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EX-32.2 - EXHIBIT 32.2 - WhiteHorse Finance, Inc.tv505178_ex32-2.htm
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EX-31.2 - EXHIBIT 31.2 - WhiteHorse Finance, Inc.tv505178_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - WhiteHorse Finance, Inc.tv505178_ex31-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2018

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 every Interactive Data File required to be submitted 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 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   ¨

 

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 7, 2018 the Registrant had 20,546,032 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, 2018 (Unaudited) and December 31, 2017 3
  Consolidated Statements of Operations for the three and nine months ended September 30, 2018 (Unaudited) and 2017 (Unaudited) 4
  Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2018 (Unaudited) and 2017 (Unaudited) 5
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 (Unaudited) and 2017 (Unaudited) 6
  Consolidated Schedules of Investments as of September 30, 2018 (Unaudited) and December 31, 2017 7
  Notes to the Consolidated Financial Statements (Unaudited) 15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
Item 4. Controls and Procedures 46
Part II. Other Information 47
Item 1. Legal Proceedings 47
Item 1A. Risk Factors 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
Item 3. Defaults Upon Senior Securities 49
Item 4. Mine Safety Disclosures 49
Item 5. Other Information 49
Item 6. Exhibits 49

 

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, 2018   December 31, 2017 
   (Unaudited)     
Assets          
Investments, at fair value          
Non-controlled/non-affiliate company investments  $435,932   $404,434 
Non-controlled affiliate company investments   73,688    36,246 
Total investments, at fair value (amortized cost $482,145 and $448,522, respectively)   509,620    440,680 
Cash and cash equivalents   11,481    35,219 
Restricted cash and cash equivalents   15,116    3,717 
Interest receivable   4,506    4,947 
Receivables from investments sold   599    783 
Prepaid expenses and other receivables   521    185 
Total assets  $541,843   $485,531 
           
Liabilities          
Debt  $195,708   $182,122 
Distributions payable   7,294    7,289 
Management and incentive fees payable   11,724    7,848 
Payables for investments purchased   7,780    - 
Accounts payable and accrued expenses   742    701 
Interest payable   899    527 
Advances received from unfunded credit facilities   42    92 
Total liabilities   224,189    198,579 
           
Commitments and contingencies (See Note 7)          
           
Net assets          
Common stock, 20,546,032 and 20,531,948 shares issued and outstanding, par value $0.001 per share, respectively, and 100,000,000 authorized   21    20 
Paid-in capital in excess of par   302,498    302,292 
Accumulated overdistributed net investment income   (11,696)   (6,784)
Accumulated net realized losses on investments   (644)   (734)
Accumulated net unrealized appreciation (depreciation) on investments   27,475    (7,842)
Total net assets   317,654    286,952 
Total liabilities and total net assets  $541,843   $485,531 
           
Number of shares outstanding   20,546,032    20,531,948 
Net asset value per share  $15.46   $13.98 

 

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, 
   2018    2017   2018    2017 
Investment income                    
From non-controlled/non-affiliate company investments                    
Interest income  $13,843   $12,235   $40,871   $36,830 
Fee income   875    161    3,855    1,986 
From non-controlled affiliate company investments                    
Dividend income   600    628    1,851    2,068 
Total investment income   15,318    13,024    46,577    40,884 
                     
Expenses                    
Interest expense   3,283    2,379    8,649    7,382 
Base management fees   2,761    2,481    7,813    7,133 
Performance-based incentive fees   4,865    1,487    10,900    4,852 
Administrative service fees   175    246    525    538 
General and administrative expenses   572    481    1,843    1,571 
Total expenses, before fees waived   11,656    7,074    29,730    21,476 
Base management fees waived   (115)   -    (115)   - 
Total expenses, net of fees waived   11,541    7,074    29,615    21,476 
Net investment income   3,777    5,950    16,962    19,408 
                     
Realized and unrealized gains (losses) on investments                    
Net realized gains                    
Non-controlled/non-affiliate company investments   17    133    90    156 
Net realized gains   17    133    90    156 
Net change in unrealized appreciation (depreciation)                    
Non-controlled/non-affiliate company investments   (1,164)   1,390    (2,125)   2,323 
Non-controlled affiliate company investments   16,832    1,583    37,442    4,073 
Net change in unrealized appreciation   15,668    2,973    35,317    6,396 
Net realized and unrealized gains on investments   15,685    3,106    35,407    6,552 
Net increase in net assets resulting from operations  $19,462   $9,056   $52,369   $25,960 
                     
Per Common Share Data                    
Basic and diluted earnings per common share  $0.95   $0.45   $2.55   $1.36 
Dividends and distributions declared per common share  $0.36   $0.36   $1.07   $1.07 
Basic and diluted weighted average common shares outstanding   20,545,726    20,518,104    20,536,591    19,062,764 

 

See notes to the consolidated financial statements

 

4

 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Changes in Net Assets (Unaudited)

(in thousands, except share and per share data)

 

   Common Stock  

Paid-in

Capital in

   Accumulated
Overdistributed
Net
Investment
   Accumulated
Net Realized
Losses
on
   Accumulated
Net
Unrealized
Appreciation
(Depreciation)
on
   Total Net 
   Shares   Par amount   Excess of Par   Income   Investments   Investments   Assets 
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 
                                    
Balance at December 31, 2017   20,531,948   $20   $302,292   $(6,784)  $(734)  $(7,842)  $286,952 
                                    
Stock issued in connection with distribution reinvestment plan   14,084    1    206    -    -    -    207 
                                    
Net increase in net assets resulting from operations   -    -    -    16,962    90    35,317    52,369 
                                    
Distributions declared   -    -    -    (21,874)   -    -    (21,874)
                                    
Balance at September 30, 2018   20,546,032   $21   $302,498   $(11,696)  $(644)  $27,475   $317,654 

 

See notes to the consolidated financial sents

  

5

 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

  

Nine months ended 

September 30,

 
   2018   2017 
Cash flows from operating activities          
Net increase in net assets resulting from operations  $52,369   $25,960 
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:          
Paid-in-kind income   (460)   (540)
Net realized gains on investments   (90)   (156)
Net unrealized appreciation on investments   (35,317)   (6,396)
Accretion of discount   (3,503)   (2,323)
Amortization of deferred financing costs   933    623 
Acquisition of investments   (209,790)   (94,783)
Proceeds from principal payments and sales of portfolio investments   180,220    80,589 
Net changes in operating assets and liabilities:          
Interest receivable   441    (647)
Prepaid expenses and other receivables   (336)   818 
Receivables from investments sold   184    (681)
Payables for investments purchased   7,780    (995)
Management and incentive fees payable   3,876    1,042 
Accounts payable and accrued expenses   41    546 
Interest payable   372    8 
Advances received from unfunded credit facilities   (50)   - 
Net cash (used in) provided by operating activities   (3,330)   3,065 
           
Cash flows from financing activities          
Proceeds from sales of common stock, net of offering costs   -    30,287 
Borrowings   130,400    102,567 
Repayments of debt   (116,900)   (102,567)
Deferred financing costs   (847)   (1,033)
Distributions paid to common stockholders, net of distributions reinvested   (21,662)   (19,302)
Net cash (used in) provided by financing activities   (9,009)   9,952 
           
Net change in cash, cash equivalents and restricted cash   (12,339)   13,017 
Cash, cash equivalents and restricted cash at beginning of period   38,936    28,894 
Cash, cash equivalents and restricted cash at end of period  $26,597   $41,911 
           
Supplemental disclosure of cash flow information:          
Interest paid  $7,344   $6,751 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated statements of assets and liabilities that sum to the total of the same amounts presented in the consolidated statements of cash flows:

 

   September 30, 
   2018   2017 
Cash and cash equivalents  $11,481   $37,103 
Restricted cash   15,116    4,808 
           
Total cash, cash equivalents and restricted cash presented in consolidated statements of cash flows  $26,597   $41,911 

 

See notes to the consolidated financial statements

 

6

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited)

September 30, 2018

(in thousands)

  

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Acquisition
Date(10)
  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value(11)
   Fair Value
As A
Percentage
of Net
Assets
 
North America                                
Debt Investments                                
Advertising                                
Fluent, LLC                                
First Lien Secured Term Loan  L+ 7.00%  9.24%  03/26/18  03/27/23   11,593   $11,593   $11,593    3.65%
   (0.50% Floor)                             
Outcome Health                                
First Lien Secured Term Loan  L+ 9.50%  11.94%  12/22/16  12/22/21   10,267    9,615    8,639    2.72 
   (1.00% Floor)  (3.00% PIK)                          
                21,860    21,208    20,232    6.37 
Automotive Retail                                
Team Car Care Holdings, LLC                                
First Lien Secured Term Loan(12)  base rate+ 7.99%  10.26%  02/26/18  02/23/23   17,299    16,956    16,989    5.35 
   (1.00% Floor)                             
Broadcasting                                
Alpha Media, LLC                                
First Lien Secured Term Loan  L+ 6.00%  8.20%  08/14/18  02/25/22   11,163    10,798    10,768    3.39 
   (1.00% Floor)                             
Multicultural Radio Broadcasting, Inc.                                
First Lien Secured Term Loan  L+ 8.00%  10.24%  12/28/17  12/28/22   18,471    18,157    18,323    5.77 
   (1.00% Floor)                             
Rural Media Group, Inc.                                
First Lien Secured Term Loan  L+ 7.86%  10.20%  12/29/17  12/29/22   7,044    6,925    6,903    2.17 
   (1.00% Floor)                             
                36,678    35,880    35,994    11.33 
Cable & Satellite                                
Bulk Midco, LLC                                
First Lien Secured Term Loan  L+ 7.35%  9.68%  06/08/18  06/08/23   15,000    14,789    14,792    4.66 
   (1.00% Floor)                             
                                 
Data Processing & Outsourced Services                                
FPT Operating Company, LLC/                                
TLabs Operating Company, LLC                                
First Lien Secured Term Loan  L+ 8.25%  10.35%  12/23/16  12/23/21   25,559    25,232    24,858    7.83 
   (1.00% Floor)                             
Department Stores                                
Mills Fleet Farm Group, LLC                                
Second Lien Secured Term Loan  L+ 9.75%  11.99%  02/26/16  02/26/23   7,146    7,054    7,146    2.25 
   (1.00% Floor)                             
Diversified Support Services                                
Account Control Technology Holdings, Inc.                                
First Lien Secured Term Loan  L+ 8.75%  11.09%  04/28/17  04/28/22   6,413    6,281    6,370    2.01 
   (1.00% Floor)                             
ImageOne Industries, LLC                                
First Lien Secured Term Loan  L+ 7.50%  9.74%  01/11/18  01/11/23   7,321    7,196    7,102    2.24 
   (1.00% Floor)                             
                13,734    13,477    13,472    4.25 
Environmental & Facilities Services                                
Montrose Environmental Group, Inc.                                
Second Lien Secured Term Loan  L+ 9.50%  11.74%  09/29/17  09/30/20   8,500    8,387    8,500    2.68 
   (1.00% Floor)                             
Food Retail                                
AG Kings Holdings, Inc.                                
First Lien Secured Term Loan  L+ 9.95%  12.34%  08/10/16  08/10/21   13,031    12,709    11,988    3.77 
   (1.00% Floor)                             
Crews of California, Inc.                                
First Lien Secured Term Loan  L+ 11.00%  13.13%  11/20/14  11/20/19   10,607    10,561    10,501    3.31 
   (1.00% Floor)  (1.00% PIK)                          
First Lien Secured Revolving Loan  L+ 11.00%  13.13%  06/05/15  11/20/19   5,158    5,128    5,107    1.61 
   (1.00% Floor)  (1.00% PIK)                          
First Lien Secured Delayed Draw Loan  L+ 11.00%  13.13%  03/27/15  11/20/19   3,046    3,030    3,016    0.95 
   (1.00% Floor)  (1.00% PIK)                          
                31,842    31,428    30,612    9.64 
Health Care Facilities                                
Grupo HIMA San Pablo, Inc.                                
First Lien Secured Term Loan  L+ 9.00%  11.34%  04/01/18  05/31/19   14,250    14,250    11,229    3.53 
   (1.50% Floor)                             
Second Lien Secured Term Loan(8)  N/A  15.75%  02/01/13  07/31/18   1,028    1,024    103    0.03 
      (2.00% PIK)                          
                15,278    15,274    11,332    3.56 

  

See notes to consolidated financial statements

 

7

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2018

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
 

Acquisition

Date(10)

  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value(11)
   Fair Value
As A
Percentage
of Net
Assets
 
Health Care Services                                
PMA Holdco, LLC                                
First Lien Secured Term Loan  L+ 7.50%  9.89%  06/28/18  06/28/23   14,969    $14,667    $14,684    4.62%
   (1.00% Floor)                             
Internet Retail                                
Clarus Commerce, LLC                                
First Lien Secured Term Loan  L+ 8.56%  10.81%  03/09/18  03/09/23   17,100    16,919    16,903    5.32 
   (1.00% Floor)                             
Internet Software & Services                                
London Trust Media Incorporated                                
First Lien Secured Term Loan  L+ 8.00%  10.34%  02/01/18  02/01/23   11,069    10,925    10,913    3.44 
   (1.00% Floor)                             
StackPath, LLC & Highwinds Capital, Inc.                                
Second Lien Secured Term Loan  L+ 9.50%  12.01%  02/03/17  02/02/24   18,000    17,657    17,820    5.61 
   (1.00% Floor)                             
                29,069    28,582    28,733    9.05 
Investment Banking & Brokerage                                
JVMC Holdings Corp. (f/k/a RJO Holdings Corp)                                
First Lien First Out Secured Term Loan  L+ 8.02%  10.26%  05/05/17  05/05/22   12,656    12,452    12,656    3.98 
   (1.00% Floor)                             
First Lien Last Out Secured Term Loan  L+ 12.00%  14.24%  05/05/17  05/05/22   4,688    4,612    4,688    1.48 
   (1.00% Floor)                             
                17,344    17,064    17,344    5.46 
IT Consulting & Other Services                                
AST-Applications Software Technology LLC                                
First Lien Secured Term Loan  L+ 8.00%  10.24%  01/10/17  01/10/23   4,203    4,133    4,077    1.28 
   (1.00% Floor)  (1.00% PIK)                          
Leisure Facilities                                
Planet Fit Indy 10 LLC                                
First Lien Incremental Term Loan  L+ 7.25%  9.59%  11/30/17  03/07/22   9,915    9,747    9,915    3.12 
   (1.00% Floor)                             
First Lien Initial Delayed Draw Loan  L+ 7.25%  9.58%  11/30/17  03/07/22   6,183    6,162    6,183    1.95 
   (1.00% Floor)                             
First Lien Initial Term Loan  L+ 7.25%  9.57%  11/30/17  03/07/22   131    130    131    0.04 
   (1.00% Floor)                             
Lift Brands, Inc.                                
First Lien Secured Term Loan  L+ 7.00%  9.39%  04/16/18  04/16/23   10,885    10,678    10,670    3.36 
   (1.00% Floor)                             
First Lien Secured Revolving Loan(7)  L+ 7.00%  9.09%  04/16/18  04/16/23   -    -    -    - 
   (1.00% Floor)                             
Honors Holdings, LLC                                
First Lien Secured Term Loan  L+ 8.94%  11.28%  07/17/18  07/17/23   7,500    7,392    7,377    2.32 
                                 
                34,614    34,109    34,276    10.79 
Oil & Gas Exploration & Production                                
Caelus Energy Alaska O3, LLC                                
Second Lien Secured Term Loan  L+ 7.50%  9.84%  04/04/14  04/15/20   13,000    12,952    11,931    3.76 
   (1.25% Floor)                             
Other Diversified Financial Services                                
Sigue Corporation(4)                                
Second Lien Secured Term Loan  L+ 12.00%  14.39%  12/27/13  12/27/18   25,000    24,976    24,575    7.74 
   (1.00% Floor)                             
Packaged Foods & Meats                                
Lenny & Larry's, LLC                                
First Lien Secured Term Loan  L+ 6.86%  9.02%  05/15/18  05/15/23   13,496    13,247    13,226    4.16 
   (1.00% Floor)                             
Research & Consulting Services                                
Nelson Worldwide, LLC                                
First Lien Secured Term Loan  L+ 8.00%  10.49%  01/09/18  01/09/23   17,622    17,245    17,128    5.39 
   (1.00% Floor)                             
First Lien Secured Revolving Loan(7)  L+ 8.00%  10.48%  01/09/18  01/09/23   1,234    1,208    1,191    0.37 
   (1.00% Floor)                             
                18,856    18,453    18,319    5.76 
Security & Alarm Services                                
SecurAmerica, LLC                                
First Lien Secured Term Loan  L+ 9.00%  11.31%  11/17/17  11/17/22   11,320    11,086    11,301    3.56 
   (1.00% Floor)                             

 

See notes to consolidated financial statements

 

8

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2018

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
 

Acquisition

Date(10)

  Maturity
Date
  Principal/
Share
Amount
   Amortized
Cost
   Fair
Value(11)
   Fair Value
As A
Percentage
of Net
Assets
 
Specialized Finance                                
Golden Pear Funding Assetco, LLC(5)                                
Second Lien Secured Term Loan  L+ 10.50%  12.67%  09/20/18  03/20/24   17,500    $17,152    $17,150    5.40%
   (1.00% Floor)                             
Oasis Legal Finance, LLC(5)                                
Second Lien Secured Term Loan  L+ 10.75%  12.85%  09/09/16  03/09/22   20,000    19,750    20,000    6.30
   (1.00% Floor)                             
                37,500    36,902    37,150    11.70 
Technology Hardware, Storage & Peripherals                                
Source Code Midco, LLC                                
First Lien Secured Term Loan  L+ 8.75%  11.09%  05/04/18  05/04/23   14,545    14,212    14,218    4.48 
   (1.00% Floor)                             
                                 
Trucking                                
Sunteck / TTS Holdings, LLC                                
Second Lien Secured Term Loan  L+ 9.00%  11.33%  12/15/16  06/15/22   3,500    3,459    3,500    1.10 
   (1.00% Floor)                             
Total Debt Investments               447,412    440,446    434,164    136.70 
                                 
                                 
Equity Investments                                
Advertising                                
Fluent, Inc. (f/k/a Cogint, Inc.)(4)(9)  N/A  N/A  11/28/17  12/08/25   187    560    383    0.12 
                                 
Food Retail                                
Crews of California, Inc. Warrants (4)  N/A  N/A  11/20/14  12/31/24   -    -    6    - 
Nicholas & Associates, LLC Warrants(4)  N/A  N/A  11/20/14  12/31/24   2    -    130    0.04 
Pinnacle Management Group, LLC Warrants(4)  N/A  N/A  11/20/14  12/31/24   2    -    130    0.04 
RC3 Enterprises, LLC Warrants(4)  N/A  N/A  11/20/14  12/31/24   2    -    130    0.04 
                6    -    396    0.12 
                                 
Health Care Services                                
PMA Holdco, LLC Warrants(4)  N/A  N/A  06/28/18  N/A   8    -    358    0.11 
                                 
Other Diversified Financial Services                                
Aretec Group, Inc. (4)(5)(6)  N/A  N/A  03/21/14  N/A   536    20,692    53,817    16.94 
                                 
RCS Creditor Trust Class B Units(4)(6)  N/A  N/A  10/01/17  N/A   143    -    535    0.17 
                                 
SFS Global Holding Company Warrants(4)  N/A  N/A  06/28/18  N/A   -    -    -    - 
                                 
Sigue Corporation Warrants(4)  N/A  N/A  06/28/18  N/A   6    327    533    0.17 
                685    21,019    54,885    17.28 
Specialized Finance                                
NMFC Senior Loan Program I LLC Units (4)(5)(6)  N/A  N/A  06/13/14  06/13/20   20,000    20,120    19,334    6.09 
                                 
Trucking                                
Fox Rent A Car, Inc. Warrants(4)  N/A  N/A  10/26/16  N/A   -    -    100    0.03 
                                 
Total Equity Investments               20,886    41,699    75,456    23.75 
                                 
Total Investments              $468,298   $482,145   $509,620    160.45%

  

See notes to consolidated financial statements

 

9

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2018

(in thousands)

 

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

 

(2) The investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”), which resets monthly, quarterly or semiannually, or the U.S. Prime Rate as published by the Wall Street Journal (“Prime” or “P”). The one, three and six-month LIBOR were 2.3%, 2.4% and 2.6%, respectively, as of September 30, 2018. The Prime was 5.25% as of September 30, 2018.

 

(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 80%, 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) The investment has an unfunded commitment in addition to any amounts presented in the consolidated schedule of investments as of September 30, 2018. See Note 7.

 

(8) The investment is on non-accrual status.

 

(9) The fair value of the investment was determined using observable inputs. See Note 4. There are no legal restrictions on sales of the investment.

 

(10) Except as otherwise noted, all of the Company’s portfolio company investments, which as of the date of the consolidated schedule of investments represented 160% of the Company’s net assets or 94% of the Company’s total assets, are subject to legal restrictions on sales.

 

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

 

(12) The investment was comprised of two contracts, which were indexed to different base rates, L and P, respectively. The Spread Above Index and Interest Rate presented represent the weighted average of both contracts.

 

See notes to consolidated financial statements

 

10

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments

December 31, 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)
  13.05%
(1.00% PIK)
  12/08/20   25,650   $25,352   $25,651    8.94%
Outcome Health                             
First Lien Secured Term Loan  L+ 6.50%
(1.00% Floor)
  8.13%  12/22/21   14,853    13,667    12,372    4.31 
             40,503    39,019    38,023    13.25 
Application Software                             
Intermedia Holdings, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.88%  02/03/25   18,000    17,680    17,892    6.24 
Auto Parts & Equipment                             
Crowne Group, LLC                             
First Lien Secured Term Loan  L+ 9.25%
(1.00% Floor)
  10.73%  05/26/21   12,031    11,747    12,031    4.19 
Broadcasting                             
Multicultural Radio Broadcasting, Inc.                             
First Lien Secured Term Loan  L+ 8.00%
(1.00% Floor)
  9.56%  12/28/22   20,000    19,601    19,600    6.83 
Rural Media Group, Inc.                             
First Lien Secured Term Loan  P+ 5.75%
(1.00% Floor)
  10.25%  12/29/22   7,133    6,991    6,991    2.44 
First Lien Secured Delayed Draw Loan  (8)  P+ 5.75%
(1.00% Floor)
  10.25%  12/29/22   -    -    -    - 
             27,133    26,592    26,591    9.27 
Data Processing & Outsourced Services                             
FPT Operating Company, LLC/                             
TLabs Operating Company, LLC                             
First Lien Secured Term Loan  L+ 8.25%
(1.00% Floor)
  9.61%  12/23/21   23,305    22,975    23,188    8.08 
Department Stores                             
Mills Fleet Farm Group, LLC                             
Second Lien Secured Term Loan  L+ 9.75%
(1.00% Floor)
  11.32%  02/26/23   7,146    7,038    7,146    2.49 
Diversified Support Services                             
Account Control Technology Holdings, Inc.                             
First Lien Secured Term Loan(4)  L+ 8.50%
(1.00% Floor)
  9.88%  04/28/22   14,329    13,971    14,180    4.94 
Sitel Worldwide Corporation                             
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.88%  09/18/22   8,670    8,553    8,651    3.01 
             22,999    22,524    22,831    7.95 
Environmental & Facilities Services                             
Montrose Environmental Group, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.88%  09/30/20   8,500    8,345    8,423    2.94 

 

See notes to consolidated financial statements

 

11

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments - (continued)

December 31, 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

 
Food Retail                             
AG Kings Holdings, Inc.                             
First Lien Secured Term Loan  L+ 9.95%
(1.00% Floor)
  11.64%  08/10/21   13,615   $13,190   $13,479    4.70%
Crews of California, Inc.                             
First Lien Secured Term Loan  L+ 11.00%
(1.00% Floor)
  12.48%
(1.00% PIK)
  11/20/19   16,853    16,732    16,516    5.76 
First Lien Secured Revolving Loan  L+ 11.00%
(1.00% Floor)
  12.48%
(1.00% PIK)
  11/20/19   5,119    5,070    5,017    1.75 
First Lien Secured Delayed Draw Loan  L+ 11.00%
(1.00% Floor)
  12.48%
(1.00% PIK)
  11/20/19   4,884    4,840    4,786    1.67 
             40,471    39,832    39,798    13.88 
Health Care Facilities                             
Grupo HIMA San Pablo, Inc.                             
First Lien Secured Term Loan  L+ 9.00%
(1.50% Floor)
  10.50%  01/31/18   14,250    14,245    12,430    4.33 
Second Lien Secured Term Loan  N/A  15.75%
(2.00% PIK)
  07/31/18   1,027    1,023    239    0.08 
             15,277    15,268    12,669    4.41 
Internet Retail                             
Clarus Commerce, LLC                             
First Lien Secured Term Loan  L+ 9.77%
(1.00% Floor)
  11.34%  03/17/21   6,000    5,923    6,000    2.09 
Internet Software & Services                             
StackPath, LLC & Highwinds Capital, Inc.                             
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.88%  02/02/24   18,000    17,608    17,576    6.13 
Investment Banking & Brokerage                             
JVMC Holdings Corp. (f/k/a RJO Holdings Corp)                             
First Lien First Out Secured Term Loan  L+ 8.02%
(1.00% Floor)
  9.59%  05/05/22   13,163    12,905    13,042    4.55 
First Lien Last Out Secured Term Loan  L+ 12.00%
(1.00% Floor)
  13.57%  05/05/22   4,875    4,780    4,830    1.68 
             18,038    17,685    17,872    6.23 
IT Consulting & Other Services                             
AST-Applications Software Technology LLC                             
First Lien Secured Term Loan  L+ 9.00%
(1.00% Floor)
  10.57%
(2.00% PIK)
  01/10/23   4,150    4,067    3,901    1.36 
Leisure Facilities                             
Planet Fit Indy 10 LLC                             
First Lien Initial Secured Term Loan  L+ 7.25%
(1.00% Floor)
  8.77%  03/07/22   132    131    131    0.05 
First Lien Incremental Secured Term Loan  L+ 7.25%
(1.00% Floor)
  8.94%  03/07/22   1,935    1,916    1,916    0.67 
First Lien Initial Secured Delayed Draw Loan   (8)  L+ 7.25%
(1.00% Floor)
  8.73%  03/07/22   2,658    2,632    2,632    0.92 
             4,725    4,679    4,679    1.64 

 

See notes to consolidated financial statements

 

12

 

  

WhiteHorse Finance, Inc. 

Consolidated Schedule of Investments - (continued)

December 31, 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

 
Office Services & Supplies                             
Katun Corporation                             
Second Lien Secured Term Loan  L+ 11.25%
(1.00% Floor)
  12.61%  01/25/21   4,422   $4,402   $4,466    1.56%
Oil & Gas Exploration & Production                             
Caelus Energy Alaska O3, LLC                             
Second Lien Secured Term Loan  L+ 7.50%
(1.25% Floor)
  9.10%  04/15/20   13,000    12,929    10,837    3.78 
Other Diversified Financial Services                             
Sigue Corporation(4)                             
Second Lien Secured Term Loan  L+ 11.50%
(1.00% Floor)
  13.19%  12/27/18   25,000    24,901    24,872    8.67 
The Pay-O-Matic Corp.                             
First Lien Secured Term Loan  L+ 11.00%
(1.00% Floor)
  12.38%  04/02/18   12,044    12,003    12,044    4.20 
             37,044    36,904    36,916    12.87 
Research & Consulting Services                             
Project Time & Cost, LLC                             
First Lien Secured Term Loan  L+ 12.00%
(0.50% Floor)
  13.53%  10/09/20   9,104    9,004    8,440    2.94 
Security & Alarm Services                             
SecurAmerica, LLC                             
First Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)
  10.92%  11/17/22   11,320    11,044    11,084    3.86 
Specialized Consumer Services                             
Pre-Paid Legal Services, Inc.                             
Second Lien Secured Term Loan  L+ 9.00%
(1.25% Floor)
  10.57%  07/01/20   19,000    18,912    19,000    6.62 
Specialized Finance                             
Golden Pear Funding III, LLC  (5)                             
Second Lien Secured Term Loan  L+ 10.25%
(1.00% Floor)
  11.63%  06/25/20   25,000    24,855    24,760    8.63 
Second Lien Secured Revolving Loan  L+ 10.25%
(1.00% Floor)
  11.63%  06/25/20   5,000    4,971    4,952    1.73 
Oasis Legal Finance, LLC (5)                             
Second Lien Secured Term Loan  L+ 10.75%
(1.00% Floor)
  12.11%  03/09/22   20,000    19,696    20,000    6.97 
             50,000    49,522    49,712    17.33 
Trucking                             
Sunteck/TTS Holdings, LLC                             
Second Lien Secured Term Loan  L+ 9.00%
(1.00% Floor)
  10.59%  06/15/22   3,500    3,450    3,456    1.20 
Total Debt Investments            413,668    407,149    402,531    140.31 
Equity Investments                             
Advertising                             
Cogint, Inc. (f/k/a IDI, Inc.) (4)  N/A  N/A  12/08/25   187    560    821    0.29 
Food Retail                             
Crews of California, Inc. Warrants  (4)  N/A  N/A  12/31/24   -    -    14    0.00 
Nicholas & Associates, LLC Warrants  (4)  N/A  N/A  12/31/24   3    -    296    0.10 

 

See notes to consolidated financial statements

 

13

 

 

WhiteHorse Finance, Inc. 

Consolidated Schedule of Investments - (continued)

December 31, 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

 
Pinnacle Management Group, LLC Warrants (4)  N/A  N/A  12/31/24   3   $-   $296    0.10%
RC3 Enterprises, LLC Warrants (4)  N/A  N/A  12/31/24   3    -    296    0.10 
             9    -    902    0.30 
Other Diversified Financial Services                             
Aretec Group, Inc.(4)(5)(6)  N/A  N/A  N/A   536    20,693    17,314    6.03 
RCS Creditor Trust Class B Units (4)(6)  N/A  N/A  N/A   143    -    428    0.15 
             679    20,693    17,742    6.18 
Specialized Finance                             
NMFC Senior Loan Program I LLC Units (4)(5)(6)  N/A  N/A  06/13/20   20,000    20,120    18,504    6.45 
Trucking                             
Fox Rent A Car, Inc. Warrants (4)  N/A  N/A  N/A   -    -    180    0.06 
Total Equity Investments            20,875    41,373    38,149    13.28 
Total Investments            434,543   $448,522   $440,680    153.59%

 

(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 LIBOR, which resets monthly, quarterly or semiannually, or Prime. The one, three and six-month LIBOR were 1.6%, 1.7% and 1.8%, respectively, as of December 31, 2017. The Prime was 4.5% as of December 31, 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 82% 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.

 

(8) The investment has an unfunded commitment in addition to any amounts presented in the consolidated schedule of investments as of December 31, 2017. See note 7.

 

See notes to consolidated financial statements

 

14

 

 

WhiteHorse Finance, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018

(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 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 its subsidiary WhiteHorse Finance (CA), LLC (“WhiteHorse California”), and WhiteHorse Finance Warehouse, LLC (“WhiteHorse Warehouse”). 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, 10 and 12 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, 2017. 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, 2018.

   

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 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.

 

15

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Closing fees associated with investments in portfolio companies are deferred and recognized as interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any unamortized loan closing fees are recorded as part of interest 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 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.

 

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.

 

16

 

 

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.

 

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, 2018 and December 31, 2017.

 

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, 2018 or December 31, 2017. 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 2014 remain subject to examination by the Internal Revenue Service.

 

As of September 30, 2018 and December 31, 2017, the cost of investments for federal income tax purposes was $484,163 and $448,937, resulting in net unrealized appreciation of $25,457 and net unrealized depreciation of $8,256, respectively. This is comprised of gross unrealized appreciation of $34,362 and $3,953, and gross unrealized depreciation of $8,905 and $12,209, on a tax basis, as of September 30, 2018 and December 31, 2017, respectively.

 

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 the Company’s investments are fairly stated, taking into consideration these risks along with estimated collateral values, payment histories and other market information.

 

17

 

  

Recent Accounting Pronouncements: In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and related disclosures.

 

During March 2017, the FASB issued 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. The Company adopted this guidance effective January 1, 2018, and the adoption of this standard did not have an impact on the Company’s financial condition, results of operations, or cash flows.

 

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. The guidance only affects the classification of transactions as presented on the consolidated statements of cash flows. The Company adopted this guidance effective January 1, 2018, and the adoption of this standard did not have a material impact on the Company’s cash flows or disclosures.

 

During January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which, among other things, requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, this ASU changes the disclosure requirements for financial instruments. This guidance is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018, and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or related disclosures 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 Company adopted the revised provisions to ASC Topic 606 effective January 1, 2018 using the modified retrospective method. The adoption of this guidance did not result in a change to the accounting for any of its revenue streams; as such, no cumulative effect adjustment was recorded.

 

18

 

 

NOTE 3 - INVESTMENTS

 

Investments consisted of the following:

 

   September 30, 2018   December 31, 2017 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
First lien secured loans  $328,035   $323,439   $232,786   $230,261 
Second lien secured loans   112,411    110,725    174,363    172,270 
Equity   41,699    75,456    41,373    38,149 
Total  $482,145   $509,620   $448,522   $440,680 

 

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

 

   September 30, 2018   December 31, 2017 
Advertising  $20,615    4.05%  $38,844    8.81%
Application Software   -    -    17,892    4.06 
Auto Parts & Equipment   -    -    12,031    2.73 
Automotive Retail   16,989    3.33    -    - 
Broadcasting   35,994    7.06    26,591    6.03 
Cable & Satellite   14,792    2.90    -    - 
Data Processing & Outsourced Services   24,858    4.88    23,188    5.26 
Department Stores   7,146    1.40    7,146    1.62 
Diversified Support Services   13,472    2.64    22,831    5.18 
Environmental & Facilities Services   8,500    1.67    8,423    1.91 
Food Retail   31,008    6.08    40,700    9.24 
Health Care Facilities   11,332    2.22    12,669    2.87 
Health Care Services   15,042    2.95    -    - 
Internet Retail   16,903    3.32    6,000    1.36 
Internet Software & Services   28,733    5.64    17,576    3.99 
Investment Banking & Brokerage   17,344    3.40    17,872    4.06 
IT Consulting & Other Services   4,077    0.80    3,901    0.89 
Leisure Facilities   34,276    6.73    4,679    1.06 
Office Services & Supplies   -    -    4,466    1.01 
Oil & Gas Exploration & Production   11,931    2.34    10,837    2.46 
Other Diversified Financial Services   79,460    15.60    54,658    12.40 
Packaged Foods & Meats   13,226    2.60    -    - 
Research & Consulting Services   18,319    3.59    8,440    1.92 
Security & Alarm Services   11,301    2.22    11,084    2.52 
Specialized Consumer Services   -    -    19,000    4.31 
Specialized Finance   56,484    11.08    68,216    15.48 
Technology Hardware, Storage & Peripherals   14,218    2.79    -    - 
Trucking   3,600    0.71    3,636    0.83 
Total  $509,620    100.00%  $440,680    100.00%

 

The portfolio companies underlying the investments are located in the United States. As of September 30, 2018 and December 31, 2017, the weighted average remaining term of the Company’s debt investments was approximately 3.5 years and 3.4 years, respectively.

 

As of September 30, 2018, the total fair value of non-accrual loans was $103. As of December 31, 2017, the Company had no non-accrual loans.

 

19

 

 

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, 2018:

 

 

Affiliated Person(1) 

Type of

Asset

  

Amount of

dividends and

interest

included in

income

  

Beginning

Fair Value at

December 31,

2017

   Purchases   Sales  

Net

Realized

Gain (Loss)

  

Net Change in

Unrealized

Appreciation

(Depreciation)

  

Ending Fair

Value at

September 30,

2018

 
Aretec Group, Inc.   Equity   $-   $17,314   $-   $-   $-   $36,503   $53,817 
NMFC Senior Loan Program I LLC Units   Equity    1,851    18,504    -    -    -    830    19,334 
RCS Creditor Trust Class B Units   Equity    -    428    -         -    107    535 
Total       $1,851   $36,246   $-   $-   $-   $37,440   $73,686 

 

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 year ended December 31, 2017:

 

Affiliated Person(1) 

Type of

Asset

  

Amount of

dividends and

interest

included in

income

  

Beginning

Fair Value at

December 31,

2016

   Purchases   Sales  

Net

Realized

Gain (Loss)

  

Net Change in

Unrealized

Appreciation

(Depreciation)

  

Ending Fair

Value at

December 31,

2017

 
Aretec Group, Inc.   Equity   $-   $7,505   $-   $-   $-   $9,809   $17,314 
NMFC Senior Loan Program I LLC Units   Equity    2,713    18,993    -    -    -    (489)   18,504 
RCS Creditor Trust Class B Units   Equity    -    -    -         -    428    428 
Total       $2,713   $26,498   $-   $-   $-   $9,748   $36,246 

  

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

 

During the fourth quarter of 2015, the Company placed its second lien investment in RCS Capital Corporation on non-accrual status in anticipation of a voluntary petition for a “pre-packaged” Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Delaware, which was filed on January 31, 2016. On May 23, 2016, the Company’s second lien investment, with a cost basis of $20,693, converted to 536,042 shares of common stock in Aretec Group, Inc. (previously known as RCS Capital Corporation). As of September 30, 2018 and December 31, 2017, the fair value of the Company’s investment in Aretec Group, Inc. was $53,817 and $17,314, respectively. In October 2018, the Company realized its investment in Aretec Group, Inc. and sold all 536,042 shares of common stock.

 

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, 2018 and 2017, 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.

 

20

 

 

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of September 30, 2018:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $-   $-   $323,439   $323,439 
Second lien secured loans   -    -    110,725    110,725 
Equity   383    -    75,073    75,456 
Total investments  $383   $-   $509,237   $509,620 

 

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

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $-   $-   $230,261   $230,261 
Second lien secured loans   -    -    172,270    172,270 
Equity   821    -    37,328    38,149 
Total investments  $821   $-   $439,859   $440,680 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended September 30, 2018:

 

  

First Lien

Secured

Loans

  

Second Lien

Secured

Loans

   Equity  

Total

Investments

 
Fair value, beginning of period  $308,560   $144,258   $58,095   $510,913 
Acquisition of investments   26,857    18,127    327    45,311 
Paid-in-kind income   146    -    -    146 
Accretion of discount   474    632    -    1,106 
Proceeds from principal payments and sales of portfolio investments   (11,327)   (52,670)   -    (63,997)
Net realized gain   17    -    -    17 
Net unrealized appreciation (depreciation)   (1,288)   378    16,651    15,741 
Fair value, end of period  $323,439   $110,725   $75,073   $509,237 
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2018  $(1,282)  $810   $16,651   $16,179 

   

 The following table presents the changes in investments measured at fair value using Level 3 inputs for the nine months ended September 30, 2018:

 

  

First Lien

Secured

Loans

  

Second Lien

Secured

Loans

   Equity  

Total

Investments

 
Fair value, beginning of period  $230,261   $172,270   $37,328   $439,859 
Acquisition of investments   191,313    18,150    327    209,790 
Paid-in-kind income   461    -    -    461 
Accretion of discount   2,514    989    -    3,503 
Proceeds from principal payments and sales of portfolio investments   (99,004)   (81,092)   -    (180,096)
Net realized losses   (35)   -    -    (35)
Net unrealized appreciation (depreciation)   (2,071)   408    37,418    35,755 
Fair value, end of period  $323,439   $110,725   $75,073   $509,237 
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2018  $(1,934)  $755   $37,418   $36,239 

 

21

 

 

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 

  

 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. 

 

22

 

 

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

 

Investment Type  Fair Value at
September 30, 2018
   Valuation
Techniques
  Unobservable
Inputs
  Range
(Weighted Average)
First lien secured loans  $101,466   Discounted cash flows  Discount rate  10.3% – 19.5% (14.2%)
           Exit multiple  4.5x – 7.0x (5.9x)
    11,229   Market multiples  Exit multiple  2.3x
    210,744   Weighting of discounted cash  Discount rate  9.9% – 20.9% (11.9%)
        flows and consensus pricing  Market quotes  84.0 – 100.0 (97.5)
           Exit multiple  4.5x – 10.0x (7.0x)
   $323,439          
               
Second lien secured loans  $73,041   Discounted cash flows  Discount rate  11.0% – 21.9% (16.1%)
           Exit multiple  4.1x – 8.0x (6.0x)
    103   Market multiples  Exit multiple  2.3x
    29,081   Weighting of discounted cash  Discount rate  14.9% – 18.2% (16.3%)
        flows and consensus pricing  Market quotes  93.0 – 98.0 (95.9)
           Exit multiple  1.3x
    8,500   Weighting of discounted cash  Discount rate  18.7%
        flows and expected repayment  Repayment price  101.0
   $110,725          
               
Common Equity  $19,334   Discounted cash flows  Discount rate  10.2%
           Discount for lack of marketability  2.5%
    535   Consensus pricing  Market quotes  $3.8/s
    53,817   Expected sale  Exit Price  $100.4/s
   $73,686          
               
Warrant  $1,287   Discounted cash flows and  Discount rate  20.0% - 33.0% (24.8%)
        option-pricing method  Exit multiple  4.0x – 8.0x (5.7x)
           Volatility  2.6% - 25.0% (10.2%)
           Discount for lack of marketability  13.0% - 55.0% (25.9%)
    100   Market multiples  Exit multiple  5.7x
           Discount for lack of marketability  15.0%
   $1,387          
               
Total Level 3 Investments  $509,237        

 

23

 

 

Investment Type 

Fair Value at

December 31,

2017

   Valuation Techniques  Unobservable Inputs  Range (Weighted
Average)
First lien secured loans  $143,483   Discounted cash flows  Discount rate  10.8% - 79.8% (20.4%)
           Exit multiple  2.6x - 7.0x (5.8x)
        Weighting of discounted cash  Discount rate  9.7% - 15.2% (12.2%)
        flows and consensus pricing  Market quotes  81.0 - 99.0 (94.9)
    86,778      Exit multiple  5.0x - 8.5x (6.4x)
    230,261          
Second lien secured loans       Discounted cash flows  Discount rate  11.7% - 112.2% (14.1%)
    96,021      Exit multiple  2.6x - 8.0x (7.3x)
        Weighting of discounted cash  Discount rate  9.7% - 15.3% (12.5%)
        flows and consensus pricing  Market quotes  89.0 - 100.3 (96.5)
    46,911      Exit multiple  5.0x - 8.5x (6.5x)
    4,466   Expected repayment  Repayment price  101.0
        Weighting of discounted cash  Discount rate  15.4%
    24,872   flows and expected repayment  Repayment price  100.0
    172,270