10-Q 1 tv519808_10q.htm FORM 10-Q

 

 

 

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 March 31, 2019

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, a smaller reporting company, or an emerging growth 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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share WHF

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market) 

6.50% Notes due 2025 WHFBZ

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market) 

 

As of May 10, 2019 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 March 31, 2019 (Unaudited) and December 31, 2018 3
  Consolidated Statements of Operations for the three months ended March 31, 2019 (Unaudited) and 2018 (Unaudited) 4
  Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2019 (Unaudited) and 2018 (Unaudited) 5
  Consolidated Statements of Cash Flows for the three months ended March 31,2019 (Unaudited) and 2018 (Unaudited) 6
  Consolidated Schedules of Investments as of March 31,2019 (Unaudited) and December 31, 2018 7
  Notes to the Consolidated Financial Statements (Unaudited) 16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk 49
Item 4. Controls and Procedures 49
Part II. Other Information 50
Item 1. Legal Proceedings 50
Item 1A. Risk Factors 50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
Item 3. Defaults Upon Senior Securities 52
Item 4. Mine Safety Disclosures 52
Item 5. Other Information 52
Item 6. Exhibits 52

 

 2 

 

 

Part I. Financial Information

 

Item 1. Financial Statements 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share data)

 

   March 31, 2019   December 31, 2018 
   (Unaudited)     
Assets          
Investments, at fair value          
Non-controlled/non-affiliate company investments  $458,795   $459,399 
Non-controlled affiliate company investments   9,590    10,165 
Total investments, at fair value (amortized cost $475,248 and $477,839, respectively)   468,385    469,564 
Cash and cash equivalents   30,707    24,148 
Restricted cash and cash equivalents   6,186    9,584 
Interest receivable   6,833    4,616 
Receivables from investments sold   8,818    5,608 
Prepaid expenses and other receivables   583    575 
Total assets  $521,512   $514,095 
           
Liabilities          
Debt  $176,197   $175,953 
Management and incentive fees payable   15,356    11,193 
Distributions payable   7,294    7,294 
Payables for investments purchased   5,093    445 
Accounts payable and accrued expenses   1,518    2,322 
Interest payable   983    1,562 
Advances received from unfunded credit facilities   64    30 
Total liabilities   206,505    198,799 
           
Commitments and contingencies (See Note 7)          
           
Net assets          
Common stock, 20,546,032 and 20,546,032 shares issued and outstanding, par value $0.001 per share, respectively, and 100,000,000 authorized   21    21 
Paid-in capital in excess of par   301,557    301,557 
Accumulated undistributed earnings   13,429    13,718 
Total net assets   315,007    315,296 
Total liabilities and total net assets  $521,512   $514,095 
           
Number of shares outstanding   20,546,032    20,546,032 
Net asset value per share  $15.33   $15.35 

 

See notes to the consolidated financial statements

 

 3 

 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

 

   Three months ended March 31, 
   2019   2018 
Investment income          
From non-controlled/non-affiliate company investments          
Interest income  $14,492   $13,763 
Fee income   1,157    2,192 
From non-controlled affiliate company investments          
Dividend income   275    650 
Total investment income   15,924    16,605 
           
Expenses          
Interest expense   3,073    2,565 
Base management fees   2,589    2,445 
Performance-based incentive fees   1,751    2,144 
Administrative service fees   158    175 
General and administrative expenses   682    698 
Total expenses, before fees waived   8,253    8,027 
Base management fee waived   (177)   - 
Total expenses, net of fees waived   8,076    8,027 
Net investment income before excise tax   7,848    8,578 
  Excise tax   237    - 
Net investment income after excise tax   7,611    8,578 
           
Realized and unrealized gains (losses) on investments          
Net realized losses          
Non-controlled/non-affiliate company investments   (2,018)   - 
Net realized losses   (2,018)   - 
Net change in unrealized appreciation (depreciation)          
Non-controlled/non-affiliate company investments   1,988    (2,911)
Non-controlled affiliate company investments   (576)   8,186 
Net change in unrealized appreciation   1,412    5,275 
Net realized and unrealized losses on investments   (606)   5,275 
Net increase in net assets resulting from operations  $7,005   $13,853 
           
Per Common Share Data          
Basic and diluted earnings per common share  $0.34   $0.68 
Dividends and distributions declared per common share  $0.36   $0.36 
Basic and diluted weighted average common shares outstanding   20,546,032    20,531,948 

 

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

Excess of

  

Accumulated

Undistributed

(Overdistributed)

  

Total Net

 
   Shares  

Par amount

   Par   Earnings   Assets 
Balance at December 31, 2017   20,531,948   $20   $302,292   $(15,360)  $286,952 
Stock issued in connection with public offering   —    —    —    —    — 
Stock issued in connection with distribution reinvestment plan   —    —    —    —    — 
Net increase in net assets resulting from operations:                         
Net investment income after excise tax   —    —    —    8,578    8,578 
Net realized gains (losses) on investments   —    —    —    —    — 
Net change in unrealized appreciation (depreciation) on investments   —    —    —    5,275    5,275 
Distributions declared   —    —    —    (7,289)   (7,289)
Tax reclassification of stockholders’ equity   —    —    —    —    — 
Balance at March 31, 2018   20,531,948   $20   $302,292   $(8,796)  $293,516 
                          
Balance at December 31, 2018   20,546,032   $21   $301,557   $13,718   $315,296 
Stock issued in connection with public offering   —    —    —    —    — 
Stock issued in connection with distribution reinvestment plan   —    —    —    —    — 
Net increase in net assets resulting from operations:                         
Net investment income after excise tax   —    —    —    7,611    7,611 
Net realized gains (losses) on investments   —    —    —    (2,018)   (2,018)
Net change in unrealized appreciation (depreciation) on investments   —    —    —    1,412    1,412 
Distributions declared   —    —    —    (7,294)   (7,294)
Tax reclassification of stockholders’ equity   —    —    —    —    — 
Balance at March 31, 2019   20,546,032   $21   $301,557   $13,429   $315,007 

 

See notes to the consolidated financial statements

 

 5 

 

 

WhiteHorse Finance, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

  

Three months ended

March 31,

 
   2019   2018 
Cash flows from operating activities          
Net increase in net assets resulting from operations  $7,005   $13,853 
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:          
Paid-in-kind income   (658)   (142)
Net realized losses on investments   2,018    - 
Net unrealized appreciation on investments   (1,412)   (5,275)
Accretion of discount   (1,328)   (1,598)
Amortization of deferred financing costs   246    195 
Acquisition of investments   (49,699)   (85,883)
Proceeds from principal payments and sales of portfolio investments   52,258    65,836 
Net changes in operating assets and liabilities:          
Interest receivable   (1,225)   (83)
Prepaid expenses and other receivables   (8)   (653)
Receivables from investments sold   (4,201)   320 
Payables for investments purchased   4,648    - 
Management and incentive fees payable   4,163    (112)
Accounts payable and accrued expenses   (804)   363 
Interest payable   (579)   35 
Advances received from unfunded credit facilities   34    69 
Net cash provided by (used in) operating activities   10,458    (13,075)
           
Cash flows from financing activities          
Borrowings   7,300    33,600 
Repayments of debt   (7,300)   (33,600)
Deferred financing costs   (3)   - 
Distributions paid to common stockholders, net of distributions reinvested   (7,294)   (7,289)
Net cash used in financing activities   (7,297)   (7,289)
           
Net change in cash, cash equivalents and restricted cash   3,161    (20,364)
Cash, cash equivalents and restricted cash at beginning of period   33,732    38,936 
Cash, cash equivalents and restricted cash at end of period  $36,893   $18,572 
           
Supplemental disclosure of cash flow information:          
Interest paid  $3,405   $2,335 

 

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:

 

   March 31, 
   2019   2018 
Cash and cash equivalents  $30,707   $11,992 
Restricted cash   6,186    6,580 
           
Total cash, cash equivalents and restricted cash presented in consolidated statements of cash flows  $36,893   $18,572 

 

See notes to the consolidated financial statements

 

 6 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited)

March 31, 2019

(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%  9.50%  03/26/18  03/27/23   10,615   $10,615   $10,615    3.37%
   (0.50% Floor)                             
Air Freight & Logistics                                
Access USA Shipping, LLC                                
First Lien Secured Term Loan  L+ 8.00%  10.50%  02/08/19  02/08/24   5,833    5,748    5,742    1.82 
   (1.50% Floor)                             
Automotive Retail                                
Team Car Care Holdings, LLC                                
First Lien Secured Term Loan(12)  base rate+ 7.99%  10.51%  02/26/18  02/23/23   17,068    16,768    16,727    5.31 
   (1.00% Floor)                             
Broadcasting                                
Alpha Media, LLC                                
First Lien Secured Term Loan  L+ 6.25%  8.83%  08/14/18  02/25/22   5,901    5,735    5,889    1.87 
   (1.00% Floor)                             
Multicultural Radio Broadcasting, Inc.                                
First Lien Secured Term Loan  L+ 8.00%  10.50%  12/28/17  12/28/22   17,412    17,151    17,272    5.48 
   (1.00% Floor)                             
Rural Media Group, Inc.                                
First Lien Secured Term Loan  L+ 7.86%  10.60%  12/29/17  12/29/22   6,955    6,851    6,847    2.17 
   (1.00% Floor)                             
                30,268    29,737    30,008    9.52 
Cable & Satellite                                
Bulk Midco, LLC                                
First Lien Secured Term Loan  L+ 7.33%  9.93%  06/08/18  06/08/23   15,000    14,811    14,700    4.67 
   (1.00% Floor)                             
Communications Equipment                                
Sorenson Communications, LLC                                
First Lien Secured Term Loan  L+ 6.50%  9.05%  03/15/19  03/15/24   5,250    5,093    5,092    1.62 
                                 
                                 
Data Processing & Outsourced Services                                
FPT Operating Company, LLC/                                
TLabs Operating Company, LLC                                
First Lien Secured Term Loan  L+ 8.25%  10.74%  12/23/16  12/23/21   25,229    24,957    24,548    7.79 
   (1.00% Floor)                             
Department Stores                                
Mills Fleet Farm Group, LLC                                
First Lien Secured Term Loan  L+ 6.25%  8.75%  10/24/18  10/24/24   14,963    14,684    14,670    4.66 
   (1.00% Floor)                             
Distributors                                
Crown Brands, LLC                                
First Lien Secured Term Loan  L+ 8.00%  10.50%  01/28/19  01/25/24   5,950    5,806    5,807    1.84 
   (1.50% Floor)                             
First Lien Secured Delayed Draw Loan(7)  L+ 8.00%  10.50%  01/28/19  01/25/24   -    -    -    - 
    (1.50% Floor)                             
                5,950    5,806    5,807    2 
Diversified Support Services                                
Account Control Technology Holdings, Inc.                                
First Lien Secured Term Loan  L+ 8.75%  11.49%  04/28/17  04/28/22   622    610    622    0.20 
   (1.00% Floor)                             
ImageOne Industries, LLC                                
First Lien Secured Term Loan  L+ 10.00%  12.50%  01/11/18  01/11/23   7,204    7,038    6,988    2.22 
   (1.00% Floor)  (2.00% PIK)                          
NNA Services, LLC                                
First Lien Secured Term Loan  L+ 7.00%  9.60%  10/16/18  10/16/23   10,369    10,180    10,138    3.22 
   (1.00% Floor)                             
Quest Events, LLC                                
First Lien Secured Term Loan  L+ 6.00%  8.60%  12/28/18  12/28/24   10,915    10,706    10,697    3.40 
   (1.00% Floor)                             
First Lien Secured Revolving Loan(7)  L+ 6.00%  8.60%  12/28/18  12/28/24   -    -    -    - 
    (1.00% Floor)                             
                29,110    28,534    28,445    9.04 

 

See notes to consolidated financial statements

 

 7 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

March 31, 2019

(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		 
Food Retail                                
AG Kings Holdings, Inc.                                
First Lien Secured Term Loan  L+ 11.95%  14.55%  08/10/16  08/10/21   13,046   $ 12,780   $11,089    3.52% 
   (1.00% Floor)  (2.00% PIK)                          
Crews of California, Inc.                                
First Lien Secured Term Loan  L+ 11.00%  13.48%  11/20/14  11/20/19   10,101    10,077    10,000    3.17 
   (1.00% Floor)  (1.00% PIK)                          
First Lien Secured Revolving Loan  L+ 11.00%  13.48%  06/05/15  11/20/19   5,185    5,168    5,133    1.63 
   (1.00% Floor)  (1.00% PIK)                          
First Lien Secured Delayed Draw Loan  L+ 11.00%  13.48%  03/27/15  11/20/19   2,901    2,892    2,872    0.91 
   (1.00% Floor)  (1.00% PIK)                          
                31,233    30,917    29,094    9.23 
Health Care Facilities                                
Grupo HIMA San Pablo, Inc.                                
First Lien Secured Term Loan  L+ 9.00%  11.75%  04/01/18  05/31/19   13,881    13,881    12,215    3.88 
   (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)                          
                14,909    14,905    12,318    3.91 
Health Care Services                                
PMA Holdco, LLC                                
First Lien Secured Term Loan  L+ 7.50%  10.10%  06/28/18  06/28/23   14,781    14,514    14,540    4.62 
   (1.00% Floor)                             
Home Furnishings                                
Sure Fit Home Products, LLC                                
First Lien Secured Term Loan  L+ 9.50%  12.11%  10/26/18  07/13/22   5,460    5,363    5,371    1.71 
   (1.00% Floor)                             
Human Resources & Employment Services                                
Pluto Acquisition Topco, LLC                                
First Lien Secured Term Loan  L+ 6.56%  9.30%  01/31/19  01/31/24   12,543    12,300    12,292    3.90 
   (1.00% Floor)                             
Internet Retail                                
Clarus Commerce, LLC                                
First Lien Secured Term Loan  L+ 8.39%  10.89%  03/09/18  03/09/23   17,100    16,940    17,100    5.43 
   (1.00% Floor)                             
Internet Services & Infrastructure                                
London Trust Media Incorporated                                
First Lien Secured Term Loan  L+ 8.00%  10.74%  02/01/18  02/01/23   10,781    10,657    10,707    3.40 
   (1.00% Floor)                             
StackPath, LLC & Highwinds Capital, Inc.                                
Second Lien Secured Term Loan  L+ 9.50%  12.33%  02/03/17  02/02/24   18,567    18,256    15,218    4.83 
   (1.00% Floor)  (12.33% PIK)                          
                29,348    28,913    25,925    8.23 
Investment Banking & Brokerage                                
Arcole Acquisition Corp(5)                                
First Lien Secured Term Loan A  L+ 7.25%  9.88%  11/29/18  11/30/23   7,493    7,364    7,380    2.34 
   (1.00% Floor)                             
First Lien Secured Term Loan B  L+ 14.50%  17.13%  11/29/18  11/30/23   1,854    1,822    1,826    0.58 
   (1.00% Floor)  (1.50% PIK)                          
JVMC Holdings Corp.                                
First Lien Secured Term Loan  L+ 6.50%  9.00%  02/28/19  02/28/24   17,378    17,207    17,211    5.46 
   (1.00% Floor)                             
First Lien Secured Delayed Draw Loan(7)  L+ 6.50%  9.00%  02/28/19  02/28/24   -    -    -    - 
    (1.00% Floor)                             
                26,725    26,393    26,417    8.38 
IT Consulting & Other Services                                
AST-Applications Software Technology LLC                                
First Lien Secured Term Loan  L+ 8.00%  10.50%  01/10/17  01/10/23   4,225    4,163    4,098    1.30 
   (1.00% Floor)  (1.00% PIK)                          
Leisure Facilities                                
Planet Fit Indy 10 LLC                                
First Lien Incremental Term Loan  L+ 7.25%  9.86%  11/30/17  03/07/22   12,890    12,673    12,822    4.07 
   (1.00% Floor)                             
First Lien Initial Delayed Draw Loan  L+ 7.25%  9.96%  11/30/17  03/07/22   6,167    6,149    6,134    1.95 
   (1.00% Floor)                             
First Lien Initial Term Loan  L+ 7.25%  9.86%  11/30/17  03/07/22   130    129    129    0.04 
   (1.00% Floor)                             
Lift Brands, Inc.                                
First Lien Secured Term Loan  L+ 7.00%  9.60%  04/16/18  04/16/23   10,831    10,647    10,523    3.34 
   (1.00% Floor)                             
First Lien Secured Revolving Loan(7)  P+ 6.00%  11.50%  04/16/18  04/16/23   203    200    191    0.06 
   (1.00% Floor)                             
Honors Holdings, LLC                                
First Lien Secured Term Loan  L+ 8.80%  11.45%  07/17/18  07/17/23   7,500    7,403    7,355    2.33 
   (0.00% Floor)                             
                37,721    37,201    37,154    11.79 
Other Diversified Financial Services                                
Sigue Corporation(4)                                
Second Lien Secured Term Loan  L+ 12.00%  14.60%  12/27/13  09/30/19   24,904    24,905    24,358    7.73 
   (1.00% Floor)                             

 

See notes to consolidated financial statements

 

 8 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

March 31, 2019

(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		 
Packaged Foods & Meats                                
Lenny & Larry's, LLC                                
First Lien Secured Term Loan  L+ 8.02%  10.50%  05/15/18  05/15/23   12,327    $12,124   $ 11,957    3.80% 
   (1.00% Floor)  (1.19% PIK)                          
Research & Consulting Services                                
Nelson Worldwide, LLC                                
First Lien Secured Term Loan  L+ 8.75%  11.55%  01/09/18  01/09/23   13,869    13,607    13,481    4.28 
   (1.00% Floor)                             
Restaurants                                
LS GFG Holdings Inc.                                
First Lien Secured Term Loan  L+ 6.00%  8.48%  11/30/18  11/19/25   10,314    10,019    9,994    3.17 
   (0.00% Floor)                             
Specialized Finance                                
Golden Pear Funding Assetco, LLC(5)                                
Second Lien Secured Term Loan  L+ 10.50%  12.99%  09/20/18  03/20/24   17,500    17,183    17,150    5.44 
   (1.00% Floor)                             
Oasis Legal Finance, LLC(5)                                
Second Lien Secured Term Loan  L+ 10.75%  13.24%  09/09/16  03/09/22   20,000    19,786    20,000    6.35 
   (1.00% Floor)                             
                37,500    36,969    37,150    11.79 
Technology Hardware, Storage & Peripherals                                
Source Code Midco, LLC                                
First Lien Secured Term Loan  L+ 8.25%  10.99%  05/04/18  05/04/23   14,000    13,713    13,720    4.36 
   (1.00% Floor)                             
Trucking                                
Sunteck / TTS Holdings, LLC                                
Second Lien Secured Term Loan  L+ 9.00%  11.61%  12/15/16  06/15/22   3,500    3,464    3,500    1.11 
   (1.00% Floor)                             
Total Debt Investments               469,745    463,163    454,823    144.38 
                                 
                                 
Equity Investments                                
Advertising                                
Fluent, Inc.(4)(9)  N/A  N/A  11/28/17  N/A   187   $560   $1,021    0.32%
                                 
Diversified Support Services                                
Quest Events, LLC                                
Preferred Units(4)  N/A  N/A  12/28/18  12/08/25   317    317    317    0.10 
                                 
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    -    131    0.04 
Pinnacle Management Group, LLC Warrants(4)  N/A  N/A  11/20/14  12/31/24   2    -    131    0.04 
RC3 Enterprises, LLC Warrants(4)  N/A  N/A  11/20/14  12/31/24   2    -    131    0.04 
                6    -    399    0.12 
                                 
Health Care Services                                
PMA Holdco, LLC Warrants(4)  N/A  N/A  06/28/18  06/28/28   8    -    441    0.14 
                                 
Other Diversified Financial Services                                
RCS Creditor Trust Class B Units(4)(6)  N/A  N/A  10/01/17  N/A   143    -    6    - 
                                 
SFS Global Holding Company Warrants(4)  N/A  N/A  06/28/18  12/28/25   -    -    -    - 
                                 
Sigue Corporation Warrants(4)  N/A  N/A  06/28/18  12/28/25   10    1,179    1,594    0.51 
                153    1,179    1,600    0.51 
Specialized Finance                                
NMFC Senior Loan Program I LLC Units (4)(5)(6)  N/A  N/A  08/13/14  08/31/21   10,000    10,029    9,584    3.04 
                                 
Trucking                                
Fox Rent A Car, Inc. Warrants(4)  N/A  N/A  10/26/16  12/31/22   -    -    200    0.06 
                                 
Total Equity Investments               10,671    12,085    13,562    4.29 
                                 
Total Investments              480,416   $475,248   $468,385    148.67%

 

See notes to consolidated financial statements

 

 9 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

March 31, 2019

(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 2.5%, 2.6% and 2.7%, respectively, as of March 31, 2019. The Prime was 5.5% as of March 31, 2019.

 

(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 89% 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 March 31, 2019. 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 148% of the Company’s net assets or 90% 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, 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%
(0.50% Floor)		  9.52%  03/26/18  03/27/23   10,771   $10,771   $10,771    3.42%
Outcome Health                                
First Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)		  12.31%
(3.00% PIK)		  12/22/16  12/22/21   7,943    7,581    6,408    2.03 
                18,714    18,352    17,179    5.45 
Automotive Retail                                
Team Car Care Holdings, LLC                                
First Lien Secured Term Loan (12)  base rate+ 7.99%
(1.00% Floor)		  10.54%  02/26/18  02/23/23   17,183    16,862    16,840    5.34 
Broadcasting                                
Alpha Media, LLC                                
First Lien Secured Term Loan  L+ 6.50%
(1.00% Floor)		  9.00%  08/14/18  02/25/22   10,877    10,546    10,493    3.33 
Multicultural Radio Broadcasting, Inc.                                
First Lien Secured Term Loan  L+ 8.00%
(1.00% Floor)		  10.52%  12/28/17  12/28/22   17,882    17,597    17,739    5.63 
Rural Media Group, Inc.                                
First Lien Secured Term Loan  L+ 7.86%
(1.00% Floor)		  10.38%  12/29/17  12/29/22   7,000    6,888    6,860    2.18 
                35,759    35,031    35,092    11.14 
Cable & Satellite                                
Bulk Midco, LLC                                
First Lien Secured Term Loan  L+ 7.33%
(1.00% Floor)		  10.10%  06/08/18  06/08/23   15,000    14,801    14,700    4.66 
Data Processing & Outsourced Services                                
FPT Operating Company, LLC/ TLabs Operating Company, LLC                                
First Lien Secured Term Loan  L+ 8.25%
(1.00% Floor)		  10.60%  12/23/16  12/23/21   25,394    25,096    24,707    7.84 
Department Stores                                
Mills Fleet Farm Group, LLC                                
First Lien Secured Term Loan  L+ 6.25%
(1.00% Floor)		  8.77%  10/24/18  10/24/24   15,000    14,708    14,707    4.66 
Diversified Support Services                                
Account Control Technology Holdings, Inc.                                
First Lien Secured Term Loan  L+ 8.75%
(1.00% Floor)		  11.28%  04/28/17  04/28/22   3,933    3,857    3,920    1.24 
ImageOne Industries, LLC                                
First Lien Secured Term Loan  L+ 10.00%
(1.00% Floor)		  12.52%
(2.00% PIK)		  01/11/18  01/11/23   7,264    7,082    6,683    2.12 
NNA Services, LLC                                
First Lien Secured Term Loan  L+ 7.00%  9.80%  10/16/18  10/16/23   10,434    10,234    10,202    3.24 

 

See notes to consolidated financial statements

 

 11 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments - (continued)

December 31, 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

 
Quest Events, LLC                                
First Lien Secured Term Loan  L+ 6.00%  8.81%  12/28/18  12/28/24   10,942   $10,724   $10,724    3.40%
First Lien Secured Revolving Loan (7)  L+ 6.00%  8.81%  12/28/18  12/28/24   —    —    —    — 
                32,573    31,897    31,529    10.00 
Food Retail                                
AG Kings Holdings, Inc.                                
First Lien Secured Term Loan  L+ 9.95%
(1.00% Floor)		  12.75%  08/10/16  08/10/21   13,031    12,737    11,076    3.51 
Crews of California, Inc.                                
First Lien Secured Term Loan  L+ 11.00%
(1.00% Floor)		  13.44%
(1.00% PIK)		  11/20/14  11/20/19   10,354    10,320    10,251    3.25 
First Lien Secured Revolving Loan  L+ 11.00%
(1.00% Floor)		  13.44%
(1.00% PIK)		  06/05/15  11/20/19   5,171    5,148    5,120    1.62 
First Lien Secured Delayed Draw Loan  L+ 11.00%
(1.00% Floor)		  13.44%
(1.00% PIK)		  03/27/15  11/20/19   2,974    2,961    2,944    0.93 
                31,530    31,166    29,391    9.31 
Health Care Facilities                                
Grupo HIMA San Pablo, Inc.                                
First Lien Secured Term Loan  L+ 9.00%
(1.50% Floor)		  11.52%  04/01/18  05/31/19   14,065    14,065    11,955    3.79 
Second Lien Secured Term Loan (8)  N/A  15.75%
(2.00% PIK)		  02/01/13  07/31/18   1,028    1,024    103    0.03 
                15,093    15,089    12,058    3.82 
Health Care Services                                
PMA Holdco, LLC                                
First Lien Secured Term Loan  L+ 7.50%
(1.00% Floor)		  10.30%  06/28/18  06/28/23   14,875    14,591    14,577    4.62 
Home Furnishings                                
Sure Fit Home Products, LLC                                
First Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)		  12.31%  10/26/18  07/13/22   5,530    5,424    5,392    1.71 
Internet Retail                                
Clarus Commerce, LLC                                
First Lien Secured Term Loan  L+ 8.42%
(1.00% Floor)		  10.95%  03/09/18  03/09/23   17,100    16,930    17,100    5.42 
Internet Services & Infrastructure                                
London Trust Media Incorporated                                
First Lien Secured Term Loan  L+ 8.00%
(1.00% Floor)		  10.53%  02/01/18  02/01/23   10,925    10,791    10,816    3.43 
StackPath, LLC & Highwinds Capital, Inc.                                
Second Lien Secured Term Loan  L+ 9.50%
(1.00% Floor)		  12.33%  02/03/17  02/02/24   18,000    17,673    14,760    4.68 
                28,925    28,464    25,576    8.11 

 

See notes to consolidated financial statements

 

 12 

 

 

WhiteHorse Finance, Inc. 

Consolidated Schedule of Investments - (continued)

December 31, 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

 
Investment Banking & Brokerage                                
Arcole Acquisition Corp(5)                                
First Lien Secured Term Loan A  L+ 7.25%
(1.00% Floor)		  9.96%  11/29/18  11/30/23   7,588   $7,451   $7,448    2.36% 
First Lien Secured Term Loan B  L+ 14.50%
(1.00% Floor)		  17.21%
(1.50% PIK)		  11/29/18  11/30/23   1,870    1,837    1,836    0.58 
JVMC Holdings Corp.
(f/k/a RJO Holdings Corp)
                                
First Lien First Out Secured Term Loan  L+ 8.02%
(1.00% Floor)		  10.54%  05/05/17  05/05/22   12,488   12,300   12,726    4.04
First Lien Last Out Secured Term Loan  L+ 12.00%
(1.00% Floor)		  14.52%  05/05/17  05/05/22   4,625    4,555    4,713    1.49 
                26,571    26,143    26,723    8.47 
IT Consulting & Other Services                                
AST-Applications Software Technology LLC                                
First Lien Secured Term Loan  L+ 8.00%
(1.00% Floor)		  10.52%
(1.00% PIK)		  01/10/17  01/10/23   4,214    4,148    4,088    1.30 
                                 
Leisure Facilities                                
Planet Fit Indy 10 LLC                                
First Lien Incremental Term Loan  L+ 7.25%
(1.00% Floor)		  10.04%  11/30/17  03/07/22   9,892    9,735    9,841    3.12 
First Lien Initial Delayed Draw Loan  L+ 7.25%
(1.00% Floor)		  9.82%  11/30/17  03/07/22   6,183    6,163    6,153    1.95 
First Lien Initial Term Loan  L+ 7.25%
(1.00% Floor)		  10.02%  11/30/17  03/07/22   130    129    130    0.04 
Lift Brands, Inc.                                
First Lien Secured Term Loan  L+ 7.00%
(1.00% Floor)		  9.80%  04/16/18  04/16/23   10,858    10,663    10,433    3.31 
First Lien Secured Revolving Loan (7)  L+ 7.00%
(1.00% Floor)		  9.09%  04/16/18  04/16/23   128    126    110    0.03 
Honors Holdings, LLC (Orange Theory)                                
First Lien Secured Term Loan  L+ 8.94%
(0.00% Floor)		  11.37%  07/17/18  07/17/23   7,500    7,398    7,355    2.33 
                34,691    34,214    34,022    10.78 
Oil & Gas Exploration & Production                                
Caelus Energy Alaska O3, LLC                                
Second Lien Secured Term Loan  L+ 7.50%
  10.30%  04/04/14  04/15/20   17,342    16,876    17,342    5.50 
                                 
Other Diversified Financial Services                                
Sigue Corporation(4)                                
Second Lien Secured Term Loan  L+ 12.00%
(1.00% Floor)		  14.80%  12/27/13  09/30/19   24,904    24,904    24,344    7.72 
                34,362    34,192    33,628    10.66 
Packaged Foods & Meats                                
Lenny & Larry’s, LLC                                
First Lien Secured Term Loan  L+ 6.84%
(1.00% Floor)		  9.29%  05/15/18  05/15/23   13,449    13,214    12,777    4.05 

 

See notes to consolidated financial statements

 

 13 

 

 

WhiteHorse Finance, Inc. 

Consolidated Schedule of Investments - (continued)

December 31, 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

 
Research & Consulting Services                                
Nelson Worldwide, LLC                                
First Lien Secured Term Loan  L+ 8.75%
(1.00% Floor)		  11.16%  01/09/18  01/09/23   14,303   $14,016   $13,903    4.41%
Restaurants                                
LS GFG Holdings Inc.                                
First Lien Secured Term Loan  L+ 6.00%
  8.47%  11/30/18  11/19/25   10,340    10,033    10,020    3.18 
Specialized Finance                                
Golden Pear Funding Assetco, LLC (5)                                
Second Lien Secured Term Loan  L+ 10.50%
(1.00% Floor)		  12.85%  09/20/18  03/20/24   17,500    17,168    17,150    5.44 
Oasis Legal Finance, LLC(5)                                
Second Lien Secured Term Loan  L+ 10.75%
(1.00% Floor)		  13.10%  09/09/16  03/09/22   20,000    19,768    20,000    6.34 
                37,500    36,936    37,150    11.78 
Technology Hardware, Storage & Peripherals                                
Source Code Midco, LLC                                
First Lien Secured Term Loan  L+ 8.75%
(1.00% Floor)		  11.28%  05/04/18  05/04/23   14,182    13,874    13,898    4.41 
Trucking                                
Sunteck / TTS Holdings, LLC                                
Second Lien Secured Term Loan  L+ 9.00%
(1.00% Floor)		  11.79%  12/15/16  06/15/22   3,500    3,462    3,468    1.10 
Total Debt Investments               473,672    466,231    456,583    144.78 
Equity Investments                                
Advertising                                
Fluent, Inc. (f/k/a Cogint, Inc.) (4)(9)  N/A  N/A  11/28/17  12/08/25   187    560    706    0.22%
Diversified Support Services                                
Quest Events, LLC                                
Preferred Units(4)  N/A  N/A  12/28/18  12/08/25   317    317    317    0.10 
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    —    131    0.04 
Pinnacle Management Group, LLC Warrants (4)  N/A  N/A  11/20/14  12/31/24   2    —    131    0.04 
RC3 Enterprises, LLC Warrants (4)  N/A  N/A  11/20/14  12/31/24   2    —    131    0.04 
                6    —    399    0.12 
Health Care Services                                
PMA Holdco, LLC Warrants(4)  N/A  N/A  06/28/18  N/A   8    —    393    0.12 

 

See notes to consolidated financial statements

 

 14 

 

 

WhiteHorse Finance, Inc. 

Consolidated Schedule of Investments - (continued)

December 31, 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

 
Other Diversified Financial Services                                
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   7    702    901    0.29 
                150    702    1,436    0.46 
Specialized Finance                                
NMFC Senior Loan Program I LLC Units (4)(5)(6)  N/A  N/A  08/13/14  06/13/20   10,000    10,029    9,630    3.05 
Trucking                                
Fox Rent A Car, Inc. Warrants(4)  N/A  N/A  10/26/16  N/A   —    —    100    0.03 
Total Equity Investments               10,668    11,608    12,981    4.10 
Total Investments              $484,340   $477,839   $469,564    148.88%

 

(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 2.5%, 2.8% and 2.9%, respectively, as of December 31, 2018. The Prime was 5.5% as of December 31, 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 maybe.

 

(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 89%, 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 December 31, 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 149% of the Company’s net assets or 91% 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

 

 15 

 

 

WhiteHorse Finance, Inc.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2019

(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. 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, 2018. 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, 2019.

 

Reclassifications: Certain reclassifications have been made to prior fiscal year amounts or balances to conform to the industry classifications presented within the Company’s consolidated schedule of investments 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 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.

 

 16 

 

 

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 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.

 

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.

 

 17 

 

 

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 March 31, 2019 and December 31, 2018.

 

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 March 31, 2019 or December 31, 2018. 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 2015 remain subject to examination by the Internal Revenue Service.

 

As of March 31, 2019 and December 31, 2018, the cost of investments for federal income tax purposes was $478,425 and $481,919, resulting in net unrealized depreciation of $10,040 and net unrealized depreciation of $12,355, respectively. This is comprised of gross unrealized appreciation of $2,887 and $3,598, and gross unrealized depreciation of $12,927 and $15,953, on a tax basis, as of March 31, 2019 and December 31, 2018, 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.

 

 18 

 

 

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 adopted the provisions of the ASU 2017-08 effective January 1, 2019 and determined adoption of this standard did not have a material impact as the Company does not hold any material purchased callable debt securities at a premium.

 

Securities and Exchange Commission Disclosure Update and Simplification: In August 2018, the Securities and Exchange Commission adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification (the “SEC Release”) amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments are intended to facilitate the disclosure of information to investors and simplify compliance. The effective date for the SEC Release is effective for all filings on or after November 5, 2018. The Company first adopted the final rule under SEC Release No. 33-10532 as of December 31, 2018. The SEC Release requires presentation changes to the Company's consolidated statements of assets and liabilities and consolidated statements of changes in net assets. The Company has evaluated the impact of the amendments and determined the effect of the adoption of the simplification rules on financial statements will be limited to the modification and removal of certain disclosures.

 

 19 

 

 

NOTE 3 - INVESTMENTS

 

Investments consisted of the following:

 

   March 31, 2019   December 31, 2018 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
First lien secured loans  $378,545   $374,494   $365,356   $359,416 
Second lien secured loans   84,618    80,329    100,875    97,167 
Equity   12,085    13,562    11,608    12,981 
Total  $475,248   $468,385   $477,839   $469,564 

 

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

 

   March 31, 2019   December 31, 2018 
Advertising  $11,636    2.48%  $17,885    3.81%
Air Freight & Logistics   5,742    1.23    -    - 
Automotive Retail   16,727    3.57    16,840    3.59 
Broadcasting   30,008    6.41    35,092    7.47 
Cable & Satellite   14,700    3.14    14,700    3.13 
Communications Equipment   5,092    1.09    -    - 
Data Processing & Outsourced Services   24,548    5.24    24,707    5.26 
Department Stores   14,670    3.13    14,707    3.13 
Distributors   5,807    1.24    -    - 
Diversified Support Services   28,762    6.14    31,846    6.78 
Food Retail   29,493    6.30    29,790    6.34 
Health Care Facilities   12,318    2.63    12,058    2.57 
Health Care Services   14,981    3.20    14,970    3.19 
Home Furnishings   5,371    1.15    5,392    1.15 
Human Resources & Employment Services   12,292    2.62    -    - 
Internet Retail   17,100    3.65    17,100    3.64 
Internet Services & Infrastructure   25,925    5.53    25,576    5.45 
Investment Banking & Brokerage   26,417    5.64    26,723    5.69 
IT Consulting & Other Services   4,098    0.87    4,088    0.87 
Leisure Facilities   37,154    7.93    34,022    7.25 
Oil & Gas Exploration & Production   -    -    17,342    3.69 
Other Diversified Financial Services   25,958    5.54    25,780    5.49 
Packaged Foods & Meats   11,957    2.55    12,777    2.72 
Research & Consulting Services   13,481    2.88    13,903    2.96 
Restaurants   9,994    2.13    10,020    2.13 
Specialized Finance   46,734    9.99    46,780    9.97 
Technology Hardware, Storage & Peripherals   13,720    2.93    13,898    2.96 
Trucking   3,700    0.79    3,568    0.76 
Total  $468,385    100.00%  $469,564    100.00%

 

The portfolio companies underlying the investments are all located in the United States and its territories, except for Arcole Acquisition Corp (which is located in Canada). As of March 31, 2019 and December 31, 2018, the weighted average remaining term of the Company’s debt investments were both approximately 3.6 years.

 

As of March 31, 2019 and December 31, 2018, the total fair value of non-accrual loans were $103 as of the end of each respective period. 

 

 20 

 

 

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 three months ended March 31, 2019:

 

Affiliated Person(1) 

Type of

Asset

 

Amount of

dividends and

interest

included in

income

  

Beginning

Fair Value at

December 31,

2018

   Purchases   Sales  

Net

Realized

Gain (Loss)

  

Net Change in

Unrealized

Appreciation

(Depreciation)

  

Ending Fair

Value at

March 31,

2019

 
NMFC Senior Loan Program I LLC Units  Equity  $275   $9,630   $-   $-   $-   $(46)  $9,584 
RCS Creditor Trust Class B Units  Equity   -    535    -         -    (529)   6 
Total     $275   $10,165   $-   $-   $-   $(575)  $9,590 

 

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, 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

December 31,

2018

 
Aretec Group, Inc.  Equity  $-   $17,314   $-   $(53,734)  $33,041   $3,379   $- 
NMFC Senior Loan Program I LLC Units  Equity   2,132    18,504    -    (10,000)   (91)   1,217    9,630 
RCS Creditor Trust Class B Units  Equity   -    428    -    -    -    107    535 
Total     $2,132   $36,246   $-   $(63,734)  $32,950   $4,703   $10,165 

  

(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). 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 three months ended March 31, 2019 and year ended December 31, 2018, 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 arm’s-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.

 

 21 

 

 

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of March 31, 2019:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $-   $-   $374,494   $374,494 
Second lien secured loans   -    -    80,329    80,329 
Equity   1,021    -    12,541    13,562 
Total investments  $1,021   $-   $467,364   $468,385 

 

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of December 31, 2018:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $-   $-   $359,416   $359,416 
Second lien secured loans   -    -    97,167    97,167 
Equity   706    -    12,275    12,981 
Total investments  $706   $-   $468,858   $469,564 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended March 31, 2019:

 

  

First Lien

Secured

Loans

  

Second Lien

Secured

Loans

   Equity  

Total

Investments

 
Fair value, beginning of period  $359,416   $97,167   $12,275   $468,858 
Funding of investments   49,222    -    477    49,699 
Non-cash interest income   91    567    -    658 
Accretion of discount   809    519    -    1,328 
Proceeds from paydowns and sales   (34,916)   (17,342)   -    (52,258)
Realized losses   (2,018)   -    -    (2,018)
Net unrealized (depreciation) appreciation   1,890   (582)   (211)   1,097 
Fair value, end of period  $374,494   $80,329   $12,541   $467,364 
Change in unrealized appreciation (depreciation) on investments still held as of March 31, 2019  $1,300   $(115)  $(211)  $974 

   

 22 

 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended March 31, 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 
Funding of investments   85,883    -    -    85,883 
Non-cash income   142    -    -    142 
Accretion of discount   1,444    154    -    1,598 
Proceeds from paydowns and sales   (61,414)   (4,422)   -    (65,836)
Realized gains   -    -    -    - 
Net unrealized (depreciation) appreciation   (765)   (1,443)   7,685    5,477 
Fair value, end of period  $255,551    166,559    45,013    467,123 
Change in unrealized appreciation (depreciation) on investments still held as of March 31, 2018  $(669)  $(1,379)  $7,685   $5,637 

   

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 would result in significantly lower or higher fair value measurement, respectively. An increase or decrease in the market quote for an investment would in isolation result in significantly higher or lower fair value measurement, respectively. An increase or decrease in the exit multiple would 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. 

 

 23 

 

 

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

 

Investment Type  Fair Value at
March 31, 2019		   Valuation
Techniques		  Unobservable
Inputs		  Range
(Weighted Average)
First lien secured loans  $113,035   Discounted cash flows  Discount rate  11.4% – 24.0% (14.6%)
           Exit multiple  5.5x – 9.0x (6.8x)
    12,215   Market multiples  Exit multiple  3.3x
    622   Expected repayment  Repayment price  100.0
    248,622   Weighting of discounted cash flows and consensus market pricing or recent transaction  Discount rate  8.2% – 18.6% (10.6%)
           Market quotes or transaction price  97.0 – 100.0 (98.2)
           Exit multiple  4.0x – 10.0x (7.5x)
   $374,494          
               
Second lien secured loans  $63,076   Discounted cash flows  Discount rate  10.8% – 19.8% (16.8%)
           Exit multiple  6.0x – 9.0x (7.3x)
    103   Market multiples  Exit multiple  3.3x
    17,150   Weighting of discounted cash flows and consensus market pricing or recent transaction  Discount rate  14.3%
           Market quotes or transaction price  98.0
   $80,329          
               
Preferred Equity  $317   Market multiples  Exit multiple  9.4x
   $317          
               
Common Equity  $9,584   Weighting of discounted cash flows and recent transaction  Discount rate  9.3%
           Transaction price  100.0
           Discount for lack of marketability  2.0%
    6   Consensus pricing  Market quotes  $0.04/s
   $9,590          
               
Warrant  $2,434   Discounted cash flows and  Discount rate  18.0% - 32.2% (22.0%)
        Option-pricing method  Exit multiple  4.8x – 8.0x (5.8x)
           Volatility  1.3% - 25.0% (7.4%)
           Discount for lack of marketability  13.0% - 55.0% (19.9%)
    200   Market multiples  Exit multiple  5.2x
           Discount for lack of marketability  15.0%
   $2,634          
               
 Total Level 3 Investments  $467,364          

 

 24 

 

 

Investment Type 

Fair Value at

December 31, 2018

  

Valuation

Techniques

 

Unobservable

Inputs

  Range (Weighted Average)
First lien secured loans  $107,291   Discounted cash flows  Discount rate  11.8% – 23.5% (15.2%)
           Exit multiple  4.5x – 7.0x (6.2x)
    11,955   Market multiples  Exit multiple  2.9x
    17,439   Weighting of discounted cash  Discount rate  10.5% – 14.9% (11.7%)
        cash flows and expected repayment price  Repayment price  101.9
           Exit multiple  4.5x
    222,731   Weighting of discounted cash  Discount rate  8.7% – 21.2% (11.5%)
        flows and consensus market pricing or recent transaction  Market quotes or transaction price  79.8 – 100.0 (97.5)
           Exit multiple  4.0x – 10.0x (7.2x)
   $359,416          
Second lien secured loans  $62,572   Discounted cash flows  Discount rate  12.9% – 21.6% (18.2%)
           Exit multiple  5.5x – 8.0x (6.6x)
    103   Market multiples  Exit multiple  2.9x
    17,150   Weighting of discounted cash  Discount rate  14.7%
        flows and consensus pricing or recent transaction  Market quotes or transaction price  98.0
    17,342   Expected repayment  Repayment price  100.0
   $97,167          
Preferred Equity  $317   Market multiples  Exit multiple  9.4x
   $317          
Common Equity  $9,630   Weighting of discounted cash flows and recent transaction  Discount rate  10.2%
           Transaction price  100.0
           Discount for lack of marketability  2.0%
    535   Consensus pricing  Market quotes  $3.8/s
   $10,165          
Warrant  $1,693   Discounted cash flows and  Discount rate  22.0% – 30.3% (25.1%)
        Option-pricing method  Exit multiple  4.8x – 8.0x (5.9x)
           Volatility  2.3% – 25.0% (8.7%)
           Discount for lack of marketability  13.0% – 55.0% (22.9%)
    100   Market multiples  Exit multiple  5.5x
           Discount for lack of marketability  15.0%
   $1,793          
Total Level 3 Investments  $468,858          

 

 25 

 

 

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 r