borrowings and $45,000 undrawn under the Credit Facility. Weighted average outstanding borrowings were $155,473 and $167,565 at a weighted average interest rate of 4.01% and 3.98%, respectively, for the three and nine months ended September 30, 2017. At September 30, 2017, the interest rate in effect was 4.07%. 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 September 30, 2017, approximately $45,000 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.”

 

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”). The Company’s board of directors most recently reapproved the Investment Advisory Agreement on August 3, 2017. 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 f