WhiteHorse Finance, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - WhiteHorse Finance, Inc.	tm2029591d1_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - WhiteHorse Finance, Inc.	tm2029591d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - WhiteHorse Finance, Inc.	tm2029591d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - WhiteHorse Finance, Inc.	tm2029591d1_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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

(305) 381-6999

(Registrant’s Telephone Number, Including Area Code)

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)

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

As of November 6, 2020 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, 2020 (Unaudited) and December 31, 2019	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 (Unaudited) and 2019 (Unaudited)	4
	Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020 (Unaudited) and 2019 (Unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 (Unaudited) and 2019 (Unaudited)	7
	Consolidated Schedules of Investments as of September 30, 2020 (Unaudited) and December 31, 2019	8
	Notes to the Consolidated Financial Statements (Unaudited)	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4.	Controls and Procedures	60
Part II.	Other Information	61
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	64
Item 4.	Mine Safety Disclosures	64
Item 5.	Other Information	64
Item 6.	Exhibits	64

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,		December 31,
	2020		2019
	(Unaudited)
Assets
Investments, at fair value
Non-controlled/non-affiliate company investments	$	535,387	$	546,744
Non-controlled affiliate company investments		9,520		9,651
Controlled affiliate company investments		50,388		33,293
Total investments, at fair value (amortized cost $598,477 and $597,725, respectively)		595,295		589,688
Cash and cash equivalents		8,863		4,294
Restricted cash and cash equivalents		13,830		23,252
Restricted foreign currency (cost of $233)		231		—
Interest and dividend receivable		6,145		6,010
Amounts receivable on unsettled investment transactions		815		360
Prepaid expenses and other receivables		627		7,620
Total assets	$	625,806	$	631,224

Liabilities
Debt	$	291,924	$	298,924
Distributions payable		7,294		7,294
Management fees payable		3,069		3,060
Incentive fees payable		7,029		5,230
Interest payable		853		1,674
Accounts payable and accrued expenses		1,035		1,944
Advances received from unfunded credit facilities		39		143
Total liabilities		311,243		318,269

Commitments and contingencies (See Note 8)

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		300,744		300,744
Accumulated earnings		13,798		12,190
Total net assets		314,563		312,955
Total liabilities and total net assets	$	625,806	$	631,224

Number of shares outstanding		20,546,032		20,546,032
Net asset value per share	$	15.31	$	15.23

See notes to the consolidated financial statements

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,
	2020			2019			2020			2019
Investment income
From non-controlled/non-affiliate company investments
Interest income	$	14,222		$	14,865		$	39,506		$	42,104
Fee income		741			2,246			1,571			6,328
Dividend income		21			-			101			-
From non-controlled affiliate company investments
Dividend income		263			301			800			888
From controlled affiliate company investments
Interest income		682			343			1,913			343
Dividend income		568			-			961			-
Total investment income		16,497			17,755			44,852			49,663

Expenses
Interest expense		2,770			3,495			9,661			9,744
Base management fees		3,069			2,834			9,110			8,240
Performance-based incentive fees		3,819			1,714			5,571			5,520
Administrative service fees		171			159			512			475
General and administrative expenses		601			660			2,212			1,875
Total expenses, before fees waived		10,430			8,862			27,066			25,854
Base management fee waived		-			-			-			(397	)
Total expenses, net of fees waived		10,430			8,862			27,066			25,457
Net investment income before excise tax		6,067			8,893			17,786			24,206
Excise tax		137			238			513			712
Net investment income after excise tax		5,930			8,655			17,273			23,494

Realized and unrealized gains (losses) on investments and foreign currency transactions
Net realized gains (losses)
Non-controlled/non-affiliate company investments		635			(2	)		1,069			(2,020	)
Foreign currency transactions		(1	)		-			66			-
Foreign currency forward contracts		(25	)		-			(25	)		-
Net realized gains (losses)		609			(2	)		1,110			(2,020	)
Net change in unrealized appreciation (depreciation)
Non-controlled/non-affiliate company investments		12,659			(1,882	)		6,303			1,042
Non-controlled affiliate company investments		999			28			(131	)		(492	)
Controlled affiliate company investments		1,526			56			(1,316	)		56
Translation of assets and liabilities in foreign currencies		(92	)		-			251			-
Foreign currency forward contracts		3			-			-			-
Net change in unrealized appreciation (depreciation)		15,095			(1,798	)		5,107			606
Net realized and unrealized gains (losses) on investments		15,704			(1,800	)		6,217			(1,414	)
Net increase in net assets resulting from operations	$	21,634		$	6,855		$	23,490		$	22,080

Per Common Share Data
Basic and diluted earnings per common share	$	1.06		$	0.34		$	1.15		$	1.08
Dividends and distributions declared per common share	$	0.36		$	0.36		$	1.07		$	1.07
Basic and diluted weighted average common shares outstanding		20,546,032			20,546,032			20,546,032			20,546,032

See notes to the consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Statements of Changes in Net Assets (Unaudited)

(in thousands, except share and per share data)

					Paid-in		Accumulated
					Capital in		Undistributed
	Common Stock				Excess of		(Overdistributed)			Total Net
	Shares		Par amount		Par		Earnings			Assets
Balance at June 30, 2019		20,546,032	$	21	$	301,557	$	14,354		$	315,932
Net increase in net assets resulting from operations:
Net investment income after excise tax		-		-		-		8,655			8,655
Net realized gains (losses) on investments		-		-		-		(2	)		(2	)
Net change in unrealized appreciation (depreciation) on investments		-		-		-		(1,798	)		(1,798	)
Distributions declared		-		-		-		(7,293	)		(7,293	)
Balance at September 30, 2019		20,546,032	$	21	$	301,557	$	13,916		$	315,494

Balance at June 30, 2020		20,546,032	$	21	$	300,744	$	(543	)	$	300,222
Net increase in net assets resulting from operations:
Net investment income after excise tax		-		-		-		5,930			5,930
Net realized gains (losses) on investments		-		-		-		609			609
Net change in unrealized appreciation (depreciation) on investments		-		-		-		15,095			15,095
Distributions declared		-		-		-		(7,293	)		(7,293	)
Balance at September 30, 2020		20,546,032	$	21	$	300,744	$	13,798		$	314,563

See notes to the consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Statements of Changes in Net Assets (Unaudited)

(in thousands, except share and per share data)

					Paid-in		Accumulated
					Capital in		Undistributed
	Common Stock				Excess of		(Overdistributed)			Total Net
	Shares		Par amount		Par		Earnings			Assets
Balance at December 31, 2018		20,546,032	$	21	$	301,557	$	13,718		$	315,296
Net increase in net assets resulting from operations:
Net investment income after excise tax		-		-		-		23,494			23,494
Net realized gains (losses) on investments		-		-		-		(2,020	)		(2,020	)
Net change in unrealized appreciation (depreciation) on investments		-		-		-		606			606
Distributions declared		-		-		-		(21,882	)		(21,882	)
Balance at September 30, 2019		20,546,032	$	21	$	301,557	$	13,916		$	315,494

Balance at December 31, 2019		20,546,032	$	21	$	300,744	$	12,190		$	312,955
Net increase in net assets resulting from operations:
Net investment income after excise tax		-		-		-		17,273			17,273
Net realized gains (losses) on investments		-		-		-		1,110			1,110
Net change in unrealized appreciation (depreciation) on investments		-		-		-		5,107			5,107
Distributions declared		-		-		-		(21,882	)		(21,882	)
Balance at September 30, 2020		20,546,032	$	21	$	300,744	$	13,798			314,563

See notes to the consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine months ended
	September 30,
	2020			2019
Cash flows from operating activities
Net increase in net assets resulting from operations	$	23,490		$	22,080
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
Paid-in-kind income		(681	)		(1,922	)
Net realized (gains) losses on investments		(1,069	)		2,020
Net unrealized (appreciation) depreciation on investments		(4,856	)		(606	)
Net unrealized appreciation on translation of assets and liabilities in foreign currencies		(251	)		-
Accretion of discount		(2,169	)		(3,346	)
Amortization of deferred financing costs		767			746
Acquisition of investments		(126,255	)		(207,756	)
Proceeds from principal payments and sales of portfolio investments		81,438			121,619
Proceeds for sales of portfolio investments to STRS JV		47,985			32,011
Net changes in operating assets and liabilities:
Interest and dividend receivable		(135	)		(1,344	)
Prepaid expenses and other receivables		6,993			417
Amounts receivable on unsettled investment transactions		(455	)		(4,603	)
Amounts payable on unsettled investment transactions		-			(445	)
Management fees payable		1,808			(3,765	)
Incentive fees payable		(725	)		289
Accounts payable and accrued expenses		-			95
Interest payable		(821	)		(495	)
Advances received from unfunded credit facilities		(104	)		49
Net cash provided by (used in) operating activities		24,960			(44,956	)

Cash flows from financing activities
Borrowings		133,695			107,400
Repayments of debt		(141,393	)		(52,100	)
Deferred financing costs		-			(32	)
Distributions paid to common stockholders, net of distributions reinvested		(21,882	)		(21,882	)
Net cash provided by (used in) financing activities		(29,580	)		33,386
Effect of exchange rate changes on cash		(2	)		-
Net change in cash, cash equivalents and restricted cash		(4,622	)		(11,570	)
Cash, cash equivalents and restricted cash at beginning of period		27,546			33,732
Cash, cash equivalents and restricted cash at end of period	$	22,924		$	22,162

Supplemental disclosure of cash flow information:
Interest paid	$	9,728		$	9,492
Non-cash exchanges of investments		18,411			24,355

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,
	2020		2019
Cash and cash equivalents	$	8,863	$	9,827
Restricted cash and restricted foreign currency		14,061		12,335

Total cash, cash equivalents and restricted cash presented in consolidated statements of cash flows	$	22,924	$	22,162

See notes to the consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited)

September 30, 2020

(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%	7.50%	03/26/18	03/27/23	7,609	$	7,609	$	7,609		2.42	%
	(0.50% Floor)
SmartSign Holdings LLC
First Lien Secured Term Loan	L+ 7.50%	8.50%	08/21/20	10/11/24	7,763		7,612		7,763		2.47
	(1.00% Floor)				15,372		15,221		15,372		4.89
Agricultural & Farm Machinery
Bad Boy Mowers Acquisition, LLC
First Lien Secured Term Loan	L+ 5.75%	6.75%	12/19/19	12/06/25	10,307		10,037		10,152		3.23
	(1.00% Floor)
Air Freight & Logistics
Access USA Shipping, LLC
First Lien Secured Term Loan	L+ 8.00%	9.00%	02/08/19	02/08/24	5,432		5,378		5,398		1.72
	(1.50% Floor)
Application Software
Connexity, Inc.
First Lien Secured Term Loan	L+ 8.50%	10.00%	05/21/20	05/21/25	10,931		10,627		10,771		3.42
	(1.50% Floor)
Newscycle Solutions, Inc.
First Lien Secured Term Loan	L+ 7.00%	8.00%	06/14/19	12/29/22	5,114		5,050		4,774		1.52
	(1.00% Floor)
First Lien Secured Revolving Loan	L+ 7.00%	8.00%	06/14/19	12/29/22	301		298		281		0.09
	(1.00% Floor)				16,346		15,975		15,826		5.03
Automotive Retail
Team Car Care Holdings, LLC
First Lien Secured Term Loan⁽¹²⁾	base rate+ 7.99%	9.01%	02/26/18	02/23/23	16,330		16,154		15,953		5.07
	(1.00% Floor)
BW Gas & Convenience Holdings, LLC
First Lien Secured Term Loan	L+ 6.25%	6.40%	11/15/19	11/18/24	8,181		7,908		8,181		2.60
	(0.00% Floor)				24,511		24,062		24,134		7.67
Broadcasting
Alpha Media, LLC
First Lien Secured Term Loan	P+ 7.50%	10.75%	08/14/18	02/25/22	5,075		5,010		4,849		1.54
	(2.00% Floor)
Building Products
LHS Borrower, LLC
First Lien Secured Term Loan	L+ 6.75%	7.75%	09/30/20	09/30/25	19,499		19,063		19,062		6.06
	(1.00% Floor)
First Lien Secured Revolving Loan⁽⁷⁾	L+ 6.75%	7.75%	09/30/20	09/30/25	-		-		-		-
	(1.00% Floor)				19,499		19,063		19,062		6.06
Cable & Satellite
Bulk Midco, LLC
First Lien Secured Term Loan⁽¹⁵⁾	L+7.19%	8.19%	06/08/18	06/08/23	15,000		14,879		14,250		4.53
	(1.00% Floor)
Communications Equipment
Ribbon Communications Operating Company, Inc.⁽⁵⁾
First Lien Secured Term Loan	L+ 7.50%	7.65%	08/14/20	03/03/26	12,469		12,011		12,011		3.82
	(0.00% Floor)
Sorenson Communications, LLC
First Lien Secured Term Loan	L+ 6.50%	6.72%	03/15/19	04/29/24	3,971		3,886		3,950		1.26
	(0.00% Floor)				16,440		15,897		15,961		5.08
Construction & Engineering
Atlas Intermediate Holdings LLC
First Lien Secured Term Loan	L+ 6.25%	7.25%	05/26/20	02/13/26	15,269		14,404		14,810		4.71
	(1.00% Floor)
Data Processing & Outsourced Services
FPT Operating Company, LLC/
TLabs Operating Company, LLC
First Lien Secured Term Loan	L+ 8.75%	9.75%	12/23/16	06/07/24	24,441		24,200		23,431		7.45
	(1.00% Floor)	(0.50%PIK)
Geo Logic Systems Ltd. ⁽⁵⁾
First Lien Secured Term Loan ⁽¹³⁾	C +6.25%	7.25%	12/19/19	12/19/24	6,752		5,062		4,903		1.56
	(1.00% Floor)
First Lien Secured Revolving Loan ^(7)(13)	C +6.25%	7.25%	12/19/19	12/19/24	-		-		(4	)	-
	(1.00% Floor)	`			31,193		29,262		28,330		9.01
Department Stores
Mills Fleet Farm Group, LLC
First Lien Secured Term Loan	L+ 6.25%	7.25%	10/24/18	10/24/24	13,543		13,280		13,272		4.22
	(1.00% Floor)
Distributors
Crown Brands, LLC
First Lien Secured Term Loan	L+ 8.00%	9.50%	01/28/19	01/25/24	5,727		5,632		4,868		1.55
	(1.50% Floor)
First Lien Secured Delayed Draw Loan	L+ 8.00%	9.50%	06/10/20	01/25/24	850		850		723		0.23
	(1.50% Floor)				6,577		6,482		5,591		1.78
Diversified Chemicals
Sklar Holdings, Inc.
First Lien Secured Term Loan	L+ 6.00%	8.00%	11/13/19	05/13/23	8,903		8,726		8,790		2.79
	(1.00% Floor)

See notes to the consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2020

(in thousands)

Diversified Support Services
ImageOne Industries, LLC
First Lien Secured Term Loan	L+ 10.00%	11.00%	01/11/18	01/11/23	6,497	$	6,355	$	6,444	2.05	%
	(1.00% Floor)	(4.00%PIK)
First Lien Secured Revolving Loan⁽⁴⁾⁽⁷⁾	L+ 10.00%	11.00%	07/22/19	12/12/22	731		731		731	0.23
	(1.00% Floor)	(4.00%PIK)
NNA Services, LLC
First Lien Secured Term Loan	L+ 7.00%	8.50%	10/16/18	10/16/23	13,442		13,249		13,308	4.23
	(1.50% Floor)				20,670		20,335		20,483	6.51
Education Services
EducationDynamics, LLC
First Lien Secured Term Loan	L+ 7.75%	8.75%	11/26/19	11/26/24	13,936		13,697		13,936	4.43
	(1.00% Floor)
Food Retail
AG Kings Holdings, Inc.
First Lien Secured Term Loan⁽⁴⁾⁽⁸⁾	P+ 11.00%	14.25%	08/10/16	08/10/21	21,644		8,612		8,541	2.72
	(0.75% Floor)	(2.00%PIK)
Superpriority Secured Debtor-In-Possession Term Loan^(4)(18)	L+ 10.00%	11.00%	08/26/20	08/10/21	14,222		5,663		14,222	4.52
	(1.00% Floor)				35,866		14,275		22,763	7.24
Health Care Facilities
Grupo HIMA San Pablo, Inc.
First Lien Secured Term Loan A	L+ 9.00%	9.25%	05/15/19	04/30/19	3,855		3,855		2,621	0.83

First Lien Secured Term Loan B	L+ 9.00%	10.50%	02/01/13	04/30/19	13,511		13,511		9,188	2.92
	(1.50% Floor)
Second Lien Secured Term Loan⁽⁸⁾	N/A	15.75%	02/01/13	07/31/18	1,028		1,024		-	-
		(2.00%PIK)			18,394		18,390		11,809	3.75
Health Care Services
CHS Therapy, LLC
First Lien Secured Term Loan A	L+ 7.75%	9.25%	06/14/19	06/14/24	7,470		7,365		7,470	2.37
	(1.50% Floor)
Lab Logistics, LLC
First Lien Secured Term Loan	L+ 6.50%	7.50%	10/16/19	09/25/23	106		105		106	0.03
	(1.00% Floor)
First Lien Secured Delayed Draw Loan	L+ 6.50%	7.73%	10/16/19	09/25/23	5,249		5,219		5,249	1.67
	(1.00% Floor)				12,825		12,689		12,825	4.07
Home Furnishings
Sure Fit Home Products, LLC
First Lien Secured Term Loan⁽⁸⁾	L+ 9.75%	10.75%	10/26/18	07/13/22	5,228		5,111		3,778	1.20
	(1.00% Floor)
Interactive Media & Services
What If Media Group, LLC
First Lien Secured Term Loan	L+ 6.50%	7.50%	10/02/19	10/02/24	12,675		12,472		12,675	4.03
	(1.00% Floor)
Internet & Direct Marketing Retail
BBQ Buyer, LLC
First Lien Secured Term Loan	L+ 8.00%	9.50%	08/28/20	08/28/25	10,696		10,434		10,432	3.32
	(1.50% Floor)
First Lien Secured Revolving Loan ⁽⁷⁾	L+ 8.00%	9.50%	08/28/20	02/28/21	-		-		-	-
	(1.50% Floor)
Potpourri Group, Inc.
First Lien Secured Term Loan	L+ 8.25%	9.75%	07/03/19	07/03/24	18,034		17,732		17,855	5.68
	(1.50% Floor)				28,730		28,166		28,287	9.00
Investment Banking & Brokerage
Arcole Acquisition Corp⁽⁵⁾
First Lien Secured Term Loan A^(4)(8)(19)	L+ 10.25%	11.25%	11/29/18	11/30/23	5,231		5,159		4,708	1.50
	(1.00% Floor)
First Lien Secured Term Loan B^(4)(8)(19)	L+ 16.50%	17.50%	11/29/18	11/30/23	1,826		1,785		1,643	0.52
	(1.00% Floor)	(1.50%PIK)
Subordinated Unsecured Term Loan⁽⁴⁾	L+ 9.00%	10.00%	07/31/20	10/31/20	291		291		291	0.09
	(1.00% Floor)
JVMC Holdings Corp. (f/k/a RJO Holdings Corp)
First Lien Secured Term Loan	L+ 6.50%	7.50%	02/28/19	02/28/24	13,815		13,721		13,815	4.39
	(1.00% Floor)				21,163		20,956		20,457	6.50
IT Consulting & Other Services
AST-Applications Software Technology LLC
First Lien Secured Term Loan	L+ 8.00%	9.00%	01/10/17	01/10/23	4,034		3,999		4,034	1.28
	(1.00% Floor)	(1.00%PIK)
Leisure Facilities
Honors Holdings, LLC
First Lien Secured Term Loan ⁽¹⁶⁾	L+ 7.97%	8.97%	09/06/19	09/06/24	9,414		9,265		8,284	2.63
	(1.00% Floor)	(0.50%PIK)
First Lien Secured Delayed Draw Loan⁽¹⁶⁾	L+ 7.61%	8.61%	09/06/19	09/06/24	4,638		4,591		4,081	1.30
	(1.00% Floor)	(0.50%PIK)
Lift Brands, Inc. (aka Snap Fitness Holdings, Inc.)		`
First Lien Secured Term Loan A	L+ 3.25%	4.25%	06/29/20	06/29/25	5,659		5,576		5,571	1.77
	(1.00% Floor)
First Lien Secured Term Loan B	N/A	9.50%	06/29/20	06/29/25	1,136		1,109		1,107	0.35
		(9.50%PIK)
First Lien Secured Term Loan C ⁽⁹⁾	N/A	9.50%	06/29/20	N/A	1,268		1,265		1,265	0.40
		(9.50%PIK)			22,115		21,806		20,308	6.45
Office Services & Supplies
Empire Office, Inc.
First Lien Secured Term Loan	L+ 6.75%	8.25%	04/12/19	04/12/24	10,895		10,741		10,644	3.38
	(1.50% Floor)
Packaged Foods & Meats
Lenny & Larry's, LLC
First Lien Secured Term Loan⁽¹⁷⁾	L+ 7.94%	8.94%	05/15/18	05/15/23	11,271		11,155		10,779	3.43
	(1.00% Floor)	(1.17%PIK)
Property & Casualty Insurance
Policy Services Company, LLC ⁽⁵⁾
First Lien Secured Term Loan	L+ 6.00%	7.00%	03/06/20	05/31/24	6,256		5,983		6,131	1.95
	(1.00% Floor)

See notes to the consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2020

(in thousands)

Research & Consulting Services
Nelson Worldwide, LLC
First Lien Secured Term Loan	L+ 9.25%	10.25%	01/09/18	01/09/23	12,708	$	12,563	$	12,453	3.96	%
	(1.00% Floor)
ALM Media, LLC
First Lien Secured Term Loan	L+ 6.50%	7.50%	11/25/19	11/25/24	15,159		14,908		14,401	4.58
	(1.00% Floor)				27,867		27,471		26,854	8.54
Restaurants
LS GFG Holdings Inc.
First Lien Secured Term Loan	P+ 5.00%	8.25%	11/30/18	11/19/25	10,159		9,934		8,534	2.71

Specialized Consumer Services
True Blue Car Wash, LLC
First Lien Secured Term Loan	L+ 7.12%	8.12%	10/17/19	10/17/24	4,377		4,306		4,377	1.39
	(1.00% Floor)
First Lien Secured Delayed Draw Loan	L+ 7.12%	8.12%	10/17/19	10/17/24	2,018		2,000		2,018	0.64
	(1.00% Floor)				6,395		6,306		6,395	2.03
Specialized Finance
Golden Pear Funding Assetco, LLC⁽⁵⁾
Second Lien Secured Term Loan	L+ 10.50%	11.50%	09/20/18	03/20/24	17,500		17,279		17,500	5.56
	(1.00% Floor)
Oasis Legal Finance, LLC⁽⁵⁾
Second Lien Secured Term Loan	L+ 10.75%	11.75%	09/09/16	03/09/22	12,500		12,435		12,500	3.97
	(1.00% Floor)
WHF STRS Ohio Senior Loan Fund LLC
Subordinated Note^{(4)(5)(7)(9)(14)}	L+ 6.50%	6.66%	07/19/19	N/A	41,073		41,073		41,073	13.06
					71,073		70,787		71,073	22.59
Specialty Chemicals
Flexitallic Group SAS
First Lien Secured Term Loan	L+ 6.50%	7.50%	10/28/19	10/29/26	11,662		11,407		10,846	3.45
	(1.00% Floor)
Systems Software
Vero Parent, Inc.
First Lien Secured Term Loan	L+ 6.00%	7.00%	11/06/19	08/16/24	16,428		15,061		16,267	5.17
	(1.00% Floor)
Technology Hardware, Storage & Peripherals
Source Code Midco, LLC
First Lien Secured Term Loan	L+ 8.25%	9.25%	05/04/18	05/04/23	22,634		22,295		22,633	7.19
	(1.00% Floor)
Trading Companies & Distributors
Vessco Holdings, LLC
First Lien Secured Term Loan	L+ 7.25%	8.75%	08/22/19	08/22/24	8,835		8,696		8,922	2.84
	(1.50% Floor)

Total Debt Investments					602,578		569,408		566,230	180.00

Equity Investments
Diversified Support Services
Quest Events, LLC Preferred Units⁽⁴⁾	N/A	N/A	12/28/18	12/08/25	317		317		-	-
ImageOne Industries, LLC Common A Units⁽⁴⁾	N/A	N/A	09/20/19	N/A	225		-		169	0.05
Health Care Services
Lab Logistics Preferred Units ⁽⁴⁾	N/A	N/A	10/29/19	N/A	2		857		857	0.27
Internet & Direct Marketing Retail
BBQ Buyer, LLC Shares⁽⁴⁾	N/A	N/A	08/28/20	N/A	1,100		1,100		1,199	0.38
Leisure Facilities
Lift Brands, Inc. (aka Snap Fitness Holdings, Inc.) Class A Common Stock ⁽⁴⁾	N/A	N/A	06/29/20	N/A	2		1,955		282	0.09
Lift Brands, Inc. (aka Snap Fitness Holdings, Inc.) Warrants⁽⁴⁾	N/A	N/A	06/29/20	06/28/28	1		793		114	0.04
					3		2,748		396	0.13
Other Diversified Financial Services
RCS Creditor Trust Class B Units⁽⁴⁾⁽⁶⁾	N/A	N/A	10/01/17	N/A	143		-		-	-
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	22		2,890		3,490	1.11
					165		2,890		3,490	1.11
Specialized Finance
NMFC Senior Loan Program I LLC Units ^(4)(5)(6)	N/A	N/A	08/13/14	08/31/22	10,000		10,029		9,520	3.03
WHF STRS Ohio Senior Loan Fund LLC Interests ^{(4)(5)(7)(14)}	N/A	N/A	07/19/19	N/A	10,268		10,268		9,315	2.96
					20,268		20,297		18,835	5.99
Trading Companies & Distributors
Vessco Holdings, LLC Units⁽⁴⁾	N/A	N/A	08/22/19	N/A	506		860		4,090	1.30
Trucking
Europcar Mobility Group Earnout ⁽⁴⁾⁽⁵⁾	N/A	N/A	10/31/19	12/31/22	-		-		29	0.01

Total Equity Investments					22,586		29,069		29,065	9.24

Total Investments					625,164	$	598,477	$	595,295	189.24	%

See notes to the consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) - (continued)

September 30, 2020

(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, the Canadian Dollar Offered Rate (“CDOR” or “C”) or the U.S. Prime Rate as published by the Wall Street Journal (“Prime” or “P”). The one, three and six-month LIBOR were 0.1%, 0.2% and 0.3%, respectively, as of September 30, 2020. The Prime was 3.25% as of September 30, 2020. The CDOR was 0.5% as of September 30, 2020.

(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 81% 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, 2020. See Note 8.

(8)

The investment is on non-accrual status.

(9)

Security is perpetual with no defined maturity date.

(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 189% of the Company’s net assets or 95% of the Company’s total assets, are subject to legal restrictions on sales.

(11)

The fair value of each investment was determined using significant unobservable inputs. See Note 5.

(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.

(13)

Principal amount is denominated in Canadian dollars.

(14)

Investment is a controlled affiliate investment as defined by the 1940 Act. On January 14, 2019, the Company entered into an agreement (as described in Note 4 hereto) with State Teachers Retirement System of Ohio, a public pension fund established under Ohio law (“STRS Ohio”), to create WHF STRS Ohio Senior Loan Fund, LLC (“STRS JV”), a joint venture, which invests primarily in senior secured first and second lien term loans.

(15)

In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 2.75% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.

(16)

In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.50% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.

(17)

In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.00% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.

(18)

In August 2020, in conjunction with the AG Kings Holdings, Inc. bankruptcy, the Company converted approximately $14.2 million of its existing first lien secured term loan into a new superpriority secured debtor-in-possession term loan.

(19)

On October 1, 2020, as part of a restructuring agreement between the Company and Arcole Acquisition Corp, the Company’s investments in first lien secured term loans to Arcole Acquisition Corp were equitized into common shares of Arcole Holding Corp.

See notes to consolidated financial statements

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments

December 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%	8.80	%	03/26/18	03/26/24	9,337	$	9,337	$	9,337	2.98	%
	(0.50% Floor)
Agricultural & Farm Machinery
Bad Boy Mowers Acquisition, LLC
First Lien Secured Term Loan	L+ 5.75%	7.38	%	12/19/19	12/06/25	10,385	10,073		10,073		3.22
	(1.00% Floor)
Air Freight & Logistics
Access USA Shipping, LLC
First Lien Secured Term Loan	L+ 8.00%	9.80	%	02/08/19	02/08/24	5,651	5,581		5,600		1.79
	(1.00% Floor)
Application Software
Newscycle Solutions, Inc.
First Lien Secured Term Loan	L+ 7.00%	8.80	%	06/14/19	12/29/22	5,263	5,174		5,136		1.64
	(1.00% Floor)
First Lien Secured Revolving Loan⁽⁷⁾	L+ 6.50%	9.77	%	06/14/19	12/29/22	265	262		259		0.08
	(1.00% Floor)
						5,528	5,436		5,395		1.72
Automotive Retail
Team Car Care Holdings, LLC
First Lien Secured Term Loan⁽¹²⁾	base rate+	10.05	%	02/26/18	02/26/23	16,722	16,485		16,722		5.34
	7.99%
	(1.00% Floor)
BW Gas & Convenience Holdings, LLC
First Lien Secured Term Loan	L+ 6.25%	8.00	%	11/15/19	11/18/24	8,500	8,164		8,168		2.61
	(1.00% Floor)
						25,222	24,649		24,890		7.95
Broadcasting
Alpha Media, LLC
First Lien Secured Term Loan	L+ 6.00%	7.87	%	08/14/18	02/25/22	5,405	5,299		5,405		1.73
	(1.50% Floor)
Rural Media Group, Inc.
First Lien Secured Term Loan	L+ 7.71%	9.64	%	12/29/17	12/29/22	7,133	7,050		6,991		2.23
	(1.00% Floor)
						12,538	12,349		12,396		3.96
Cable & Satellite
Bulk Midco, LLC
First Lien Secured Term Loan	P+ 6.27%	11.02	%	06/08/18	06/08/23	15,000	14,845		14,250		4.45
	(2.25% Floor)
Communications Equipment
Sorenson Communications, LLC
First Lien Secured Term Loan	L+ 6.50%	8.44	%	03/15/19	04/29/24	4,875	4,749		4,857		1.55
	(0.00% Floor)
Data Processing & Outsourced Services
FPT Operating Company, LLC/ TLabs
Operating Company, LLC
First Lien Secured Term Loan	L+ 8.25%	9.94	%	06/07/19	06/07/24	24,907	24,685		24,284		7.76
	(1.00% Floor)
Geo Logic Systems Ltd.⁽⁵⁾
First Lien Secured Term Loan⁽¹³⁾	C+ 6.25%	8.26	%	12/19/19	12/19/24	21,718	16,231		16,415		5.25
	(1.00% Floor)
First Lien Secured Revolving Loan^(7)(13)	C+ 6.25%
	(1.00% Floor)	8.26	%	12/19/19	12/19/24	-	-		-		-
						46,625	40,916		40,699		13.01

See notes to consolidated financial statements

Whitehorse Finance, Inc.

Consolidated Schedule of Investments - (Continued)

December 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
Department Stores
Mills Fleet Farm Group, LLC
First Lien Secured Term Loan	L+ 7.00%	9.04%	10/24/18	10/24/24	14,883	$	14,591	$	13,544		4.33	%
	(1.00% Floor)	(0.75%PIK)
Distributors
Crown Brands, LLC
First Lien Secured Term Loan	L+ 8.00%	9.80%	01/28/19	01/25/24	5,727	5,610		5,596			1.79
	(1.50% Floor)
First Lien Secured Delayed Draw Loan⁽⁷⁾	L+ 8.00%	9.80%	01/28/19	01/25/24	—	—		(2		)	—
	(1.50% Floor)
					5,727	5,610		5,594			1.79
Diversified Chemicals
Sklar Holdings, Inc.
First Lien Secured Term Loan	L+ 6.00%	7.99%	11/13/19	05/13/23	8,902	8,731		8,731			2.79
	(1.00% Floor)	(1.00%PIK)
First Lien Secured Revolving Loan⁽⁷⁾	L+ 6.00%	7.99%	11/13/19	05/13/20	—	—		2			—
	(1.00% Floor)	(1.00%PIK)
					8,902	8,731		8,733			2.79
Diversified Support Services
ImageOne Industries, LLC
First Lien Secured Term Loan	L+ 10.00%	11.80%	01/11/18	01/11/23	7,261	7,097		6,898			2.20
	(1.00% Floor)	(4.00%PIK)
First Lien Secured Revolving Loan⁽⁴⁾	L+ 10.00%	11.94%	07/22/19	12/12/22	525	525		525			0.17
	(1.00% Floor)	(4.00%PIK)
NNA Services, LLC
First Lien Secured Term Loan	L+ 7.00%	8.84%	10/16/18	10/16/23	9,889	9,739		9,889			3.16
	(1.50% Floor)
					17,675	17,361		17,312			5.53
Education Services
EducationDynamics, LLC
First Lien Secured Term Loan	L+ 7.50%	9.42%	11/26/19	11/26/24	11,750	11,520		11,519			3.68
	(1.00% Floor)
Environmental & Facilities Services
WH Lessor Corp.
First Lien Secured Term Loan	L+ 6.00%	7.79%	12/26/19	12/26/24	6,458	6,330		6,329			2.02
	(1.00% Floor)
First Lien Secured Revolving Loan⁽⁷⁾	L+ 6.00%	7.79%	12/26/19	12/26/24	—	—		—			—
	(1.00% Floor)
					6,458	6,330		6,329			2.02
Food Retail
AG Kings Holdings, Inc.
First Lien Secured Term Loan⁽⁸⁾	P+ 11.00%	15.75%	08/10/16	08/10/21	13,250	12,837		7,668			2.45
	(2.25% Floor)	(2.00%PIK)
Health Care Facilities
Grupo HIMA San Pablo, Inc.
First Lien Secured Term Loan A	L+ 9.00%	10.94%	05/15/19	04/30/19	3,855	3,855		3,276			1.05
	(1.50% Floor)
First Lien Secured Term Loan B	L+ 9.00%	10.94%	02/01/13	04/30/19	13,511	13,511		11,484			3.67
	(1.50% Floor)
Second Lien Secured Term Loan⁽⁸⁾	N/A	15.75%	02/01/13	07/31/18	1,028	1,024		—			—
		(2.00%PIK)
					18,394	18,390		14,760			4.72

See notes to consolidated financial statements

Whitehorse Finance, Inc.

Consolidated Schedule of Investments - (Continued)

December 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
Health Care Services
CHS Therapy, LLC
First Lien Secured Term Loan A	L+ 8.50%	10.44%	06/14/19	06/14/24	7,615	$	7,486	$	7,615	2.43	%
	(1.50% Floor)
Lab Logistics, LLC
First Lien Secured Term Loan	L+ 6.50%	8.56%	10/16/19	09/25/23	107	106		106		0.03
	(1.00% Floor)
First Lien Secured Delayed Draw	L+ 6.50%
Loan⁽⁷⁾	(1.00% Floor)	8.44%	10/16/19	09/25/23	5,289	5,251		5,251		1.68
PMA Holdco, LLC
First Lien Secured Term Loan	L+ 7.75%	9.69%	06/28/18	06/28/23	12,784	12,595		12,720		4.06
	(1.00% Floor)	(2.00%PIK)
					25,795	25,438		25,692		8.20
Home Furnishings
Sure Fit Home Products, LLC
First Lien Secured Term Loan	L+ 9.75%	11.70%	10/26/18	07/13/22	5,250	5,178		5,040		1.61
	(1.00% Floor)
Human Resources & Employment Services
Pluto Acquisition Topco, LLC
First Lien Secured Term Loan	L+ 6.31%	8.23%	01/31/19	01/31/24	12,354	12,152		12,354		3.95
	(1.50% Floor)
Interactive Media & Services
What If Media Group, LLC
First Lien Secured Term Loan	L+ 7.00%	8.80%	10/02/19	10/02/24	12,919	12,673		12,673		4.05
	(1.00% Floor)
Internet & Direct Marketing Retail
Potpourri Group, Inc.
First Lien Secured Term Loan	L+ 8.25%	9.94%	07/03/19	07/03/24	18,763	18,385		18,424		5.89
	(1.50% Floor)
Investment Banking & Brokerage
Arcole Acquisition Corp⁽⁵⁾
First Lien Secured Term Loan A	L+ 8.25%	10.16%	11/29/18	11/30/23	5,231	5,156		4,968		1.59
	(1.00% Floor)
First Lien Secured Term Loan B	L+ 14.50%	16.41%	11/29/18	11/30/23	1,805	1,779		1,777		0.57
	(1.00% Floor)	(1.50%PIK)
JVMC Holdings Corp.
(f/k/a RJO Holdings Corp)
First Lien Secured Term Loan	L+ 6.50%	8.30%	02/28/19	02/28/24	16,190	16,055		16,190		5.17
	(1.00% Floor)
					23,226	22,990		22,935		7.33
IT Consulting & Other Services
AST-Applications Software Technology LLC
First Lien Secured Term Loan	L+ 8.00%	9.80%	01/10/17	01/10/23	4,236	4,187		4,236		1.35
	(1.00% Floor)	(1.00%PIK)
Leisure Facilities
Honors Holdings, LLC
First Lien Secured Term Loan	L+ 6.86%	8.74%	09/06/19	09/06/24	9,405	9,264		9,305		2.97
	(1.00% Floor)
First Lien Secured Delayed Draw	L+ 6.00%	7.90%	09/06/19	09/06/24	4,662	4,616		4,612		1.47
Loan	(1.00% Floor)
Lift Brands, Inc.
First Lien Secured Term Loan	L+ 7.50%	9.44%	04/16/18	04/16/23	10,532	10,387		10,038		3.21
	(1.00% Floor)	(0.50%PIK)
First Lien Secured Revolving	P+ 6.00%	10.75%	04/16/18	04/16/23	158	156		131		0.04
Loan⁽⁷⁾	(2.76% Floor)
					24,757	24,423		24,086		7.69

See notes to consolidated financial statements

Whitehorse Finance, Inc.

Consolidated Schedule of Investments - (Continued)

December 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
Office Services & Supplies
Empire Office, Inc.
First Lien Secured Term Loan	L+ 6.75%	8.55%	04/12/19	04/12/24	12,224	$	12,015	$	12,029		3.84	%
	(1.50% Floor)
Other Diversified Financial Services
Sigue Corporation⁽⁴⁾
Second Lien Secured Term	L+ 12.00%	13.94%	12/27/13	05/01/20	24,904	24,905		24,655			7.88
Loan⁽⁴⁾	(1.00% Floor)
Packaged Foods & Meats
Lenny & Larry’s, LLC
First Lien Secured Term Loan	L+ 7.97%	9.71%	05/15/18	05/15/23	12,293	12,128		11,924			3.81
	(1.00% Floor)	(1.18%PIK)
Research & Consulting Services
Nelson Worldwide, LLC
First Lien Secured Term Loan	L+ 9.25%	11.23%	01/09/18	01/09/23	13,603	13,397		13,263			4.24
	(1.00% Floor)
ALM Media, LLC
First Lien Secured Term Loan	L+ 6.50%	8.44%	11/25/19	11/25/24	15,750	15,441		15,441			4.93
	(1.00% Floor)
					29,353	28,838		28,704			9.17
Restaurants
LS GFG Holdings Inc.
First Lien Secured Term Loan	L+ 6.00%	7.80%	11/30/18	11/19/25	10,237	9,977		9,717			3.10
	(0.00% Floor)
Specialized Consumer Services
True Blue Car Wash, LLC
First Lien Secured Term Loan	L+ 8.12%	9.91%	10/17/19	10/17/24	4,461	4,375		4,375			1.40
	(1.00% Floor)
First Lien Secured Revolving	L+ 8.12%
Loan⁽⁷⁾	(1.00% Floor)	9.91%	10/17/19	10/17/24	-	-		(20		)	(0.01	)
					4,461	4,375		4,355			1.39
Specialty Chemicals
Flexitallic Group SAS
First Lien Secured Term Loan	L+ 6.50%	8.44%	10/28/19	10/29/26	11,750	11,461		11,463			3.66
	(1.00% Floor)
Specialized Finance
Golden Pear Funding Assetco,
LLC⁽⁵⁾
Second Lien Secured Term Loan	L+ 10.50%	12.19%	09/20/18	03/20/24	17,500	17,232		17,500			5.59
	(1.00% Floor)
Oasis Legal Finance, LLC⁽⁵⁾
Second Lien Secured Term Loan	L+ 10.75%	12.44%	09/09/16	03/09/22	20,000	19,841		20,000			6.39
	(1.00% Floor)
WHF STRS Ohio Senior Loan Fund
LLC
Subordinated Note^{(4)(5)(7)(14)(15)}	L+ 6.50%	8.16%	07/19/19	NA	26,344	26,344		26,344			8.42
					63,844	63,417		63,844			20.40
Systems Software
Vero Parent, Inc.
First Lien Secured Term Loan	L+ 6.00%	7.91%	11/06/19	08/16/24	20,000	18,014		19,025			6.08
	(1.00% Floor)
Trading Companies & Distributors
Vessco Holdings, LLC
First Lien Secured Term Loan	L+ 6.50%	8.41%	08/22/19	08/22/24	19,067	18,713		18,696			5.97
	(1.50% Floor)

See notes to consolidated financial statements

Whitehorse Finance, Inc.

Consolidated Schedule of Investments - (Continued)

December 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
Technology Hardware, Storage & Peripherals
Source Code Midco, LLC
First Lien Secured Term Loan	L+ 8.25%	10.18%	05/04/18	05/04/23	23,566	$	23,112	$	23,566	7.53	%
	(1.00% Floor)
Total Debt Investments					591,199	575,686		566,374		180.94
Equity Investments
Advertising
Fluent, Inc. (f/k/a Cogint, Inc.)⁽⁴⁾⁽⁹⁾	N/A	N/A	11/28/17	N/A	187	560		467		0.15
Diversified Support Services
Quest Events, LLC Preferred Units⁽⁴⁾	N/A	N/A	12/28/18	12/08/25	317	317		276		0.09
ImageOne Industries, LLC Common A
Units⁽⁴⁾	N/A	N/A	09/20/19	N/A	149	-		48		0.02
Health Care Services
Lab Logistics Preferred Units	N/A	N/A	10/29/19	N/A	2	857		857		0.27
PMA Holdco, LLC Warrants⁽⁴⁾	N/A	N/A	06/28/18	06/28/28	8	-		461		0.15
					10	857		1,318		0.42
Other Diversified Financial Services
RCS Creditor Trust Class B Units⁽⁴⁾⁽⁶⁾	N/A	N/A	10/01/17	N/A	143	-		-		-
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	22	2,890		3,721		1.19
					165	2,890		3,721		1.19
Specialized Finance
NMFC Senior Loan Program I LLC Units^(4)(5)(6)	N/A	N/A	08/13/14	08/31/22	10,000	10,029		9,651		3.08
WHF STRS Ohio Senior Loan Fund LLC^{(4)(5)(7)(14)}	N/A	N/A	07/19/19	N/A	6,586	6,586		6,949		2.22
Trading Companies & Distributors
Vessco Holdings, LLC⁽⁴⁾	N/A	N/A	08/22/19	N/A	489	800		800		0.26
Trucking
Europcar Mobility Group⁽⁵⁾	N/A	N/A	10/31/19	12/31/22	-	-		84		0.03
Total Equity Investments					17,903	22,039		23,314		7.46
Total Investments					609,102	$	597,725	$	589,688	188.40	%

See notes to consolidated financial statements

Whitehorse Finance, Inc.

Consolidated Schedule of Investments - (Continued)

December 31, 2019

(in thousands)

(1)

(2)

The investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”), which resets monthly, quarterly or semiannually, the Canadian Dollar Offered Rate (“CDOR” or “C”) or the U.S. Prime Rate as published by the Wall Street Journal (“Prime” or “P”). The one, three and six-month LIBOR were 1.8%, 1.9% and 1.9%, respectively, as of December 31, 2019. The Prime was 4.75% as of December 31, 2019. The CDOR was 2.1% as of December 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 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 84%, of total assets as of the date of the consolidated schedule of investments.

(6)

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

(7)

The investment has an unfunded commitment in addition to any amounts presented in the consolidated schedule of investments as of December 31, 2019. See Note 8.

(8)

The investment is on non-accrual status.

(9)

The fair value of the investment was determined using observable inputs. See Note 5. 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 188% of the Company’s net assets or 93% 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 5.

(12)

(13)

Principal amount is denominated in Canadian dollars.

(14)

Investment is a controlled affiliate investment as defined by the 1940 Act. On January 14, 2019, the Company entered into an agreement (as described in Note 4 hereto) with State Teachers Retirement System of Ohio, a public pension fund established under Ohio law (“STRS Ohio”), to create WHF STRS Ohio Senior Loan Fund, LLC (“STRS JV’’), a joint venture, which invests primarily in senior secured first and second lien term loans.

(15)

Security is perpetual with no defined maturity date.

See notes to consolidated financial statements

WhiteHorse Finance, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2020

(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 a risk-free index rate such as 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.

Engaging in commodity interest transactions such as swap transactions or futures contracts for the Company may cause WhiteHorse Advisers to fall within the definition of “commodity pool operator” under the Commodity Exchange Act (“CEA”), and related regulations promulgated by the U.S. Commodity Futures Trading Commission (the “CFTC”). On January 23, 2020, WhiteHorse Advisers claimed an exclusion from the definition of the term “commodity pool operator” under the CEA and the CFTC regulations in connection with its management of the Company and, therefore, is not subject to CFTC registration or regulation under the CEA as a commodity pool operator with respect to its management of the Company.

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 quarterly report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2019. 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, 2020.

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. The Company does not consolidate its investment in STRS JV. See further description in Note 4.

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.

Investments are measured at fair value as determined in good faith by WhiteHorse Advisers’ 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.

Foreign currency translation: The Company’s books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

(1)

cash and cash equivalents, restricted cash and cash equivalents, fair value of investments, interest receivable, and other assets and liabilities — at the spot exchange rate on the last business day of the period; and

(2)

purchases and sales of investments, income and expenses — at the exchange rates prevailing on the respective dates of such transactions.

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Fluctuations arising from the translation of assets other than investments and liabilities are included with the net change in unrealized appreciation (depreciation) on translation of assets and liabilities in foreign currencies on the consolidated statements of operations.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with investing in U.S. companies. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.

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 Credit Facility (as defined in Note 6). 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 Credit Facility (as defined in Note 6).

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

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

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 stockholders 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, 2020 and December 31, 2019.

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, 2020 or December 31, 2019. 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 2016 remain subject to examination by the Internal Revenue Service.

As of September 30, 2020 and December 31, 2019, the cost of investments for federal income tax purposes was $609,762 and $601,862 resulting in net unrealized depreciation of $14,467 and $12,174, respectively. This is comprised of gross unrealized appreciation of $17,190 and $5,223, and gross unrealized depreciation of $31,657 and $17,397, on a tax basis, as of September 30, 2020 and December 31, 2019, 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. Refer to the “COVID-19 Developments” section in Note 8. 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.

Reclassifications: Certain amounts in the consolidated financial statements as of December 31, 2019 and for the nine months ended September 30, 2019 have been reclassified. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Recent Accounting Pronouncements: In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting if certain criteria are met. The guidance is effective from March 12, 2020 through December 31, 2022. As of September 30, 2020, the guidance did not have a material impact on the consolidated financial statements.

NOTE 3 - FORWARD CURRENCY CONTRACTS

The Company may enter into foreign currency forward contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies and to economically hedge the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A foreign currency forward contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract forward exchange rate and the forward market exchange rate on the last day of the period presented as unrealized appreciation or depreciation. Realized gains or losses are recognized when forward contracts are settled. Risks arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit counterparty risk by only dealing with well-known counterparties.

The Company utilizes forward foreign currency exchange contracts to protect itself against fluctuations in exchange rates. During the three and nine months ended September 30, 2020, the Company recognized realized losses of $25 and $25, respectively, and unrealized gains of $3 and $0, respectively, in the statement of operations relating to forward currency exchange contracts held during the year. The Company may choose to renew contracts quarterly unless otherwise settled by the Company or the counterparty. There were no open contracts at September 30, 2020.

Realized gain (loss) on forward currency contracts recognized in income

	For the three			For the nine
	months ended			months ended
	September 30,			September 30,
Risk exposure category	2020			2020
Foreign exchange	$	(25	)	$	(25	)

Change in unrealized appreciation (depreciation) on forward currency contracts recognized in income

	For the three		For the nine
	months ended		months ended
	September 30,		September 30,
Risk exposure category	2020		2020
Foreign exchange	$	3	$	-

The foreign currency forward contracts open at the end of the period are generally indicative of the volume of activity during the period.

NOTE 4 - INVESTMENTS

Investments consisted of the following:

	September 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
First lien secured loans	$	497,306	$	494,866	$	486,340	$	477,875
Second lien secured loans		30,738		30,000		63,002		62,155
Subordinated unsecured loans		291		291		-		-
Subordinated Note to STRS JV		41,073		41,073		26,344		26,344
Equity (excluding STRS JV)		18,801		19,750		15,453		16,365
Equity in STRS JV		10,268		9,315		6,586		6,949
Total	$	598,477		595,295	$	597,725	$	589,688

The following table shows the portfolio composition by industry⁽¹⁾ grouping at fair value:

	September 30, 2020				December 31, 2019
Advertising	$	15,372	2.82	%	$	9,804	1.76	%
Agricultural & Farm Machinery		10,152	1.86			10,073	1.81
Air Freight & Logistics		5,398	0.99			5,600	1.01
Application Software		15,826	2.90			5,395	0.97
Automotive Retail		24,134	4.43			24,890	4.47
Broadcasting		4,849	0.89			12,396	2.23
Building Products		19,062	3.50			-	-
Cable & Satellite		14,250	2.61			14,250	2.56
Communications Equipment		15,961	2.93			4,857	0.87
Construction & Engineering		14,810	2.72			-	-
Data Processing & Outsourced Services		28,330	5.20			40,699	7.32
Department Stores		13,272	2.43			13,544	2.43
Distributors		5,591	1.03			5,594	1.01
Diversified Chemicals		8,790	1.61			8,733	1.57
Diversified Support Services		20,652	3.79			17,636	3.17
Education Services		13,936	2.56			11,519	2.07
Environmental & Facilities Services		-	-			6,329	1.14
Food Retail		22,763	4.18			7,668	1.38
Health Care Facilities		11,809	2.17			14,760	2.65
Health Care Services		13,682	2.51			27,010	4.85
Home Furnishings		3,778	0.69			5,040	0.91
Human Resource & Employment Services		-	-			12,354	2.22
Interactive Media & Services		12,675	2.33			12,673	2.28
Internet & Direct Marketing Retail		29,486	5.41			18,424	3.31
Investment Banking & Brokerage		20,457	3.75			22,935	4.12
IT Consulting & Other Services		4,034	0.74			4,236	0.76
Leisure Facilities		20,704	3.80			24,086	4.33
Office Services & Supplies		10,644	1.95			12,029	2.16
Other Diversified Financial Services		3,490	0.64			28,376	5.10
Packaged Foods & Meats		10,779	1.98			11,924	2.14
Property & Casualty Insurance		6,131	1.13			-	-
Research & Consulting Services		26,854	4.93			28,704	5.16
Restaurants		8,534	1.57			9,717	1.75
Specialized Consumer Services		6,395	1.17			4,355	0.78
Specialized Finance		39,520	7.25			47,151	8.47
Specialty Chemicals		10,846	1.99			11,463	2.06
Systems Software		16,267	2.99			19,025	3.42
Technology Hardware, Storage & Peripherals		22,633	4.15			23,566	4.24
Trading Companies & Distributors		13,012	2.39			19,496	3.50
Trucking		29	0.01			84	0.02
Total	$	544,907	100.00	%	$	556,395	100.00	%

(1) Excludes investments in STRS JV.

As of September 30, 2020 the portfolio companies underlying the Company’s investments are all located in the United States and its territories, except for Arcole Acquisition Corp and Geo Logic Systems Ltd. (which are located in Canada). As of September 30, 2020 and December 31, 2019, the weighted average remaining terms of the Company’s debt investments were approximately 3.5 years and 3.4 years, respectively.

As of September 30, 2020 and December 31, 2019, the total fair value of non-accrual loans were $18,670 and $7,668, respectively.

An affiliated company is generally a portfolio company in which the Company owns 5% or more of its voting securities. A controlled affiliated company is generally a portfolio company in which the Company owns more than 25% of its voting securities or has the power to exercise control over its management or policies (including through a management agreement). The following table presents the schedule of investments in and advances to affiliated and controlled persons (as defined by the 1940 Act) as of and for the nine months ended September 30, 2020:

		Amount of
		dividends and		Beginning								Net Change in			Ending Fair
		interest		Fair Value at						Net		Unrealized			Value at
	Type of	included in		December 31,						Realized		Appreciation			September 30,
Affiliated Person⁽¹⁾	Asset	income		2019		Purchases		Sales		Gain (Loss)		(Depreciation)			2020
Non-controlled affiliates
NMFC Senior Loan
Program I LLC Units	Equity	$	800	$	9,651	$	—	$	—	$	—	$	(131	)	$	9,520
Total Non-controlled affiliates		$	800	$	9,651	$	—	$	—	$	—	$	(131	)	$	9,520

		Amount of
		dividends and		Beginning								Net Change in			Ending Fair
		interest		Fair Value at						Net		Unrealized			Value at
	Type of	included in		December 31,						Realized		Appreciation			September 30,
Affiliated Person⁽¹⁾	Asset	income		2019		Purchases		Sales		Gain (Loss)		(Depreciation)			2020
Controlled affiliates
WHF STRS Ohio Senior Loan	Subordinated
Fund LLC^*	Note	$	1,913	$	26,344	$	14,729	$	—	$	—	$	—		$	41,073
WHF STRS Ohio Senior Loan Fund LLC^*	Equity		961		6,949		3,682		—		—		(1,316	)		9,315
Total Controlled affiliates		$	2,874	$	33,293	$	18,411	$	—	$	—	$	(1,316	)	$	50,388

The following table presents the schedule of investments in and advances to affiliated and controlled affiliated persons (as defined by the 1940 Act) as of and for the year ended December 31, 2019:

		Amount of
		dividends and		Beginning								Net Change in			Ending Fair
		interest		Fair Value at						Net		Unrealized			Value at
	Type of	included in		December 31,						Realized		Appreciation			December 31,
Affiliated Person⁽¹⁾	Asset	income		2018		Purchases		Sales		Gain (Loss)		(Depreciation)			2019
Non-controlled affiliates
NMFC Senior Loan
Program I LLC Units	Equity	$	1,173	$	9,630	$	—	$	—	$	—	$	21		$	9,651
UnitsRCS Creditor Trust Class B	Equity		—		535		—		—		—		(535	)		—
Total Non-controlled affiliates		$	1,173	$	10,165	$	—	$	—	$	—	$	(514	)	$	9,651

		Amount of
		dividends and		Beginning								Net Change in		Ending Fair
		interest		Fair Value at						Net		Unrealized		Value at
	Type of	included in		December 31,						Realized		Appreciation		December 31,
Affiliated Person⁽¹⁾	Asset	income		2018		Purchases		Sales		Gain (Loss)		(Depreciation)		2019
Controlled affiliates
WHF STRS Ohio Senior Loan	Subordinated
Fund LLC *	Note	$	936	$	—	$	26,344	$	—	$	—	$	—	$	26,344
WHF STRS Ohio Senior Loan Fund LLC^*	Equity		—		—		6,586		—		—		363		6,949
Total Controlled affiliates		$	936	$	—	$	32,930	$	—	$	—	$	363	$	33,293

The Company and STRS Ohio are the members of STRS JV, a joint venture formed as a Delaware limited liability company that is not consolidated by either member for financial reporting purposes. The members make investments in STRS JV in the form of limited liability company (“LLC”) equity interests and interest-bearing subordinated notes as STRS JV makes investments, and all portfolio and other material decisions regarding STRS JV must be submitted to STRS JV’s board of managers which is comprised of an equal number of members appointed by each of the Company and STRS Ohio. Because management of STRS JV is shared equally between the Company and STRS Ohio, the Company does not believe it controls STRS JV for purposes of the 1940 Act or otherwise.

⁽¹⁾

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

WHF STRS Ohio Senior Loan Fund LLC

On January 14, 2019, the Company entered into an LLC operating agreement with STRS Ohio to co-manage a newly formed joint venture investment company, STRS JV, a Delaware LLC. STRS Ohio and the Company have committed to provide up to $125,000 of subordinated notes and equity to STRS JV, with STRS Ohio providing up to $50,000 and the Company providing up to $75,000. STRS JV will invest primarily in lower middle market, senior secured debt facilities, to performing lower middle market companies across a broad range of industries that typically carry a floating interest rate based on a risk-free index rate such as LIBOR and have a term of three to six years.

In July 2019, STRS JV formally launched operations. As of September 30, 2020, STRS JV had total assets of $170,818. STRS JV’s portfolio consisted of debt investments in 18 portfolio companies as of September 30, 2020. As of September 30, 2020, the largest investment by aggregate principal amount (including any unfunded commitments) in a single portfolio company in STRS JV’s portfolio was $14,628. The five largest investments in portfolio companies by fair value in STRS JV totaled $61,266. STRS JV invests in portfolio companies in the same industries in which the Company may directly invest.

The Company provides capital to STRS JV in the form of LLC equity interests and through interest-bearing subordinated notes. As of September 30, 2020, the Company and STRS Ohio owned 60% and 40%, respectively, of the LLC equity interests of STRS JV. The Company’s investment in STRS JV consisted of equity contributions of $10,268 and advances of the subordinated notes of $41,073 as of September 30, 2020. As of September 30, 2020, the Company had commitments to fund equity interests and subordinated notes in STRS JV of $15,000 and $60,000, of which $4,732 and $18,927 were unfunded, respectively.

The Company and STRS Ohio each appoint two members to STRS JV’s four-person board of managers. All material decisions with respect to STRS JV, including those involving its investment portfolio, require unanimous approval of a quorum of the board of managers. Quorum is defined as (i) the presence of two members of the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of managers; provided that the individual that was elected, designated or appointed by the member with only one individual present shall be entitled to cast two votes on each matter; or (iii) the presence of four members of the board of managers; provided that two individuals are present that were elected, designated or appointed by each member.

On July 19, 2019, STRS JV entered into a $125,000 credit and security agreement (the “STRS JV Credit Facility”) with JPMorgan Chase Bank, National Association (“JPMorgan”). As of September 30, 2020, the STRS JV Credit Facility had $125,000 of commitments subject to leverage and borrowing base restrictions with an interest rate based on a risk-free index rate such as LIBOR plus 2.55%. The final maturity date of the STRS JV Credit Facility is July 19, 2024. As of September 30, 2020, STRS JV had $86,755 of outstanding borrowings under the STRS JV Credit Facility. At September 30, 2020, the effective interest rate on the STRS JV Credit Facility was 2.84% per annum.

Below is a listing of STRS JV’s individual investments as of September 30, 2020:

Investment Type⁽¹⁾	Spread Above Index⁽²⁾	Interest Rate⁽³⁾		Acquisition Date⁽⁴⁾		Maturity Date	Principal/ Share Amount		Amortized Cost		Fair Value⁽⁵⁾
North America
Debt Investments
Advertising
SmartSign Holdings LLC
First Lien Secured Term Loan	L+ 6.00%		7.00%		10/21/19	10/11/24		8,775	$	8,632	$	8,582
	(1.00% Floor)
First Lien Secured Revolving Loan	L+ 6.00%		7.00%		10/21/19	10/11/24		-		-		(5	)
	(1.00% Floor)							8,775		8,632		8,577
Construction & Engineering
SFP Holding, Inc.
First Lien Secured Term Loan	L+ 6.25%		7.25%		12/13/19	09/01/22		6,499		6,497		6,330
	(1.00% Floor)
First Lien Secured Delayed Draw Loan ⁽⁶⁾	L+ 6.25%		7.25%		12/13/19	09/01/22		4,287		4,284		4,119
	(1.00% Floor)
First Lien Secured Revolving Loan	L+ 6.25%		7.25%		12/13/19	09/01/22		1,134		1,129		1,105
	(1.00% Floor)							11,920		11,910		11,554
Data Processing & Outsourced Services
Geo Logic Systems Ltd.
First Lien Secured Term Loan ⁽⁷⁾	L+ 6.24%		7.25%		01/22/20	12/19/24		14,558		10,951		10,572
	(1.00% Floor)
First Lien Secured Revolving Loan⁽⁷⁾	L+ 6.24%		7.25%		01/22/20	12/19/24		-		-		(8	)
	(1.00% Floor)							14,558		10,951		10,564
Diversified Support Services
Quest Events, LLC
First Lien Secured Term Loan	L+ 6.00%		7.00%		07/19/19	12/28/24		11,403		11,235		9,271
	(1.00% Floor)		(3.50% PIK)
First Lien Secured Revolving Loan	L+ 6.00%		7.00%		07/19/19	12/28/24		935		921		760
	(1.00% Floor)		(3.50% PIK)					12,338		12,156		10,031
Environmental & Facilities Services
WH Lessor Corp.
First Lien Secured Term Loan	L+ 6.00%		7.00%		01/22/20	12/26/24		5,244		5,154		5,219
	(1.00% Floor)
First Lien Secured Revolving Loan	L+ 6.00%		7.00%		01/22/20	12/26/24		-		-		6
	(1.00% Floor)							5,244		5,154		5,225
Health Care Services
Akumin Corp.
First Lien Secured Term Loan	L+ 8.00%		9.00%		07/19/19	05/31/24		13,619		13,357		13,347
	(1.00% Floor)		(2.00% PIK)					13,619		13,357		13,347
Human Resource & Employment Services
Pluto Acquisition Topco, LLC
First Lien Secured Term Loan⁽⁸⁾	L+ 6.31%		7.81%		05/19/20	01/31/24		11,834		11,674		11,834
	(1.50% Floor)							11,834		11,674		11,834
Industrial Machinery
FR Flow Control CB LLC
First Lien Secured Term Loan B	L+ 6.00%		7.00%		07/19/19	06/28/26		7,288		7,167		7,102
	(1.00% Floor)
First Lien Secured Term Loan C	L+ 6.00%		7.00%		07/19/19	06/28/26		2,870		2,823		2,797
	(1.00% Floor)							10,158		9,990		9,899
Insurance Brokers
SelectQuote, Inc.
First Lien Secured Term Loan	L+ 6.00%		7.00%		11/05/19	11/05/24		7,838		7,710		7,838
	(1.00% Floor)							7,838		7,710		7,838
Internet & Direct Marketing Retail
Marlin DTC-LS Midco 2, LLC
First Lien Secured Term Loan	L+ 5.50%		6.50%		07/19/19	07/01/25		13,612		13,395		13,475
	(1.00% Floor)
First Lien Secured Revolving Loan	L+ 5.50%		6.50%		07/19/19	07/01/25		-		-		6
	(1.00% Floor)							13,612		13,395		13,481
Investment Banking & Brokerage
TOUR Intermediate Holdings, LLC
First Lien Secured Term Loan	L+ 7.00%		8.00%		05/19/20	05/15/25		8,299		8,155		8,175
	(1.00% Floor)
First Lien Secured Delayed Draw Loan	L+ 7.00%		8.00%		05/19/20	05/15/25		2,919		2,895		2,875
	(1.00% Floor)							11,218		11,050		11,050
Packaged Foods & Meats
Mikawaya Holdings, LLC
First Lien Secured Term Loan	L+ 5.75%		7.00%		02/18/20	01/29/25		3,065		3,011		3,065
	(1.25% Floor)
Poultry Holdings, LLC
First Lien Secured Term Loan	L+ 5.75%		6.75%		10/21/19	06/28/25		7,748		7,619		7,283
	(1.00% Floor)
Westrock Coffee Company, LLC
First Lien Secured Term Loan	L+ 8.25%		9.75%		03/20/20	02/28/25		9,233		9,130		9,049
	(1.50% Floor)		(1.00% PIK)					20,046		19,760		19,397
Personal Products
Sunless, Inc.
First Lien Secured Term Loan	L+ 6.50%		7.50%		10/21/19	08/13/24		4,834		4,740		4,350
	(1.00% Floor)		(0.50% PIK)
First Lien Secured Revolving Loan	L+ 6.50%		7.50%		10/21/19	08/13/24		-		-		(112	)
	(1.00% Floor)							4,834		4,740		4,238
Systems Software
arcserve (USA) LLC
First Lien Secured Term Loan	L+ 6.00%		7.00%		07/19/19	05/01/24		8,163		8,045		8,081
	(1.00% Floor)							8,163		8,045		8,081
Technology Hardware, Storage & Peripherals
PS Lightwave, Inc.
First Lien Secured Term Loan	L+ 6.75%		8.25%		05/19/20	03/10/25		7,673		7,531		7,538
	(1.50% Floor)
First Lien Secured Delayed Draw Loan	L+ 6.75%		8.25%		05/19/20	03/10/25		-		-		1
	(1.50% Floor)							7,673		7,531		7,539
Trading Companies & Distributors
Vessco Holdings, LLC
First Lien Secured Term Loan	L+ 7.25%		8.75%		04/22/20	08/22/24		9,874		9,697		9,972
	(1.50% Floor)
								9,874		9,697		9,972
Total Investments								171,704	$	165,752	$	162,627

(1)

Except as noted, all investments provide collateral for the STRS JV 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 CDOR. The one, three and six-month LIBOR were 0.1%, 0.2% and 0.3%, respectively, as of September 30, 2020. The CDOR was 0.5% as of September 30, 2020.

(3)

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

(4)

Except as otherwise noted, all of the STRS JV’s portfolio company investments, which as of the date of the portfolio represented 1,048% of STRS JV’s net assets or 95% of STRS JV’s total assets, are subject to legal restrictions on sales.

(5)

The fair value of each investment was determined using significant unobservable inputs.

(6)

The investment or a portion of the investment does not provide collateral for the STRS JV Credit Facility.

(7)

Principal is denominated in Canadian dollars.

(8)

In addition to the interest earned based on the stated interest rate of this security, STRS JV is entitled to receive an additional interest amount of 3.00% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.

Below is a listing of STRS JV’s individual investments as of December 31, 2019:

	Spread									Principal/
	Above		Interest			Acquisition		Maturity		Share		Amortized		Fair
Investment Type⁽¹⁾	Index⁽²⁾		Rate⁽³⁾			Date⁽⁴⁾		Date		Amount		Cost		Value⁽⁵⁾
North America
Debt Investments
Advertising
SmartSign Holdings LLC
First Lien Secured Term Loan		L+ 6.00%		10.19	%		10/21/19		10/11/24		8,841	$	8,672	$	8,672
		(1.00% Floor)
First Lien Secured Revolving Loan		L+ 6.00%		10.19	%		10/21/19		10/11/24		—		—		—
		(1.00% Floor)									8,841		8,672		8,672
Construction & Engineering
SFP Holding, Inc.
First Lien Secured Term Loan		L+ 6.25%		8.14	%		12/13/19		09/01/22		9,932		9,927		9,932
		(1.00% Floor)
First Lien Secured Delayed Draw Loan		L+ 6.25%		8.14	%		12/13/19		09/01/22		85		84		85
		(1.00% Floor)
First Lien Secured Delayed Draw Loan		L+ 6.25%		8.14	%		12/13/19		12/14/20		—		—		47
		(1.00% Floor)
First Lien Secured Revolving Loan		L+ 6.25%		8.41	%		12/13/19		09/01/22		61		61		68
		(1.00% Floor)									10,078		10,072		10,132
Diversified Support Services
Quest Events, LLC
First Lien Secured Term Loan		L+ 6.00%		7.94	%		07/19/19		12/28/24		10,833		10,634		10,508
		(1.00% Floor)
First Lien Secured Revolving Loan		L+ 6.00%		7.94	%		07/19/19		12/28/24		—		—		(11	)
		(1.00% Floor)									10,833		10,634		10,497
Health Care Services
Akumin Corp.
First Lien Secured Term Loan		L+ 6.00%		7.80	%		07/19/19		05/31/24		13,632		13,392		13,482
		(1.00% Floor)									13,632		13,392		13,482
Industrial Machinery
FR Flow Control CB LLC
First Lien Secured Term Loan B		L+ 6.00%		7.94	%		07/19/19		06/28/26		7,343		7,206		7,183
		(1.00% Floor)
First Lien Secured Term Loan C		L+ 6.00%		7.94	%		07/19/19		06/28/26		2,870		2,816		2,807
		(1.00% Floor)									10,213		10,022		9,990
Insurance Brokers
SelectQuote, Inc.
First Lien Secured Term Loan		L+ 6.00%		7.70	%		11/05/19		11/05/24		10,250		10,051		10,051
		(1.00% Floor)									10,250		10,051		10,051
Internet & Direct Marketing Retail
Marlin DTC-LS Midco 2, LLC
First Lien Secured Term Loan		L+ 6.00%		7.80	%		07/19/19		07/01/25		13,715		13,463		13,644
		(1.00% Floor)
First Lien Secured Revolving Loan		L+ 6.00%		7.80	%		07/19/19		07/01/25		—		—		13
		(1.00% Floor)									13,715		13,463		13,657
Packaged Foods & Meats
Poultry Holdings, LLC
First Lien Secured Term Loan		L+ 5.75%		7.55	%		10/21/19		06/28/25		7,807		7,656		7,688
		(1.00% Floor)									7,807		7,656		7,688
Personal Products
Sunless, Inc.
First Lien Secured Term Loan		L+ 6.00%		7.79	%		10/21/19		08/13/24		4,864		4,773		4,779
		(1.00% Floor)
First Lien Secured Revolving Loan		L+ 6.00%		7.79	%		10/21/19		08/13/24		—		—		2
		(1.00% Floor)									4,864		4,773		4,781
Systems Software
arcserve (USA) LLC
First Lien Secured Term Loan		L+ 6.00%		7.91	%		07/19/19		05/01/24		8,321		8,175		8,310
		(1.00% Floor)									8,321		8,175		8,310
Total Investments											98,554	$	96,910	$	97,260

(1)

All investments provide collateral for the STRS JV Credit Facility.

(2)

The investments bear interest at a rate that may be determined by reference to LIBOR, which resets monthly, quarterly or semiannually. The one, three and six-month LIBOR were 1.8%, 1.9% and 1.9%, respectively, as of December 31, 2019.

(3)

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

(4)

Except as otherwise noted, all of the STRS JV’S portfolio company investments, which as of the date of the portfolio represented 840% of STRS JV’S net assets or 98% of STRS JV’S total assets or 98% of STRS JV’S total assets, are subject to legal restrictions on Sales.

(5)

The fair value of each investment was determined using significant unobservable inputs.

As of September 30, 2020, and December 31, 2019, STRS JV had no investments on non-accrual status. STRS JV had outstanding commitments to fund investments totaling $8,420 and $8,592 under undrawn revolvers as of September 30, 2020 and December 31, 2019, respectively.

Below is certain summarized financial information for STRS JV as of September 30, 2020 and December 31, 2019 and for the three and nine month periods ended September 30, 2020 and for the period July 19, 2019 (commencement of operations) through September 30, 2019 (dollars in thousands):

Selected Balance Sheet Information	September 30, 2020		December 31, 2019
Assets:
Investments, at fair value (amortized cost of $165,752, $96,910, respectively)	$	162,627	$	97,260
Cash and cash equivalents		7,444		1,552
Other assets		747		726
Total assets	$	170,818	$	99,538
Liabilities:
Credit facility	$	85,226	$	42,773
Note payable to members		68,456		43,907
Interest payable on credit facility		160		179
Interest payable on notes to members		1,140		850
Other liabilities		311		248
Total liabilities		155,293		87,957
Members’ equity		15,525		11,581
Total liabilities and members’ equity	$	170,818	$	99,538

	Three Months Ended			Nine months Ended
Selected Statement of Operations Information	September 30, 2020			September 30, 2020
Interest income	$	3,402		$	8,948
Total investment income	$	3,402		$	8,948
Interest expense on credit facility		806			2,407
Interest expense on notes to members		1,140			3,328
Administrative fee		84			219
Other expenses		40			314
Total expenses	$	2,070		$	6,268
Net investment income		1,332			2,680
Net realized gains (losses) on investments		(2	)		(17	)
Net change in unrealized appreciation (depreciation) on investments		2,158			(3,254	)
Net increase (decrease) in net assets resulting from operations	$	3,488		$	(591	)

	For the period July 19, 2019 (commencement of operations)
Selected Statement of Operations Information	through September 30, 2019
Interest income	$	1,022
Total investment income	$	1,022

Interest expense on credit facility		378
Interest expense on notes to members		572
Administrative fee		24
Other expenses		58
Total expenses	$	1,032

Net investment income		(10	)
Net realized gains (losses) on investments		12
Net change in unrealized appreciation (depreciation) on investments		91
Net increase (decrease) in net assets resulting from operations	$	93

NOTE 5 - 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, 2020 and 2019, 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.

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of September 30, 2020:

	Level 1		Level 2		Level 3		Total
First lien secured loans	$	—	$	—	$	494,866		494,866
Second lien secured loans		—		—		30,000		30,000
Subordinated unsecured loans		—		—		291		291
Subordinated Note to STRS JV		—		—		41,073		41,073
Equity (excluding STRS JV)		—		—		19,750		19,750
Equity in STRS JV⁽¹⁾		—		—		—		9,315
Total investments	$	—	$	—	$	585,980		595,295

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

	Level 1		Level 2		Level 3		Total
First lien secured loans	$	—	$	—	$	477,875	$	477,875
Second lien secured loans		—		—		62,155		62,155
Subordinated Note to STRS JV		—		—		26,344		26,344
Equity (excluding STRS JV)		467		—		15,898		16,365
Equity in STRS JV⁽¹⁾		—		—		—		6,949
Total investments	$	467	$	—	$	582,272	$	589,688

(1)

The Company’s equity investment in STRS JV is measured using the net asset value per share as a practical expedient for fair value, and thus has not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statements of assets and liabilities.

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended September 30, 2020:

	First Lien			Second Lien		Subordinated		Subordinated
	Secured			Secured		Unsecured		Notes to STRS					Total
	Loans			Loans		Loans		JV		Equity			Investments
Fair value, beginning of period	$	453,721			29,968		-		41,073		14,846			539,608
Funding of investments		57,920			-		291		-		1,100			59,311
Non-cash interest income		198			-		-		-		-			198
Accretion of discount		680			28		-		-		-			708
Proceeds from paydowns and sales		(27,507	)		-		-		-		(632	)		(28,139	)
Realized gains		4			-		-		-		632			636
Net unrealized (depreciation) appreciation		9,850			4		-		-		3,804			13,658
Fair value, end of period	$	494,866			30,000		291		41,073		19,750			585,980
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2020	$	9,980			4		-		-		3,804			13,788

The following table presents the changes in investments measured at fair value using Level 3 inputs for the nine months ended September 30, 2020:

	First Lien			Second Lien			Subordinated		Subordinated
	Secured			Secured			Unsecured		Notes to STRS					Total
	Loans			Loans			Loans		JV		Equity			Investments
Fair value, beginning of period	$	477,875			62,155			-		26,344		15,898			582,272
Funding of investments		122,057			-			291		14,729		3,908			140,985
Non-cash interest income		681			-			-		-		-			681
Accretion of discount		2,009			142			-		-		18			2,169
Proceeds from paydowns and sales		(114,065	)		(32,404	)		-		-		(650	)		(147,119	)
Realized gains		281			-			-		-		632			913
Net unrealized (depreciation) appreciation		6,028			107			-		-		(56	)		6,079
Fair value, end of period	$	494,866			30,000			291		41,073		19,750			585,980
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2020	$	6,090			109			-		-		(56	)		6,143

The following table presents the changes in investments measured at fair value using Level 3 inputs for the three months ended September 30, 2019:

	First Lien			Second Lien			Subordinated
	Secured			Secured			Notes to STRS					Total
	Loans			Loans			JV		Equity			Investments
Fair value, beginning of period	$	453,080			65,700			-		15,040			533,820
Funding of investments		79,498			-			19,484		1,480			100,462
Non-cash interest income		605			-			-		-			605
Accretion of discount		1,359			35			-		-			1,394
Proceeds from paydowns and sales		(112,825	)		-			-		-			(112,825	)
Realized gains		(2	)		-			-		-			(2	)
Net unrealized (depreciation) appreciation		(1,038	)		(139	)		-		(197	)		(1,374	)
Fair value, end of period	$	420,677			65,596			19,484		16,323			522,080
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2019	$	(1,042	)		(138	)		-		(195	)		(1,374	)

The following table presents the changes in investments measured at fair value using Level 3 inputs for the nine months ended September 30, 2019:

	First Lien			Second Lien			Subordinated
	Secured			Secured			Notes to STRS				Total
	Loans			Loans			JV		Equity		Investments
Fair value, beginning of period	$	359,416			97,167			-		12,275		468,858
Funding of investments		204,180			-			19,484		2,990		226,654
Non-cash interest income		1,350			567			-		-		1,917
Accretion of discount		2,694			657			-		-		3,351
Proceeds from paydowns and sales		(156,209	)		(21,190	)		-		-		(177,399	)
Lien priority conversion		14,472			(14,472	)		-		-		-
Realized gains		(2,020	)		-			-		-		(2,020	)
Net unrealized (depreciation) appreciation		(3,206	)		2,867			-		1,058		719
Fair value, end of period	$	(3,736	)		3,335			-		1,060		659
Change in unrealized appreciation (depreciation) on investments still held as of September 30, 2019	$	(3,736	)		3,335			-		1,060		659

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.

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

Investment Type	Fair Value at September 30, 2020		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
First lien secured loans	$	346,304	Discounted cash flows	Discount rate	7.3% – 29.0% (10.6%)
				Exit EBITDA multiple	3.0x – 15.0x (7.4x)
		40,923	Guideline public companies	LTM EBITDA multiple	1.8x – 6.3x (3.6x)
		27,984	Recent transaction	Transaction price	97.8
				Exit EBITDA multiple	14.3x
		78,924	Discounted cash flows, recent transaction and consensus market pricing	Discount rate	8.1% – 10.7% (9.1%)
				Market pricing	96.5 – 100.9 (98.7)
				Transaction price	96.3 – 100.3 (98.5)
				Exit EBITDA multiple	6.0x – 11.0x (8.9x)
		731	Asset coverage	-	-
	$	494,866

Second lien secured loans	$	30,000	Discounted cash flows	Discount rate	11.9% – 12.2% (12.0%)
	$	30,000

Subordinated Note to STRS JV	$	41,073	Enterprise value	-	-
	$	41,073

Subordinated unsecured loan	$	291	Guideline public companies	LTM EBITDA multiple	6.3x
	$	291

Preferred Equity	$	857	Similar transactions	LTM EBITDA multiple	8.0x
	$	857

Common Equity	$	9,831	Discounted cash flows	Discount rate	0.2% - 18.4% (12.3%)
				Exit EBITDA Multiple	8.6x
				Discount for lack of marketability	2.0%
		1,199	Guideline public companies	LTM EBITDA multiple	6.7x
				Discount for lack of marketability	35.0%
		4,259	Similar transactions	LTM EBITDA multiple	6.0x – 14.3x (14.0x)
				Discount for lack of marketability	15.0%
	$	15,289

Warrant	$	3,604	Discounted cash flows and	Discount rate	18.4% - 20.3% (20.2%)
			Option-pricing method	Exit EBITDA multiple	5.5x – 8.6x (5.6x)
				Volatility	3.0% - 7.5% (3.2%)
				Discount for lack of marketability	10.0% - 15.0% (10.2%)
	$	3,604

Total Level 3 Investments	$	585,980

		Fair Value at			Range (Weighted
Investment Type		December 31, 2019	Valuation Techniques	Unobservable Inputs	Average)
First lien secured loans	$	204,908	Discounted cash flows	Discount rate	8.8% – 20.0% (10.9)%
				Exit multiple	4.8x – 9.0x (7.3x)
		525	Asset coverage and Recent transaction	Transaction price	100.0
		184,636	Discounted cash flows and consensus market pricing or recent transaction	Discount rate	6.2% – 11.2% (9.1)%
				Market quotes or
				transaction price	97.1 – 99.7 (98.2)
				Exit multiple	7.0x – 10.0x (8.2x)
		22,429	Guideline public companies	Exit multiple	4.0x – 5.0x (4.6x)
		5,405	Expected repayment	Repayment price	100.0
		59,972	Consensus market pricing or recent transaction	Market quotes or transaction price	95.1 – 98.0 (96.6)
	$	477,875
Second lien secured loans	$	62,155	Discounted cash flows	Discount rate	12.0% – 1 8.5% (14.9)%
				Exit multiple	6.0x
	$	62,155
Subordinated Note to STRS JV	$	26,344	Enterprise value	—	—
	$	26,344
Preferred Equity	$	1,133	Similar transactions	Transaction multiple	9.4x – 9.5x (9.5x)
	$	1,133
Common Equity	$	9,650	Discounted cash flows	Discount rate	9.1%
				Discount for lack of marketability	2.0%
	$	849	Similar transactions	Transaction multiple	6.0x – 6.8x (6.8x)
	$	10,499
Warrant	$	4,182	Discounted cash flows and	Discount rate	23.0% – 30.0% (23.8)%
			Option-pricing method	Exit multiple	5.5x – 8.0x (5.8x)
				Volatility	1.3% – 2.2% (2.1)%
				Discount for lack of marketability	10.0% – 13.0% (10.3)%
	$	4,182
Earnout and Holdback	$	84	Discounted cash flows	Discount rate	1.6%
	$	84
Total Level 3 Investments	$	582,272

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

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

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

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

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

The following table presents the amortized cost and fair value of the Company’s borrowings as of September 30, 2020 and December 31, 2019. The amortized cost disclosed below excludes debt issuance costs. The fair value of the Credit Facility (as defined in Note 6) was estimated by discounting remaining payments using applicable market rates or market quotes for similar instruments at the measurement date, if available. The fair value of the Company’s 6.0% private notes due 2023 (the “2023 Private Notes”) was estimated using discounted future cash flows to the valuation date. The fair value of the 6.5% notes due 2025, (the “2025 Notes”) was estimated using the trailing 10-day volume weighted average quoted price as of the valuation date.

	Fair	September 30, 2020				December 31, 2019
	Value Level	Amortized Cost		Fair Value		Amortized Cost		Fair Value
JPM Credit Facility	3	$	231,150	$	231,567	$	238,917	$	243,435
2023 Private Notes	3		30,000		30,950		30,000		31,558
2025 Notes	2		35,000		35,419		35,000		36,722
		$	296,150	$	297,936	$	303,917	$	311,715

NOTE 6 - BORROWINGS

Historically, the 1940 Act has permitted the Company to issue “senior securities,” including borrowing money from banks or other financial institutions, only in amounts such that its asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. In March 2018, the Small Business Credit Availability Act (the “SBCAA”) was enacted into law. The SBCAA, among other things, amended the 1940 Act to reduce the asset coverage requirements applicable to business development companies from 200% to 150% so long as the business development company meets certain disclosure requirements and obtains certain approvals. At the Company’s annual meeting of stockholders held on August 1, 2018, the Company’s stockholders approved the reduced asset coverage ratio from 200% to 150%, such that the Company’s maximum debt-to-equity ratio increased from a prior maximum of 1.0x (equivalent of $1 of debt outstanding for each $1 of equity) to a maximum of 2.0x (equivalent to $2 of debt outstanding for each $1 of equity). As a result, the Company’s asset coverage requirements applicable to senior securities decreased from 200% to 150%, effective August 2, 2018. As of September 30, 2020, the Company’s asset coverage for borrowed amounts was 206.2%.

Total borrowings outstanding and available as of September 30, 2020 were as follows:

	Maturity		Rate			Face Amount			Available
JPM Credit Facility		2024		L+2.50	%	$	231,150			18,850
2023 Private Notes		2023		6.0	%		30,000			—
2025 Notes		2025		6.5	%		35,000			—
Total debt							296,150		$	18,850
Debt issuance cost							(4,226	)
Total debt net issuance cost						$	291,924

Total borrowings outstanding and available as of December 31, 2019 were as follows:

	Maturity		Rate			Face Amount			Available
JPM Credit Facility		2024		L+2.50	%	$	238,917		$	11,083
2023 Private Notes		2023		6.0	%		30,000			—
2025 Notes		2025		6.5	%		35,000			—
Total debt							303,917		$	11,083
Debt issuance cost							(4,993	)
Total debt net issuance cost						$	298,924

Credit Facility: On December 23, 2015, WhiteHorse Credit entered into a $200,000 revolving credit and security agreement with JPMorgan Chase Bank, National Association (“JPMorgan”), as administrative agent and lender (the “Credit Facility”). On June 27, 2016, the Credit Facility was amended and restated to clarify certain terms. On June 29, 2017, WhiteHorse Credit and JPMorgan again amended and restated the terms of the Credit Facility to, among other things, (i) extend the maturity date to December 29, 2021, (ii) increase the amount contained within the accordion feature which allows for the expansion of the borrowing limit from $220,000 to $235,000 and (iii) reduce the interest rate spread applicable on outstanding borrowings to 2.75%. On May 15, 2018, the terms of the Credit Facility were again amended and restated to, among other things, permit the financing of certain assets to be held by WhiteHorse California, a wholly owned subsidiary of WhiteHorse Credit. In November 2018, the Company entered into an amendment to the Credit Facility, which, among other things, allows for a temporary reduction in the required minimum outstanding borrowings. On November 22, 2019, the terms of the Credit Facility were again amended and restated to, among other things, (i) extend the maturity date from December 29, 2021 to November 22, 2024; (ii) increase the size of the facility from $200,000 to $250,000 with an additional $100,000 accordion feature, which allows for the expansion of the borrowing limit, exercisable in increments of at least $35,000 (the “Commitment”); (iii) reduce the interest rate spread applicable on outstanding borrowings from 2.75% to 2.50%; (iv) change the minimum borrowing amount from 77.5% to 70.0% of the Commitment; (v) increase the advance rate from 57% to 60%; and (vi) extend the non-call period from October 29, 2019 to November 22, 2021.

The Credit Facility bears interest at LIBOR plus 2.50% on outstanding borrowings. The Company is required to pay a non-usage fee which accrues at 0.75% per annum on the average daily unused amount of the financing commitments to the extent the aggregate principal amount available under the Credit Facility has not been borrowed. Through May 19, 2019, the required minimum outstanding borrowings was $115,000 and then was increased to $135,000 until August 20, 2019. Between August 20, 2019 and November 22, 2019, the required minimum outstanding borrowings was $155,000. Subsequent to November 22, 2019 the minimum borrowing requirement is $175,000. In connection with the Credit Facility, WhiteHorse Credit pledged securities with a fair value of approximately $503,556 as of September 30, 2020 as collateral. The Credit Facility has a final maturity date of November 22, 2024.

Under the Credit Facility, the Company has made certain customary representations and warranties and is required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. As of September 30, 2020, the Company had $231,150 in outstanding borrowings and $18,850 undrawn under the Credit Facility. Weighted average outstanding borrowings were $191,666 and $207,941 at a weighted average interest rate of 2.80% and 3.51% for the three and nine months ended September 30, 2020, respectively. At September 30, 2020, the interest rate in effect on outstanding borrowings was 2.75%. The Company’s ability to draw down undrawn funds under the Credit Facility is determined by collateral and portfolio quality requirements stipulated in the credit and security agreement. At September 30, 2020, approximately $18,850 was available to be drawn by the Company based on these requirements.

2023 Private Notes: On July 13, 2018, the Company entered into an agreement (the “2023 Note Purchase Agreement”) to sell in a private offering $30,000 aggregate principal amount of senior unsecured 2023 Private Notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). Interest on the 2023 Private Notes is payable semiannually on February 7 and August 7, at a fixed, annual rate of 6.00%. This interest rate is subject to increase (up to 6.50%) in the event that, subject to certain exceptions, the 2023 Private Notes cease to have an investment grade rating. The 2023 Private Notes will mature on August 7, 2023, unless redeemed, purchased or prepaid prior to such date by the Company or its affiliates in accordance with their terms. The 2023 Private Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. The closing of the transaction occurred on August 7, 2018.

2025 Notes: On November 13, 2018, the Company completed a public offering of $35,000 of aggregate principal amount of 2025 Notes, the net proceeds of which were used to fund investments in debt and equity securities and repay outstanding indebtedness under its revolving credit facility. Interest on the 2025 Notes is paid quarterly on February 28, May 31, August 31 and November 30 each year, at an annual rate of 6.50%. The 2025 Notes will mature on November 30, 2025 and may be redeemed in whole or in part at any time, or from time to time, at the Company’s option on or after November 30, 2021. The 2025 Notes are direct unsecured obligations and are structurally subordinate to borrowings under the Credit Facility and will rank equally in right of payment with the Company’s other outstanding and future unsecured, unsubordinated indebtedness, including the 2023 Private Notes. The 2025 Notes are listed on the Nasdaq Global Select Market under the trading symbol “WHFBZ.”

NOTE 7 - RELATED PARTY TRANSACTIONS

Investment Advisory Agreement: WhiteHorse Advisers serves as the Company’s investment adviser in accordance with the terms of an investment advisory agreement (the “Investment Advisory Agreement”). On November 1, 2018, at an in-person meeting, the Company’s board of directors approved an amended and restated Investment Advisory Agreement. The Investment Advisory Agreement was amended and restated to reduce the base management fee on assets financed using leverage over 200% asset coverage (over 1.0x debt to equity) as further discussed below. The Company’s board of directors most recently re-approved the Investment Advisory Agreement on August 5, 2020. Subject to the overall supervision of the Company’s board of directors, WhiteHorse Advisers manages the day-to-day operations of, and provides investment management services to, the Company. Under the terms of the Investment Advisory Agreement, WhiteHorse Advisers:

•

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

•

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

•

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

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

Base Management Fee

Prior to November 1, 2018, the base management fee was calculated at an annual rate of 2.0% of the average carrying value of consolidated gross assets, including cash and cash equivalents and assets purchased with borrowed funds, at the end of the two most recently completed calendar quarters. Effective November 1, 2018, the base management fee is calculated at an annual rate equal to 2.0% of the Company’s consolidated gross assets (including cash and cash equivalents and assets purchased with borrowed funds); provided, however, the base management fee will be calculated at an annual rate equal to 1.25% of the Company’s consolidated gross assets (including cash and cash equivalents and assets purchased with borrowed funds), that exceed the product of (i) 200% and (ii) the value of the Company’s total net assets, at the end of the two most recently completed calendar quarters. Base management fees are payable quarterly in arrears and are appropriately pro-rated for any partial month or quarter.

During the three and nine months ended September 30, 2020, the Company incurred base management fees of $3,069 and $9,110, respectively. During the three and nine months ended September 30, 2019, the Company incurred base management fees of $2,834 and $7,843, net of fees waived, respectively. WhiteHorse Advisers has agreed to waive that portion of the base management fee payable with respect to cash and cash equivalents and restricted cash and cash equivalents to which it would otherwise be entitled under the Investment Advisory Agreement for the fiscal quarters ended September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019; and for the fiscal quarter ended September 30, 2019 only to the extent that the determination of base management fees would otherwise include June 30, 2019 cash and cash equivalents and restricted cash and cash equivalents for the purpose of calculating the average carrying value of consolidated gross assets.

Performance-Based Incentive Fee

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

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

Each quarterly incentive fee is subject to the Incentive Fee Cap (as defined below) and a deferral mechanism through which the investment adviser may recap a portion of such deferred incentive fees, which is referred to together as the “Incentive Fee Cap and Deferral Mechanism.”

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

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

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

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

•

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

•

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

•

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

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

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

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

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

In accordance with GAAP, the Company is also required to include the aggregate unrealized capital appreciation on investments in the calculation and accrue a capital gains incentive fee on a quarterly basis if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Advisory Agreement. If the Capital Gains Incentive Fee Base, adjusted as required by GAAP to include unrealized capital appreciation, is positive at the end of a reporting period, then GAAP requires the Company to accrue a Capital Gains Incentive Fee equal to 20% of such amount, less the aggregate amount of any Capital Gains Incentive Fees previously paid and Capital Gains Incentive Fees accrued under GAAP in all prior periods. If such amount is negative, then there is no accrual for such period. The resulting accrual under GAAP in a given period may result in either additional expense (if such cumulative amount is greater than in the prior period) or a reversal of previously recorded expense (if such cumulative amount is less than in the prior period). There can be no assurance that such unrealized capital appreciation will be realized in the future. For the three and nine months ended September 30, 2020, the Company accrued Capital Gains Incentive Fees of $1,870 and $1,243, respectively. For the three and nine months ended September 30, 2019, the Company accrued a Capital Gains Incentive Fee reversal of $(360) and $(283), respectively, which accruals are included in performance-based incentive fees in the consolidated statements of operations. As of September 30, 2020 and December 31, 2019, included in management and incentive fees payable on the consolidated statements of assets and liabilities were $1,870 and $626, respectively, for cumulative accruals of Capital Gains Incentive Fees under GAAP, including any amounts payable pursuant to the Investment Advisory Agreement as described above.

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

During the three and nine months ended September 30, 2020, the Company incurred total performance-based incentive fees of $3,819 and $5,571, respectively. During the three and nine months ended September 30, 2019, the Company incurred total performance-based incentive fees of $1,741 and $5,520, respectively.

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

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

During the three and nine months ended September 30, 2020, the Company incurred allocated administrative service fees of $171 and $513, respectively. During the three and nine months ended September 30, 2019, the Company incurred allocated administrative service fees of $159 and $475, respectively.

Co-investments with Related Parties: At September 30, 2020 and December 31, 2019, officers or employees affiliated with or employed by WhiteHorse Advisers and its related entities maintained no co-investments in the Company’s investments.

At September 30, 2020 and December 31, 2019, certain funds affiliated with WhiteHorse Advisers and its related entities maintained co-investments in the Company’s investments of $2,631,300 and $2,241,494, respectively.

STRS JV: For the three and nine month period ended September 30, 2020, the Company sold $1,335 and $66,397 of investments to STRS JV at fair value and recognized $0 and $(3) of net realized loss, respectively.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

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

The balance of unfunded commitments to extend credit was approximately $2,306 and $9,056 as of September 30, 2020 and December 31, 2019, respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company to extend credit, such as revolving credit arrangements or similar transactions. These commitments are often subject to financial or non-financial milestones and other conditions to borrow that must be achieved before the commitment can be drawn. In addition, the commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The following table summarizes the Company’s unfunded commitments as of September 30, 2020 and December 31, 2019:

	Unfunded Commitment as of
	September 30,		December 31,
	2020		2019
Revolving Loan Commitments:
BBQ Buyer, LLC	$	823	$	—
Geo Logic Systems Ltd.		306		1,288
ImageOne Industries, LLC		56		—
LHS Borrower, LLC		1,121		—
Lift Brands, Inc.		—		594
Newscycle Solutions, Inc.		—		36
WH Lessor Corp.		—		646
		2,306		2,564
Delayed Draw Loan Commitments:
Crown Brands LLC		—		850
Lab Logistics, LLC		—		572
Sklar Holdings, Inc.		—		3,039
True Blue Car Wash, LLC		—		2,031
		—		6,492
Total Unfunded Commitments	$	2,306	$	9,056

As of September 30, 2020, the Company had commitments to fund equity interests and subordinated notes in STRS JV of $15,000 and $60,000, of which $4,732 and $18,927 was unfunded, respectively. The capital commitments cannot be drawn without an affirmative vote by both the Company’s and STRS Ohio’s representatives on STRS JV’s board of managers.

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

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

COVID-19 Developments: In addition, during the three and nine months ended September 30, 2020 and subsequent to September 30, 2020, the current pandemic caused by the novel coronavirus (commonly known as “ COVID-19”) has had a significant impact on the U.S. economy. Certain of the Company's portfolio companies have been adversely impacted by the effects of the COVID-19 pandemic, which had an adverse impact on the Company’s results of operations and may continue to have an adverse impact on the Company’s future net investment income, the fair value of its portfolio investments, its financial condition and the results of operations and financial condition of the Company’s portfolio companies.

NOTE 9 - FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights:

	Nine months ended
	September 30,
	2020			2019
Per share data:⁽¹⁾
Net asset value, beginning of period	$	15.23		$	15.35

Net investment income		0.84			1.14
Net realized and unrealized (losses) gains on investments		0.31			(0.06	)
Net increase in net assets resulting from operations		1.15			1.08

Distributions declared from net investment income		(1.07	)		(1.07	)
Net asset value, end of period	$	15.31		$	15.36

Total annualized return based on market value⁽²⁾		(38.12	)%		12.72	%
Total annualized return based on net asset value		10.37	%		9.27	%
Net assets, end of period	$	314,563		$	315,494
Per share market value at end of period	$	9.79		$	13.93
Shares outstanding end of period		20,546,032			20,546,032

Ratios/Supplemental data:⁽³⁾
Ratio of expenses before incentive fees to average net assets⁽⁴⁾⁽⁵⁾		12.18	%		8.67	%
Ratio of incentive fees to average net assets⁽⁴⁾		2.46	%		2.32	%
Ratio of total expenses to average net assets⁽⁴⁾⁽⁵⁾		9.72	%		10.99	%
Ratio of net investment income to average net assets⁽⁴⁾⁽⁵⁾		7.63	%		9.86	%
Portfolio turnover ratio		22.06	%		30.72	%

(1)

Calculated using the average shares outstanding method.

(2)

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

(3)

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

(4)

WhiteHorse Advisers did not waive any base management fees during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, WhiteHorse Advisers irrevocably waived $397 of base management fees. Excluding these management fee waivers, the ratios to average net assets consisting of the ratio of expenses before incentive fees, ratio of incentive fees, ratio of total expenses and ratio of net investment income would have been 8.84%, 2.28%, 11.12% and 9.73%, respectively, for the nine months ended September 30, 2019.

(5)

Calculated using total expenses, including income tax provision.

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

NOTE 10 - CHANGE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Net increase in net assets resulting from operations	$	21,634	$	6,855	$	23,490	$	22,080
Weighted average shares outstanding		20,546,032		20,546,032		20,546,032		20,546,032
Basic and diluted per share net increase in net assets resulting from operations	$	1.06	$	0.34	$	1.15	$	1.08

NOTE 11 - SUBSEQUENT EVENTS

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

On October 9, 2020, the Company declared a special distribution of $0.125 per share, which will be payable on December 10, 2020 to stockholders of record as of October 30, 2020.

On October 20, 2020, the Company entered into a Note Purchase Agreement (the “2025 Note Purchase Agreement”) governing the issuance of $40,000 in aggregate principal amount of unsecured notes (the “2025 Private Notes ”) to qualified institutional investors in a private placement. The 2025 Private Notes have a fixed interest rate of 5.375% and are due on October 20, 2025, unless redeemed, purchased or prepaid prior to such date by the Company or its affiliates in accordance with their terms. Interest on the 2025 Private Notes will be due semiannually. This interest rate is subject to increase (up to 6.375%) in the event that, subject to certain exceptions, the 2025 Private Notes cease to have an investment grade rating. In addition, the Company is obligated to offer to repay the 2025 Private Notes at par if certain change in control events occur. The 2025 Private Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. The 2025 Private Notes were delivered and paid for on October 20, 2020. The Company intends to use the net proceeds from this offering to refinance and/or redeem existing debt and/or for general corporate purposes.

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

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

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

•

our future operating results;

•

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

•

our ability to continue to effectively manage our business due to the significant disruptions caused by the current pandemic caused by the novel coronavirus (commonly known as “COVID-19”);

•

our business prospects and the prospects of our prospective portfolio companies, including as a result of the current COVID-19 pandemic;

•

the ability of our portfolio companies to achieve their objectives;

•

our contractual arrangements and relationships with third parties;

•

changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes to the value of our assets, including changes from the impact of the current COVID-19 pandemic;

•

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

•

the impact of increased competition;

•

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

•

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

•

our ability to pay dividends or make distributions;

•

the adequacy of our cash resources and working capital;

•

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

•

the impact of future acquisitions and divestitures.

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

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we may file with the U.S. Securities and Exchange Commission, or the SEC, in the future, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

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

Overview

We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for tax purposes, we elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.

We were formed on December 28, 2011 and commenced operations on January 1, 2012. We were originally capitalized with approximately $176.3 million of contributed assets from H.I.G. Bayside Debt & LBO Fund II, L.P. and H.I.G. Bayside Loan Opportunity Fund II, L.P., each of which is an affiliate of H.I.G. Capital, L.L.C., or H.I.G. Capital. These assets were contributed as of January 1, 2012 in exchange for 11,752,383 units in WhiteHorse Finance, LLC. On December 4, 2012, we converted from a Delaware limited liability company into a Delaware corporation and elected to be treated as a business development company under the 1940 Act.

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

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

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

COVID-19 Developments

The rapid spread of COVID-19 and the related effect on the U.S. and world economy has had adverse consequences on the business operations of some of our portfolio companies and has adversely affected, and will likely continue to adversely affect, our operations and the operations of our investment adviser (including those relating to us). Our investment adviser has been monitoring the COVID-19 pandemic and its impact on our business and the business of our portfolio companies and has been focused on proactively engaging with our portfolio companies in order to collaborate with the management teams of certain portfolio companies to assess and evaluate the steps each portfolio company can take in response to the impacts of COVID-19.

We cannot predict the full impact of COVID-19, including its duration in the United States and worldwide and the extent of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, the extent to which COVID-19 and/or other disease pandemics may continue to negatively affect our and our portfolio companies’ operating results and financial condition, or the duration of any potential business or supply-chain disruption for us, our investment adviser and/or our portfolio companies, is uncertain, especially in light of the resurgence of the virus in various cities in the United States and throughout the world. Due to the ongoing business disruptions caused by COVID-19, some of our portfolio companies have experienced financial distress and have defaulted on their financial obligations to us and their other capital providers. Some of our portfolio companies have curtailed their business operations, furloughed or laid off employees, terminated relationships with service providers and deferred capital expenditures and may continue to do so for a prolonged period of time if another wave of the virus occurs. Such developments could permanently impair the business operations of our portfolio companies and likely result in a decrease in the value of our investment in any such portfolio company.

The COVID-19 pandemic and the related disruption and financial distress experienced by our portfolio companies have already had adverse effects on our results of operations, which are described in further detail below, and we expect that such adverse effects will continue for the duration of the pandemic and potentially for some time thereafter. In connection with the adverse effects of the COVID-19 pandemic, we have restructured and may need to restructure additional investments in some of our portfolio companies, which has resulted in and could result in additional diminished interest payments or in permanent impairments on our investments. The effects of the COVID-19 pandemic discussed above increase the risk that more of our portfolio investments may be placed on non-accrual status in the future. Any decreases in our net investment income would increase the portion of our cash flows dedicated to distribution payments to stockholders and to servicing our existing debt under our revolving credit facility, or the Credit Facility, with JPMorgan Chase Bank, National Association, as administrative agent and lender, or the Lender.

As of September 30, 2020, we are permitted under the 1940 Act, as a business development company, to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowing. While we are in compliance with our asset coverage requirements under the 1940 Act as of September 30, 2020, we are required to comply with various covenants pursuant to the Credit Facility. If we fail to satisfy the covenants of the Credit Facility or are unable to cure any event of default or obtain a waiver from the applicable lender, it could result in foreclosure by the lenders under the Credit Facility, which would accelerate our repayment obligations under the Credit Facility and thereby resulting in a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders. As of September 30, 2020, we were in compliance with all covenants and other requirements of the Credit Facility.

We are also subject to financial risks, including changes in market interest rates. As of September 30, 2020, nearly all of our debt investments at fair value were at floating rates, which are generally based on a risk-free index rate such as LIBOR, and many of which are subject to certain floors. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in our operating expenses or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for an analysis of the impact of hypothetical base rate changes in interest rates.

Over the past four years, our management team has sought strategies that will help us weather periods of economic decline. We have attempted to avoid deeply cyclical sectors and have only made loans where we believed a repeat of the Great Recession would allow us to recover 100% of our loans. We have focused on moderate leverage, first lien lending and have not extended a new second lien loan since 2018. Additionally, we have taken a conservative position on the Company’s liquidity, making sure we have a top-tier leverage partner and very significant cushion against default.

Over the past several months, the WhiteHorse Advisers credit team has been in close contact with the owners and management teams of each of our portfolio companies. With the rapid onset of the crisis, these owners and management teams have been actively assessing the likely impacts to their businesses and are continuing to coordinate with us to guide their companies through the fallout. In dealing with the economic decline that is occurring now and in the coming quarters, we are operating under a philosophy that we will work hand in hand with our borrowers to support them. We expect owners to support their firms with additional equity where possible, and we will react to this by showing flexibility in our terms as appropriate.

We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably quantify the full effect of COVID-19 on our financial condition, results of operations or cash flows in the future. However, we do expect that it will continue to have a negative impact on cash flows earned by us during the fourth quarter of 2020, which would result in a material adverse effect on our future net investment income, the fair value of our portfolio investments, and the results of operations and financial condition of our portfolio companies.

Revenues

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

Expenses

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

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

•

our organization;

•

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

•

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

•

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

•

the base management fee and any incentive fee;

•

distributions on our shares;

•

transfer agent and custody fees and expenses;

•

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

•

brokerage fees and commissions;

•

registration fees;

•

listing fees;

•

taxes;

•

independent directors’ fees and expenses;

•

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

•

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

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costs of holding stockholder meetings;

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our fidelity bond;

•

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

•

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

•

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

•

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

•

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

•

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

WhiteHorse Advisers and WhiteHorse Administration may pay for certain expenses that we incur, which are subject to reimbursement by us.

Recent Developments

Subsequent to September 30, 2020, market disruptions caused by the COVID-19 pandemic have continued to adversely affect the business operations of some, if not all, of our portfolio companies and have adversely affected, and may continue to adversely affect, our operations and the operations of our investment adviser. While we are closely monitoring this situation, we cannot predict the impact of COVID-19 on our future financial condition, results of operations or cash flows with any level of certainty. However, we do expect that the COVID-19 pandemic will continue to have a material adverse impact on our future net investment income, the fair value of our portfolio investments, and the results of operations and financial condition of our portfolio companies. For more information, see “COVID-19 Developments” above.

On October 9, 2020, we declared a special distribution of $0.125 per share, which will be payable on December 10, 2020 to stockholders of record as of October 30, 2020.

On October 20, 2020, we entered into an agreement governing the issuance of $40 million in aggregate principal amount of unsecured notes, or the 2025 Private Notes, to qualified institutional investors in a private placement. The 2025 Private Notes have a fixed interest rate of 5.375% and are due on October 20, 2025, unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. Interest on the 2025 Private Notes will be due semiannually. This interest rate is subject to increase (up to 6.375%) in the event that, subject to certain exceptions, the 2025 Private Notes cease to have an investment grade rating. In addition, we are obligated to offer to repay the 2025 Private Notes at par if certain change in control events occur. The 2025 Private Notes are general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by us. The 2025 Private Notes were delivered and paid for on October 20, 2020. We used the net proceeds from this offering to repay a portion of the debt outstandings under the JPM Credit Facility.

Consolidated Results of Operations

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

Investment Income

Investment income for the three and nine months ended September 30, 2020 totaled $16.5 million and $44.9 million. respectively, and was primarily attributable to interest, dividends and fees earned from investments in portfolio companies. This compares to investment income for the three and nine months ended September 30, 2019 of $17.8 million and $49.7 million, respectively. Investment income decreased primarily as a result of a decrease in non-recurring fee income, increase in non-accrual loans, as well as the decrease in LIBOR from September 30, 2019 to September 30, 2020. Investment income for the three and nine months ended September 30, 2020 included $0.6 million and $1.3 million of non-recurring fee income, respectively. Included in investment income for the three and nine months ended September 30, 2019 was $2.1 million and $6.0 million, respectively, of non-recurring fee income. We expect to generate some level of non-recurring fee income during most quarters from prepayments, amendments and other sources.

Operating Expenses

Expenses, excluding excise tax, totaled $10.4 million and $27.1 million for the three and nine months ended September 30, 2020, respectively. This compares to expenses of $8.9 million and $25.5 million for the three and nine months ended September 30, 2019, respectively.

Interest expense totaled $2.8 million and $9.7 million for the three and nine months ended September 30, 2020, respectively, and $3.5 million and $9.7 million for the three and nine months ended September 30, 2019, respectively. The decrease in interest expense was primarily due to lower interest rates resulting from a decrease in LIBOR, partially offset by a higher borrowing base.

Base management fees totaled (net of fees waived, if any) $3.1 million and $9.1 million for the three and nine months ended September 30, 2020, respectively, and $2.8 million and $7.8 million for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2020, there were no base management fees waived. For the three and nine months ended September 30, 2019, WhiteHorse Advisers waived approximately $0.0 and $0.4 million in base management fees, respectively.

Performance-based incentive fees totaled $3.8 million and $5.6 million for the three and nine months ended September 30, 2020, respectively and $1.7 million and $5.5 million for the three and nine months ended September 30, 2019, respectively. The increase in performance-based incentive fees was mainly attributable to a $1.9 million accrual of the capital gains incentive fee component, which was driven by gains recognized in the portfolio in the current period.

Administrative service fees for the three and nine months ended September 30, 2020 totaled $0.2 million and $0.5 million, respectively. This compares to administrative fees of $0.2 million and $0.5 million for the three and nine months ended September 30, 2019, respectively.

General and administrative expenses were $0.6 million and $2.2 million for the three and nine months ended September 30, 2020, respectively and $0.7 million and $1.9 million for the three and nine months ended September 30, 2019, respectively.

Excise Tax Expense

We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to be subject to tax as a RIC, we are required to meet certain source of income and asset diversification requirements, as well as timely distribute to our stockholders dividends for U.S. federal income tax purposes of an amount generally at least equal to 90% of investment company taxable income, as defined by the Code, and determined without regard to any deduction for dividends paid for each tax year. We have made and intend to continue to make the requisite distributions to our stockholders that will generally relieve us from U.S. federal income taxes.

Depending on the level of taxable income earned in a tax year, we may choose to retain taxable income in excess of current year distributions into the next tax year in an amount less than what would trigger payments of U.S. federal income tax under Subchapter M of the Code. We may then be required to incur a 4% excise tax on such income. To the extent that we determine that our estimated current year annual taxable income may exceed estimated current year distributions, we accrue excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and nine months ended September 30, 2020 and 2019, we accrued a net excise tax expense of $0.1 million and $0.5 million, and $0.2 million and $0.7 million, respectively, for U.S. federal excise tax.

Net Realized and Unrealized Gains (Losses) on Investments

For the three and nine months ended September 30, 2020, we incurred a net realized gains on investments of approximately $0.6 million and $1.1 million, respectively, which was primarily driven by sales or paydowns of portions of our positions in PMA Holdco, LLC, Fluent, LLC and Vero Parent, Inc. For the three and nine months ended September 30, 2019, we incurred a net realized loss of approximately $0.0 million and $2.0 million, respectively, which was driven by the sale of our remaining position in Outcome Health.

For the three and nine months ended September 30, 2020, we recorded net unrealized appreciation of $15.2 million and $4.9 million, respectively. For the three and nine months ended September 30, 2019, we recorded net unrealized depreciation of $1.8 million and unrealized appreciation of $0.6 million, respectively. Unrealized appreciation and depreciation generally arise from credit-related adjustments and the reversal of unrealized depreciation or appreciation due to repayments or disposals. Net unrealized appreciation during the three and nine months ended September 30, 2020 was primarily attributable to fair value increases on our investment in AG King Holdings Inc., Vessco Holdings, and Mills Fleet Farm Group LLC.

Financial Condition, Liquidity and Capital Resources

This “Liquidity and Capital Resources” section should be read in conjunction with the “COVID-19 Developments” section above.

As a business development company, we distribute substantially all of our net income to our stockholders. We generate cash primarily from offerings of securities, borrowings under the Credit Facility, and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. We expect to fund a portion of our investments through future borrowings. In the future, we may obtain borrowings under other credit facilities and from issuances of senior securities to the extent permitted by the 1940 Act. We may also borrow funds to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities or if our board of directors determines that leveraging our portfolio would be in our best interest and the best interests of our stockholders.

Our board of directors may decide to issue common stock, such as through at-the-market offerings, direct placements or otherwise, to finance our operations rather than issuing debt or other senior securities. Any decision to sell shares below the then-current net asset value per share of our common stock is subject to stockholder approval and a determination by our board of directors that such issuance and sale is in our and our stockholders’ best interests. Any sale or other issuance of shares of our common stock at a price below net asset value per share results in immediate dilution to our stockholders’ interests in our common stock and a reduction in our net asset value per share. If we were to issue additional shares of our common stock during the next 12 months, we do not intend to issue shares below the then-current net asset value per share.

Restricted cash and cash equivalents include amounts that are collected and held by the trustee appointed as custodian of the assets securing the 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 Credit Facility.

Our operating activities provided cash and cash equivalents of $25.0 million during the nine months ended September 30, 2020, primarily from the net proceeds received from realizations and repayments on our investments as well as cash provided from the net change in working capital. Our financing activities used cash and cash equivalents of $30.0 million during the nine months ended September 30, 2020, primarily due to repayments on the Credit Facility and the payment of distributions to stockholders.

Our operating activities used cash and cash equivalents of $45.0 million during the nine months ended September 30, 2019, primarily due to the net acquisition of investments. Our financing activities provided cash and cash equivalents of $33.4 million during the nine months ended September 30, 2019, primarily from net borrowings under the Credit Facility, partially offset by the payment of distributions to stockholders.

As of September 30, 2020, we had cash and cash equivalent resources of $22.9 million, including $14.1 million of restricted cash. As of the same date, we had approximately $18.9 million undrawn and available to be drawn under the Credit Facility based on the collateral and portfolio quality requirements stipulated in the related credit agreement.

As of December 31, 2019, we had cash and cash equivalent resources of $27.5 million, including $23.2 million of restricted cash. As of the same date, we had $11.1 million undrawn under the Credit Facility based on the collateral and portfolio quality requirements stipulated in the related credit and security agreement.

STRS JV

In January 2019, we and STRS Ohio, formed a joint venture, STRS JV, which invests primarily 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 LIBOR or an equivalent risk-free index rate and have a term of three to six years. STRS JV was formed as a Delaware limited liability company and is not consolidated by either us or STRS Ohio for financial reporting purposes. On July 19, 2019, STRS JV formally launched operations. As of September 30, 2020, STRS JV had total assets of $170.8 million. STRS JV’s portfolio consisted of debt investments in 18 portfolio companies as of September 30, 2020. As of September 30, 2020, the five largest investments in portfolio companies in STRS JV’s portfolio totaled $61.3 million. STRS JV invests in portfolio companies in the same industries in which we may directly invest.

We provide capital to STRS JV in the form of limited liability company, or LLC, equity interests and subordinated notes. As of September 30, 2020, we and STRS Ohio owned 60% and 40%, respectively, of the LLC equity interests of STRS JV. Our investment in STRS JV consisted of equity contributions and subordinated note advances of $10.3 million and $41.1 million as of September 30, 2020, respectively. As of the same date, we had commitments to fund equity interests and subordinated notes in STRS JV of $15 million and $60 million, of which $4.7 million and $18.9 million were unfunded, respectively. STRS JV is managed by a four-person board of managers, two of whom are selected by us and two of whom are selected by STRS Ohio.

All material decisions with respect to STRS JV, including those involving its investment portfolio, require unanimous approval of a quorum of the board of managers. Quorum is defined as (i) the presence of two members of the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of managers; provided that the individual that was elected, designated or appointed by the member with only one individual present is entitled to cast two votes on each matter; or (iii) the presence of four members of the board of managers; provided that two individuals are present that were elected, designated or appointed by each member.

Below is a summary of STRS JV's portfolio as of September 30, 2020 and December 31, 2019:

	September 30, 2020			December 31, 2019
Total investments⁽¹⁾	$	162,627		$	97,260
Weighted average effective yield on total portfolio⁽²⁾		8.1	%		8.5	%
Number of portfolio companies in STRS JV		18			10
Largest portfolio company investment⁽¹⁾	$	13,481		$	13,657
Total of five largest portfolio company investments⁽¹⁾	$	61,266		$	57,819

(1)

At fair value.

(2)

Weighted average effective yield is computed by dividing (a) annualized interest income (including interest income resulting from the amortization of fees and discounts) by (b) the weighted average cost of investment.

Investments consisted of the following:

	September 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
First lien secured loans	$	165,752	$	162,627	$	96,910	$	97,260
Total	$	165,752	$	162,627	$	96,910	$	97,260

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

	September 30, 2020				December 31, 2019
Advertising	$	8,577	5.3	%	$	8,672	8.9	%
Construction & Engineering		11,554	7.1			10,132	10.4
Data Processing & Outsourced Services		10,564	6.5			-	-
Diversified Support Services		10,031	6.2			10,497	10.8
Environmental & Facilities Services		5,225	3.2			-	-
Health Care Services		13,347	8.2			13,482	13.9
Human Resource & Employment Services		11,834	7.3			-	-
Industrial Machinery		9,899	6.1			9,990	10.3
Insurance Brokers		7,838	4.8			10,051	10.3
Internet & Direct Marketing Retail		13,481	8.3			13,657	14.1
Investment Banking & Brokerage		11,050	6.8			-	-
Packaged Foods & Meats		19,397	11.9			7,688	7.9
Personal Products		4,238	2.6			4,781	4.9
Systems Software		8,081	5.0			8,310	8.5
Technology Hardware, Storage & Peripherals		7,539	4.6			-	-
Trading Companies & Distributors		9,972	6.1			-	-
Total	$	162,627	100.00	%	$	97,260	100.00	%

See Note 4 to our consolidated financial statements for further discussion on STRS JV’s portfolio and selected balance sheet information as of September 30, 2020 and December 31, 2019 and selected statement of operations information for the three and nine months ended September 30, 2020 and for the period July 19, 2019 (commencement of operations) through September 30, 2019.

Credit Facility

On December 23, 2015, our wholly owned subsidiary, WhiteHorse Finance Credit I, LLC, or WhiteHorse Credit, entered into the $200 million Credit Facility with the Lender. On June 27, 2016, the Credit Facility was amended and restated to clarify certain terms. On June 29, 2017, the Credit Facility was again amended and restated to, among other things, (i) extend the maturity date to December 29, 2021, (ii) increase the amount contained within the accordion feature which allows for the expansion of the borrowing limit from $220 million to $235 million and (iii) reduce the interest rate spread applicable on outstanding borrowings to 2.75%. On May 15, 2018, the terms of the Credit Facility were again amended and restated to, among other things, permit the financing of certain assets to be held by WhiteHorse Finance (CA), LLC, or WhiteHorse California, a wholly owned subsidiary of WhiteHorse Credit. On November 19, 2018, we entered into an amendment, which, among other things, allows for an increase in the advance rate and a temporary reduction, through August 19, 2019, in the required minimum outstanding borrowings under the Credit Facility.

On November 22, 2019, the terms of the Credit Facility were again amended and restated to, among other things, (i) extend the maturity date from December 29, 2021 to November 22, 2024; (ii) increase the size of the facility from $200 million to $250 million with an additional $100 million accordion feature, which allows for the expansion of the borrowing limit, exercisable in increments of at least $35 million, or the Commitment; (iii) reduce the interest rate spread applicable on outstanding borrowings from 2.75% to 2.50%; (iv) change the minimum borrowing amount from 77.5% to 70.0% of the Commitment; (v) increase the advance rate from 57% to 60%; and (vi) extend the non-call period from October 29, 2019 to November 22, 2021.

As of September 30, 2020, there was $231.2 million in outstanding borrowings under the Credit Facility and, based on collateral and portfolio requirements stipulated in the Credit Facility agreement, approximately $18.9 million was available to be drawn on such date. The Credit Facility is secured by all of the assets of WhiteHorse Credit, which included loans with a fair value of $503.6 million as of September 30, 2020.

As of December 31, 2019, there was $238.9 million in outstanding borrowings under the Credit Facility and, based on collateral and portfolio requirements stipulated in the Credit Facility agreement, approximately $11.1 million was available to be drawn on such date. The Credit Facility is secured by all of the assets of WhiteHorse Credit, which included loans with a fair value of $394.9 million as of December 31, 2019.

The Credit Facility provides for borrowings in an aggregate principal amount up to $250 million with an accordion feature which allows for the expansion of the borrowing limit up to $350 million, subject to consent from the Lender and other customary conditions. The required minimum outstanding borrowings under the Credit Facility are $175 million, unless the accordion feature is exercised, at which time the required minimum outstanding borrowings will be $245 million.

Under the Credit Facility, there are two coverage tests that WhiteHorse Credit must meet on specified compliance dates in order to permit WhiteHorse Credit to make new borrowings and to make distributions in the ordinary course - a borrowing base test and a market value test. The borrowing base test compares, at any given time, the aggregate outstanding amount of all Lender advances under the Credit Facility less the amount of principal proceeds in respect of the collateral on deposit in the accounts to the net asset value of the collateral, as set forth in the credit agreement and related documentation. To meet the borrowing base test, this ratio must be less than or equal to 50%, as set forth in the credit agreement and related documentation. To meet the market value test, the value of WhiteHorse Credit’s portfolio investments must exceed a minimum of 165% of the aggregate outstanding amount of all Lender advances as set forth in the credit agreement and related documentation.

Advances under the Credit Facility are based on the three-month LIBOR plus an annual spread of 2.50%. Interest is payable quarterly in arrears. WhiteHorse Credit is required to pay a non-usage fee which accrues at 0.75% per annum on the average daily unused amount of the financing commitments, to the extent the aggregate principal amount available under the Credit Facility has not been borrowed. WhiteHorse Credit paid an upfront fee and incurred certain other customary costs and expenses in connection with obtaining the Credit Facility. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 22, 2024.

The Credit Facility and the related documents require WhiteHorse Finance and WhiteHorse Credit to, among other things, agree to make certain customary representations and to comply with customary affirmative and negative covenants. The Credit Facility also includes customary events of default for credit facilities of this nature, including breaches of representations, warranties or covenants by WhiteHorse Finance or WhiteHorse Credit, the occurrence of a change in control, or failure to maintain certain required ratios.

If we fail to perform our obligations under the credit agreement or the related agreements, an event of default may occur, which could cause the Lender to accelerate all of the outstanding debt and other obligations under the Credit Facility or to exercise other remedies under the credit agreement. Any such developments could have a material adverse effect on our financial condition and results of operations.

If any of our contractual obligations discussed above is terminated, our costs under new agreements that we enter into may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Advisory Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders.

2023 Private Notes

On July 13, 2018, we entered into an agreement, or the 2023 Note Purchase Agreement, to sell in a private offering $30 million of aggregate principal amount of unsecured notes, or the 2023 Private Notes, to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act. Interest on the 2023 Private Notes is payable semiannually on February 7 and August 7, at a fixed, annual rate of 6.00%. This interest rate is subject to increase (up to 6.50%) in the event that, subject to certain exceptions, the 2023 Private Notes cease to have an investment grade rating. The 2023 Private Notes mature on August 7, 2023, unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. The 2023 Private Notes are general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness that we may issue, including the 2025 Notes and the 2025 Private Notes. The closing of the transaction occurred on August 7, 2018.

2025 Notes

On November 13, 2018, we completed a public offering of $35.0 million of aggregate principal amount of unsecured notes due 2025, or the 2025 Notes, the net proceeds of which were used to fund investments in debt and equity securities and repay outstanding indebtedness under our revolving credit facility. Interest on the 2025 Notes is paid quarterly on February 28, May 31, August 31 and November 30 each year, at a fixed, annual rate of 6.50%. The 2025 Notes will mature on November 30, 2025 and may be redeemed in whole or in part at any time, or from time to time, at our option on or after November 30, 2021. The 2025 Notes will rank equally in right of payment with our other outstanding and future unsecured, unsubordinated indebtedness, including the 2023 Private Notes and the 2025 Private Notes. The 2025 Notes will effectively rank behind all of our existing and future secured indebtedness (including indebtedness that is initially unsecured in respect of which we subsequently grant security) in right of payment, to the extent of the value of the assets securing such indebtedness, including our Credit Facility. The 2025 Notes are listed on the Nasdaq Global Select Market under the trading symbol “WHFBZ.”

Portfolio Investments and Yield

As of September 30, 2020, our investment portfolio consisted primarily of senior secured loans across 73 positions in 54 companies with an aggregate fair value of $595.3 million. As of that date, the majority of our portfolio was comprised of senior secured loans to lower middle market borrowers and nearly all of those loans were variable-rate investments (primarily indexed to LIBOR) with fixed-rate loan investments representing 0.4% based on fair value. As of September 30, 2020, our portfolio had an average investment size of $7.7 million based on fair value (average debt investment size of $8.8 million), with investment sizes ranging from zero to $23.4 million and a weighted average effective yield of 9.2% (and a weighted average effective yield on income-producing debt investments of 9.9%).

As of December 31, 2019, our investment portfolio consisted primarily of senior secured loans across 66 positions in 51 companies with an aggregate fair value of $589.7 million. As of that date, the majority of our portfolio was comprised of senior secured loans to lower middle market borrowers and nearly all of those loans were variable-rate investments (primarily indexed to LIBOR) with the single fixed-rate loan investment representing 0% based on fair value. As of December 31, 2019, our portfolio had an average investment size of $8.7 million (average debt investment size of $10.2 million), with investment sizes ranging from zero to $26.3 million and a weighted average effective yield of 9.9% (and a weighted average effective yield on income-producing debt investments of 10.4%).

For the nine months ended September 30, 2020, we invested $126.3 million in new and existing portfolio companies, offset by repayments and sales of $129.4 million. Proceeds from sales totaled $54.2 million while repayments included $9.8 million of scheduled repayments and $65.4 million of unscheduled repayments.

For the nine months ended September 30, 2019, we invested $207.8 million in new and existing portfolio companies, offset by repayments and sales of $153.6 million. Proceeds from sales totaled $37.5 million while repayments included $17.1 million of scheduled repayments and $99 million of unscheduled repayments.

We actively monitor and manage our portfolio with regard to individual company performance as well as general market conditions. Investment decisions on new originations generally include an analysis of the impact of the new loan on our broader portfolio, including a “top-down” assessment of portfolio diversification and risk exposure. This assessment includes a review of portfolio concentration by issuer, industry, geography and type of credit as well as an evaluation of our portfolio’s exposure to macroeconomic factors and cyclical trends.

We believe that consistent, active monitoring of individual companies and the broader market is integral to portfolio management and a critical component of our investment process. Our investment adviser uses several methods to evaluate and monitor the performance and fair value of our investments, which may include the following:

•

frequent discussions with management and sponsors, including board observation rights where possible;

•

comparing/analyzing financial performance to the portfolio company’s business plan, as well as our internal projections developed at underwriting;

•

tracking portfolio company compliance with covenants as well as other metrics identified at initial investment stage, such as acquisitions, divestitures, product development and specified management hires; and

•

periodic review by the investment committee of each asset in the portfolio and more rigorous monitoring of “watch list” positions.

As part of the monitoring process, our investment adviser regularly assesses the risk profile of each of our investments and, on a quarterly basis, grades each investment on a risk scale of 1 to 5. This risk rating system is intended to identify and assess risks relative to when we initially made the investment and could be impacted by such factors as company-specific performance, changes in collateral, changes in potential exit opportunities or macroeconomic conditions.

All investments are initially assigned a rating of 2, as this grade represents a company that is meeting initial expectations with regard to performance and outlook. A rating may be improved to a 1 if, in the opinion of our investment adviser, a portfolio company’s risk of loss has been reduced relative to initial expectations. An investment will be assigned a rating of 3 if the risk of loss has increased relative to initial expectations and will be assigned a rating of 4 if our investment principal is at a material risk of not being fully repaid. A rating of 5 indicates an investment is in payment default and has significant risk of not receiving full repayment.

The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value:

Investment	September 30, 2020					December 31, 2019
Performance Rating	Investments at Fair Value (Dollars in Millions)		Percentage of Total Portfolio			Investments at Fair Value (Dollars in Millions)		Percentage of Total Portfolio
1	$	85.9		14.4	%		13.4	2.3	%
2		369.4		62.1			491.4	83.3
3		127.7		21.5			77.2	13.1
4		3.8		0.6			-	-
5		8.5		1.4			7.7	1.3
Total Portfolio	$	595.3		100.0	%	$	589.7	100.0	%

During the nine months ended September 30, 2020, thirteen investment positions moved from a rating of 2 to a rating of 3 or 4, largely due to the economic impact of the COVID-19 pandemic. See the “COVID-19 Developments” section in Note 8 to our consolidated financial statements.

Inflation

Inflation has not had a significant effect on our results of operations in any of the reporting periods presented in our consolidated financial statements. However, from time to time, inflation may impact the operating results of our portfolio companies.

Off-Balance Sheet Arrangements

We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve elements of liquidity and credit risk in excess of the amount recognized on the consolidated statements of assets and liabilities. As of September 30, 2020 and December 31, 2019, we had commitments to fund approximately $2.3 million and $9.1 million, respectively, of revolving lines of credit or delayed draw facilities to our portfolio companies. We reasonably believe that we have sufficient assets to adequately cover and allow us to satisfy our outstanding unfunded commitments.

Distributions

In order to maintain our status as a RIC and to avoid the imposition of corporate-level tax on income, we must distribute dividends to our stockholders each taxable year of an amount generally at least equal to the sum of 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses out of the assets legally available for distribution. In order to avoid the imposition of certain excise taxes imposed on RICs, we must distribute dividends in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses, or capital gain net income, 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 net income for preceding years that were not distributed during such years on which we incurred no U.S. federal income tax.

During both three and nine months ended September 30, 2020 and September 30, 2019, we declared to stockholders distributions of $0.355 and $1.065 per share, respectively for total distributions of $7.3 million and $21.9 million, respectively.

The timing and amount of our quarterly distributions, if any, are determined by our board of directors. While we intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution, we may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a business development company under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions.

To the extent our taxable earnings fall below the total amount of our distributions paid for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. During the nine months ended September 30, 2020, we estimate that distributions to stockholders included $21.9 million of ordinary income, for tax purposes, based on earnings for the fiscal year ended December 31, 2019 and current earnings for the nine months ended September 30, 2020. The specific tax characteristics of the distribution will be reported to stockholders on or after the end of the calendar year 2020 and in our periodic reports with the SEC. Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is only ordinary income or gains.

In addition, in order to satisfy the annual distribution requirement applicable to RICs, we may declare a significant portion of our dividends in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion may be as low as 10% of such dividend, for dividends declared on or before December 31, 2020 and after that, 20% of such dividend under published guidance from the Internal Revenue Service) and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder generally would be subject to tax on 100% of the fair market value of the dividend on the date the dividend is received by the stockholder in the same manner as a cash dividend, even though most of the dividend was paid in shares of our common stock.

We have adopted an “opt out” distribution reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our distribution reinvestment plan. If a stockholder opts out, that stockholder receives cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our distribution reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.

Contractual Obligations

A summary of our significant contractual payment obligations as of September 30, 2020 is as follows:

		Payments Due by Period (Dollars in millions)
				Less Than						More Than 5
		Total		1 Year		1 - 3 Years		3 - 5 Years		Years
Credit Facility	$	231.2	$	-	$	-	$	231.2	$	-
2023 Private Notes		30.0		-		30.0		-		-
2025 Notes		35.0		-		-		-		35.0
Total contractual obligations	$	296.2	$	-	$	30.0	$	231.2	$	35.0

As of September 30, 2020, we had $18.9 million of unused borrowing capacity under the Credit Facility.

We entered into the Investment Advisory Agreement with WhiteHorse Advisers in accordance with the 1940 Act on December 4, 2012, which was most recently amended on November 1, 2018. Under the Investment Advisory Agreement, WhiteHorse Advisers manages our day-to-day investment operations and provides us with access to personnel and an investment committee and certain other resources so that we may fulfill our obligation to act as a portfolio manager of WhiteHorse Credit under the Credit Facility. Payments under the Investment Advisory Agreement in future periods will be equal to (1) a management fee equal to 2% of the value of our consolidated gross assets; provided, however, that the management fee on consolidated gross assets financed using leverage over 200% asset coverage (in other words, over 1.0x debt to equity) will be equal to 1.25% and (2) an incentive fee based on our performance. See “Investment Advisory Agreement” in Note 7 to the consolidated financial statements.

We also entered into the Administration Agreement with WhiteHorse Administration on December 4, 2012. Pursuant to the Administration Agreement, WhiteHorse Administration furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations. WhiteHorse Administration also furnishes us with resources necessary for us to act as portfolio manager to WhiteHorse Credit under the Credit Facility. If requested to provide managerial assistance to our portfolio companies, WhiteHorse Administration will be paid an additional amount based on the services provided, which amount will not, in any case, exceed the amount we receive from the portfolio companies for such services. Payments under the Administration Agreement will be based upon our allocable portion of WhiteHorse Administration’s overhead expenses in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of our chief financial officer and chief compliance officer along with their respective staffs.

Related Party Transactions

We have entered into a number of business relationships with affiliated or related parties, including the following:

•

WhiteHorse Advisers manages our day-to-day operations and provides investment management services to us pursuant to the Investment Advisory Agreement.

•

WhiteHorse Administration and certain of its affiliates provide us with the office facilities and administrative services, including access to the resources necessary for us to perform our obligations towards certain portfolio companies, pursuant to the Administration Agreement.

•

We have entered into a license agreement with an affiliate of H.I.G. Capital pursuant to which we have been granted a non-exclusive, royalty-free license to use the “WhiteHorse” name.

WhiteHorse Advisers, WhiteHorse Administration or their respective affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, WhiteHorse Advisers, WhiteHorse Administration or their respective affiliates may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders. Such persons may face conflicts in the allocation of investment opportunities among us and other investment funds or accounts advised by or affiliated with WhiteHorse Advisers or WhiteHorse Administration. WhiteHorse Advisers or its affiliates will seek to allocate investment opportunities among eligible accounts in a manner that is fair and equitable over time and consistent with its allocation policy. However, we can offer no assurance that such opportunities will be allocated to us fairly or equitably in the short-term or over time.

We depend on the communications and information systems and policies of WhiteHorse Advisers and its affiliates as well as certain third-party service providers to monitor and prevent cybersecurity incidents. Our board of directors and management periodically review and assess the effectiveness of such communications and information systems and policies.

Critical Accounting Policies

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. We have identified the following as critical accounting policies.

Principles of Consolidation

Under the investment company financial accounting guidance, as formally codified in Accounting Standards Codification, or ASC, Topic 946, Financial Services - Investment Companies, we are precluded from consolidating any entity other than another investment company. As provided under ASC Topic 946, we generally consolidate any investment company when we own 100% of its partners’ or members’ capital or equity units. We own a 100% equity interest in each of WhiteHorse Credit and WhiteHorse Finance Warehouse, LLC, or WhiteHorse Warehouse, which are investment companies for accounting purposes. As such, we have consolidated the accounts of WhiteHorse Credit and WhiteHorse Warehouse into our financial statements. As a result of this consolidation, the amount outstanding under the Credit Facility is treated as our indebtedness.

Valuation of Portfolio Investments

We value our investments in accordance with ASC Topic 820 - Fair Value Measurements and Disclosures. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC Topic 820’s definition of fair value focuses on exit price in the principal, or most advantageous, market and prioritizes the use of market-based inputs over entity-specific inputs within a measurement of fair value.

Our portfolio consists primarily of debt investments. These investments are valued at their bid quotations obtained from unaffiliated market makers or other financial institutions that trade in similar investments or based on prices provided by independent third party pricing services. For investments where there are no available bid quotations, fair value is derived using proprietary models that consider the analyses of independent valuation agents as well as credit risk, liquidity, market credit spreads and other applicable factors for similar transactions.

Due to the nature of our strategy, our portfolio includes relatively illiquid investments that are privately held. Valuations of privately held investments are inherently uncertain, may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Our board of directors is ultimately responsible for determining the fair value of the portfolio investments that are not publicly traded, whose market prices are not readily available on a quarterly basis in good faith or any other situation where portfolio investments require a fair value determination. Our board of directors has retained one or more independent valuation firms to review the valuation of each portfolio investment that does not have a readily available market quotation at least once during each 12-month period. Independent valuation firms retained by our board of directors provide a valuation review on approximately 25% of our investments for which market quotations are not readily available each quarter to ensure that the fair value of each investment for which a market quote is not readily available is reviewed by an independent valuation firm at least once during each 12-month period. However, our board of directors does not intend to have de minimis investments of less than 1.5% of our total assets (up to an aggregate of 10% of our total assets) independently reviewed.

The valuation process is conducted at the end of each fiscal quarter, with a portion of our valuations of portfolio companies without market quotations subject to review by one or more independent valuation firms each quarter. When an external event occurs with respect to one of our portfolio companies, such as when a purchase transaction, public offering or subsequent equity sale occurs, we expect to use the pricing indicated by such external event to corroborate our valuation.

With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:

•

Our quarterly valuation process begins with each portfolio company or investment being initially valued by investment professionals of our investment adviser responsible for credit monitoring in accordance with our valuation procedures.

•

Preliminary valuation conclusions are then documented and discussed with our investment committee and our investment adviser.

•

The audit committee of the board of directors reviews these preliminary valuations, and on a quarterly basis, reviews the bases of the valuations by our investment adviser and the independent valuation firms.

•

At least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm.

•

The board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith.

Fair value of publicly traded instruments is generally based on quoted market prices. Fair value of non-publicly traded instruments, and of publicly traded instruments for which quoted market prices are not readily available, may be determined based on other relevant factors, including without limitation, quotations from unaffiliated market makers or independent third party pricing services, the price activity of equivalent instruments and valuation pricing models. For those investments valued using quotations, the bid price is generally used unless we determine that it is not representative of an exit price.

Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. Our fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:

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

Investments for which fair value is determined using inputs defined above as Level 3 are fair valued using the income and market approaches, which may include the discounted cash flow method, reference to performance statistics of industry comparables, relative comparable yield analysis and, in certain cases, third party valuations performed by independent valuation firms. The valuation methods can reference various factors and use various inputs such as assumed growth rates, capitalization rates and discount rates, loan-to-value ratios, liquidation value, relative capital structure priority, market comparables, compliance with applicable loan, covenant and interest coverage performance, book value, market derived multiples, reserve valuation, assessment of credit ratings of an underlying borrower, review of ongoing performance, review of financial projections as compared to actual performance, review of interest rate and yield risk. Such factors may be given different weighting depending on our assessment of the underlying investment, and we may analyze apparently comparable investments in different ways.

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. Our 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.

Fair value for each investment is derived using a combination of valuation methodologies that, in the judgment of the investment committee of the investment adviser are most relevant to such investment, including 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.

Investment Transactions and Related Investment Income and Expense

We record our investment transactions on a trade date basis, which is the date when we have determined that all material terms have been defined for the transactions. These transactions could possibly settle on a subsequent date depending on the transaction type. All related revenue and expenses attributable to these transactions are reflected on our consolidated statements of operations commencing on the trade date unless otherwise specified by the transaction documents. Realized gains and losses on investment transactions are recorded on the specific identification method.

We accrue interest income if we expect that ultimately we will be able to collect it. Generally, when an interest payment default occurs on a loan in our portfolio, or if our management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, we place the loan on non-accrual status and will cease recognizing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, we remain contractually entitled to this interest. We may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. Accrued interest is written off when it becomes probable that such interest will not be collected and the amount of uncollectible interest can be reasonably estimated. Any original issue discount, as well as any other market purchase discount or premium on debt investments, are accreted or amortized to interest income or expense, respectively, over the maturity periods of the investments. Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.

Interest expense is recorded on an accrual basis. Certain expenses related to legal and tax consultation, due diligence, rating fees, valuation expenses and independent collateral appraisals may arise when we make certain investments. These expenses are recognized in the consolidated statements of operations as they are incurred.

Loan Origination, Facility, Commitment and Amendment Fees

We may receive fees in addition to interest income from the loans during the life of the investment. We may receive origination fees upon the origination of an investment. We defer these origination fees and deduct them from the cost basis of the investment and subsequently accrete them into income over the term of the loan. We may receive facility, commitment and amendment fees, which are paid to us on an ongoing basis. We accrue facility fees, sometimes referred to as asset management fees, as a percentage periodic fee on the base amount (either the funded facility amount or the committed principal amount). Commitment fees are based upon the undrawn portion committed by us and we record them on an accrual basis. Amendment fees are paid in connection with loan amendments and waivers and we account for them upon completion of the amendments or waivers, generally when such fees are receivable. We include any such fees in fee income on the consolidated statements of operations.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements, which discusses recent accounting pronouncements applicable to us, if any.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. During the period covered by our financial statements, many of the loans in our portfolio had floating interest rates, and we expect that many of our loans to portfolio companies in the future will also have floating interest rates. These loans are usually based on a floating rate based on LIBOR that resets quarterly to the applicable LIBOR. Interest rate fluctuations may have a substantial negative impact on our investments, the value of our common stock and our rate of return on invested capital. Since we plan to use debt to finance investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. In addition, U.S. and global capital markets have experienced a higher level of stress due to the global COVID-19 pandemic which has resulted in an increase in the level of volatility across such markets and a general decline in value of securities held by us. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

Assuming that the consolidated statement of assets and liabilities as of September 30, 2020 was to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates (dollars in thousands).

	Increase(Decrease) in			Increase(Decrease) in
	Interest			Interest			Net
Basis Point Increase(Decrease)	Income			Expense			Increase(Decrease)
(100)	$	(782	)		(541	)		(241	)
100		2,119			2,311			(192	)
200		7,829			4,623			3,206
300		13,821			6,934			6,887
400		19,812			9,246			10,559
500		25,803			11,557			14,246

As of September 30, 2020, nearly all of the performing floating rate investments in our portfolio had interest rate floors. Variable-rate investments subject to a floor generally reset periodically to the applicable floor and, in the case of investments in our portfolio, quarterly to a floor based on LIBOR, only if the floor exceeds the index. Under these loans, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor.

For a discussion of the risks associated with the discontinuation of LIBOR, see “Item 1A. Risk Factors — Risks Relating to Our Business and Structure — Since we are using debt to finance our investments, and we may use additional debt or preferred stock financing going forward, changes in interest rates may affect our cost of capital, net investment income, value of our common stock and our rate of return on invested capital” in our annual report on Form 10-K for the year ended December 31, 2019.

Although management believes that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit markets, the size, credit quality or composition of the assets in our portfolio and other business developments, including borrowing, that could affect net increase in net assets resulting from operations or net income. It also does not adjust for the effect of the time-lag between a change in the relevant interest rate index and the rate adjustment under the applicable loan. Accordingly, we can offer no assurances that actual results would not differ materially from the statement above.

We utilized forward foreign currency contracts to protect ourselves against fluctuations in exchange rates. We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts to the extent permitted under the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates. See Note 3 to our consolidated financial statements for further discussion of foreign exchange forward contracts.

In addition, the COVID-19 pandemic has resulted in a decrease in LIBOR and a general reduction of certain interest rates by the U.S. Federal Reserve and other central banks. A continued decline in interest rates, including LIBOR, has resulted in, and could continue to, result in a reduction of our gross investment income. In addition, our net investment income could also decline if such decreases in LIBOR are not offset by, among other things, a corresponding increase in the spread over LIBOR in our portfolio investments, a decrease in our operating expenses or a decrease in the interest rates of our liabilities that are tied to LIBOR. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Developments.”

Item 4. Controls and Procedures

As of the period covered by this report, we, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on our evaluation, our management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective in timely alerting management, including the chief executive officer and chief financial officer, of material information about us required to be included in our periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, are based upon certain assumptions about the likelihood of future events and can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There has not been any change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, each of WhiteHorse Finance, WhiteHorse Advisers and WhiteHorse Administration is currently not a party to any material legal proceedings.

Item 1A. Risk Factors

In addition to the below risk factors and other information set forth in this report on Form 10-Q, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

We intend to continue to finance our investments with borrowed money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.

The use of leverage, including through the issuance of senior securities, magnifies the potential for gain or loss on amounts invested. We have incurred leverage in the past and currently incur leverage through the Credit Facility, 2023 Private Notes, 2025 Notes and the 2025 Private Notes and from time to time, intend to incur additional leverage to the extent permitted under the 1940 Act. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities. In the future, we may borrow from, and issue senior securities, to banks, insurance companies and other lenders. Holders of these senior securities will have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we would expect such holders to seek recovery against our assets in the event of a default.

WhiteHorse Credit has pledged, and expects to continue to pledge, all or substantially all of its assets. WhiteHorse Credit has granted, and may in the future grant, a security interest in all or a portion of its assets under the Credit Facility. In addition, under the terms of the Credit Facility, we must use the net proceeds of any investments that we sell to repay amounts then due with respect to our debt and certain other amounts owing under the Credit Facility before applying such net proceeds to other uses, such as distributing them to our stockholders.

We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instruments into which we may enter. In addition, under the terms of any credit facility or other debt instrument we enter into, we are likely to be required by its terms to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instrument before applying such net proceeds to any other uses.

If the value of our assets decreases, leverage would cause our net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses or eliminating our equity stake in a leveraged investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect our ability to make distributions on our common stock or preferred stock. Our ability to service our debt will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the management fee payable to WhiteHorse Advisers.

As a business development company, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 150%, subject to certain disclosure requirements, as is specified in the 1940 Act. If this ratio declines below 150%, we cannot incur additional debt and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so. This could have a material adverse effect on our operations, and we may not be able to make distributions to our stockholders. As of September 30, 2020, our total outstanding indebtedness was $296.2 million and our asset coverage was 206.2%.

The amount of leverage that we employ will depend on WhiteHorse Advisers’ and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our borrowings under the Credit Facility, the 2023 Private Notes, the 2025 Notes and the 2025 Private Notes or obtain other credit at all or on terms acceptable to us.

In addition, the terms governing the Credit Facility and the 2023 Private Notes, the 2025 Notes and the 2025 Private Notes and any indebtedness that we incur in the future could impose financial and operating covenants that restrict our business activities, including limitations that may hinder our ability to finance additional loans and investments or make the distributions required to maintain our ability to be subject to tax as a RIC.

Each of the 2023 Note Purchase Agreement and the 2025 Note Purchase Agreement governing the 2023 Private Notes and the 2025 Private Notes, respectively, contains additional terms and conditions for senior unsecured notes issued in a private placement, including minimum stockholders’ equity, minimum asset coverage ratio, maximum debt to equity ratio and prohibitions on certain of our fundamental changes or the fundamental changes of any subsidiary guarantor. Each of the 2023 Note Purchase Agreement and the 2025 Note Purchase Agreement also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under other indebtedness of the Company or certain significant subsidiaries, certain judgements and orders, and certain events of bankruptcy.

The breach of any of the covenants or restrictions, unless cured within the applicable grace period, would result in a default under the applicable indebtedness arrangement that would permit the lenders thereunder to declare all amounts outstanding to be due and payable. In such an event, we may not have sufficient assets to repay such indebtedness. As a result, any default could have serious consequences to our financial condition. An event of default or an acceleration under these arrangements could also cause a cross-default or cross-acceleration of another debt instrument or contractual obligation, which would adversely impact our liquidity. We may not be granted waivers or amendments to these arrangements if for any reason we are unable to comply with it, and we may not be able to refinance such arrangements on terms acceptable to us, or at all.

At our annual meeting of stockholders held on August 1, 2018, our stockholders approved the reduced asset coverage requirements applicable to senior securities from 200% to 150%, effective on August 2, 2018, such that our maximum debt-to-equity ratio increased from a prior maximum of 1.0x (equivalent of $1 of debt outstanding for each $1 of equity) to a maximum of 2.0x (equivalent to $2 of debt outstanding for each $1 of equity).

The following table illustrates the effect of leverage on returns from an investment in our common stock as of September 30, 2020, assuming that we employ leverage such that our asset coverage equals (1) our actual asset coverage as of September 30, 2020 and (2) 150%, each at various annual returns, net of expenses and as of September 30, 2020. The purpose of this table is to assist investors in understanding the effects of leverage. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.

	Assumed Return on Our Portfolio (Net of Expenses)
		-10%		-5%		0%		5%		10%
Corresponding return to common stockholder assuming actual asset coverage as of September 30, 2020 ⁽¹⁾		(21.8	)%	(12.3	)%	(2.8	)%	6.6	%	16.1	%
Corresponding return to common stockholder assuming 150% asset coverage ⁽²⁾		(40.4	)%	(23.8	)%	(7.2	)%	9.4	%	26.0	%

(1)

Assumes $625.8 million in total assets, $296.2 million in debt outstanding and $314.6 million in net assets as of September 30, 2020, and an average cost of funds of 3.5%, which is our weighted average borrowing cost as of September 30, 2020.

(2)

Assumes $1,075 million in total assets, $629.1 million in debt outstanding and $314.6 million in net assets as of September 30, 2020, and an average cost of funds of 3.1%, which would be our weighted average borrowing cost assuming 150% asset coverage as of September 30, 2020.

Based on our outstanding indebtedness of $296.2 million as of September 30, 2020 and an average cost of funds of 2.8%, 6.0% and 6.5%, which were the effective annualized interest rates of the Credit Facility, 2023 Private Notes and 2025 Notes, respectively, as of that date, our investment portfolio must experience an annual return of at least 1.8% to cover annual interest payments on our outstanding indebtedness.

Based on our outstanding indebtedness of $629.1 million on an assumed 150% asset coverage ratio and an average cost of funds of 2.8%, 6.0% and 6.5%, which were the effective annualized interest rates of the Credit Facility, 2023 Private Notes and 2025 Notes, respectively, as of that date, our investment portfolio must experience an annual return of at least 2.2% to cover annual interest payments on our outstanding indebtedness.

Global capital markets could enter a period of severe disruption and instability due to disease pandemics and other serious health events, future recessions, political instability, geopolitical turmoil and foreign hostilities. These market conditions have historically had and could again have a materially adverse effect on debt and equity capital markets in the United States, which could have a materially adverse impact on our business, financial condition and results of operations.

The U.S. and global capital markets have, from time to time, experienced periods of disruption characterized by the freezing of available credit, a lack of liquidity in the debt capital markets, significant losses in the principal value of investments, the re-pricing of credit risk in the broadly syndicated credit market, the failure of major financial institutions and general volatility in the financial markets. During these periods of disruption, general economic conditions deteriorated with material and adverse consequences for the broader financial and credit markets, and the availability of debt and equity capital for the market as a whole, and financial services firms in particular, was reduced significantly. These conditions may reoccur for a prolonged period of time or materially worsen in the future. In addition, continuing uncertainty arising from the United Kingdom’s decision to leave the European Union (commonly known as “Brexit”) could lead to further market disruptions and currency volatility, potentially weakening consumer, corporate and financial confidence and resulting in lower economic growth for companies that rely significantly on Europe for their business activities and revenues. Furthermore, uncertainty between the United States and other countries with respect to trade policies, treaties and tariffs, among other factors, have caused disruptions in the global markets, including markets in which we participate, and we cannot assure you that these market conditions will not continue or worsen in the future. We may in the future have difficulty accessing debt and equity capital markets, and a severe disruption in the global financial markets, deterioration in credit and financing conditions or uncertainty regarding U.S. government spending and deficit levels, Brexit or other global economic and political conditions, including future recessions, political instability, geopolitical turmoil and foreign hostilities, and disease, pandemics and other serious health events, could have a material adverse effect on our business, financial condition and results of operations.

In December 2019, COVID-19 was first detected in the city of Wuhan in the Hubei province of China. The spread of COVID-19 has resulted in governmental orders imposing travel restrictions and prolonged closures of many corporate offices, retail stores, manufacturing facilities, factories and other common places of public congregation around the world, which has materially disrupted the demand for our portfolio companies’ products and services and is making it more difficult for our portfolio companies to conduct their businesses. In addition, supply chains worldwide have been interrupted, slowed, or rendered inoperable as a result of the COVID-19 pandemic, and an increasing number of individuals are becoming ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Governmental mandates to control the outbreak have resulted in forced shutdowns of our portfolio companies’ facilities for extended periods. These prolonged disruptions in the business of our portfolio companies, including disruptions in their supply chains, have adversely affected their ability to obtain the necessary raw materials or components to make their products and caused a decline in the demand for their products or services. This may require, or in some cases already has required, our portfolio companies to furlough or lay off employees, terminate relationships with service providers or otherwise significantly curtail their standard business operations, which would likely cause, or already has caused, a negative impact on their operating results.

The global impact of the COVID-19 outbreak continues to evolve and is adversely affecting our operations and the operations of our portfolio companies. The COVID-19 pandemic has resulted in, and will continue to result in, among other things, the following: (i) increased draws by borrowers on revolving lines of credit; (ii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iii) volatility and disruption of markets including greater volatility in pricing and spreads, difficulty in valuing loans during periods of increased volatility, and liquidity issues; (iv) reduction in certain interest rates by the U.S. Federal Reserve and other central banks and decreased LIBOR; and (v) unfavorable economic conditions that would be expected to increase borrowers’ funding costs, limit borrowers’ access to the capital markets or result in a decision by lenders not to extend credit to borrowers. These factors are limiting our portfolio companies’ access to capital in a time of great economic distress. While government authorities have introduced creative proposals to address the needs of businesses, such actions may not adequately address the problems facing our portfolio companies.

The outbreak is likely to have a continued adverse impact on economic and market conditions and has triggered, and will likely continue to trigger a prolonged period of global economic slowdown. The full impact on global markets from COVID-19 is difficult to predict, and the degree to which COVID-19 will continue to negatively affect our operating results or the duration of any potential business disruption remains uncertain. In addition, the financial conditions and results of operations presented in this report, including our financial statements, reflect our financial position as of September 30, 2020, and may not be indicative of the full fiscal year as we expect the adverse effects of COVID-19 to be more pronounced in future periods. The full negative impact of COVID-19 on our business and results of operations will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to reduce the spread of the virus and prevent another wave of infections, all of which are beyond our control. These future events, while unpredictable, will likely adversely affect our operating results and the operating results of our portfolio companies.

We are currently operating in a period of capital markets disruption and economic uncertainty.

The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. Such disruptions are adversely affecting our business, financial condition, results of operations and cash flows, and future market disruptions and/or illiquidity will continue to negatively impact us. These unfavorable economic conditions are also increasing our funding costs and limiting our access to the capital markets, and may result in a decision by lenders not to extend credit to us in the future. These events have limited and will continue to limit our investment originations, limit our ability to grow and negatively impact our operating results and the fair values of our debt and equity investments.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

	EXHIBIT INDEX
Number	Description
31.1*	Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*

31.2*	Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1*	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2*	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	WhiteHorse Finance, Inc.

Dated: November 9, 2020	By	/s/ Stuart Aronson
		Stuart Aronson
		Chief Executive Officer
		(Principal Executive Officer)
Dated: November 9, 2020	By	/s/ Joyson C. Thomas
		Joyson C. Thomas
		Chief Financial Officer
		(Principal Accounting and Financial Officer)

WhiteHorse Finance, Inc. - FORM 10-Q - November 9, 2020

Attached files

WhiteHorse Finance, Inc. Reports