UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 
 Form 10-K 
  (Mark One)x

          

          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2018 or  o

          

          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 Incorporation or Organization)

          

          (I.R.S. Employer Identification No.)
  1450 Brickell Avenue, 31st Floor Miami, Florida

          

          33131(Address of Principal Executive Offices)

          

          (Zip Code)
 (305) 381-6999 (Registrants Telephone Number, Including Area Code) 
 Securities registered pursuant to Section 12(b) of the Act:  Title of Each Class

          

          Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share

          

          The NASDAQ Stock Market LLC
 Securities registered pursuant to Section 12(g) of the Act: None 
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.Yes o No x 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 o 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 o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or 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. (Check one):  Large accelerated filer o

          

          Accelerated filer xNon-accelerated filer o

          

          Smaller reporting company oEmerging growth company o
 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. o 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 o No x The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2018 based on the closing price on that date of $14.51 on the NASDAQ Global Select Market was approximately $102.9 million. For the purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates. There were 20,546,032 shares of the registrants common stock outstanding as of March 8, 2019. DOCUMENTS INCORPORATED BY REFERENCE None.
     TABLE OF CONTENTS WHITEHORSE FINANCE, INC.  TABLE OF CONTENTS  PagePart I.





1Item 1.Business





1Item 1A.Risk Factors





25Item 1B.Unresolved Staff Comments





59Item 2.Properties





59Item 3.Legal Proceedings





59Item 4.Mine Safety Disclosures





60Part II.





61Item 5.Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





61Item 6.Selected Financial Data





63Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations





64Item 7A.Quantitative and Qualitative Disclosure about Market Risk





79Item 8.Consolidated Financial Statements and Supplementary Data





81Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





119Item 9A.Controls and Procedures





119Item 9B.Other Information





120Part III.





121Item 10.Directors, Executive Officers and Corporate Governance





121Item 11.Executive Compensation





126Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





127Item 13.Certain Relationships and Related Transactions, and Director Independence





128Item 14.Principal Accounting Fees and Services





128Part IV.





130Item 15.Exhibits and Financial Statements





130Item 16.Form 10-K Summary





131Signatures





132
 i    TABLE OF CONTENTS PART I In this annual report on Form 10-K, except as otherwise indicated, the terms: 

          we, us, our and WhiteHorse Finance refer (unless the context otherwise requires) to WhiteHorse Finance, Inc., a Delaware corporation, and its consolidated subsidiaries, WhiteHorse Credit (as defined below), WhiteHorse California (as defined below). and WhiteHorse Finance Warehouse, LLC; 

          H.I.G. Capital refers (unless the context otherwise requires), collectively, to H.I.G. Capital, L.L.C., a Delaware limited liability company, and its affiliates. H.I.G. Capital employs all of WhiteHorse Finances investment professionals, as well as those of WhiteHorse Advisers (as defined below), WhiteHorse Administration (as defined below) and their respective affiliates; 

          WhiteHorse Credit refers to WhiteHorse Finance Credit I, LLC, a special purpose Delaware limited liability company and a wholly owned subsidiary of WhiteHorse Finance; 

          WhiteHorse California refers to WhiteHorse Finance (CA), LLC, a special purpose Delaware limited liability company and a wholly owned subsidiary of WhiteHorse Credit; 

          WhiteHorse Advisers and the Investment Adviser refer to H.I.G. WhiteHorse Advisers, LLC, a Delaware limited liability company and an affiliate of H.I.G. Capital; 

          WhiteHorse Administration and the Administrator refer to H.I.G. WhiteHorse Administration, LLC, a Delaware limited liability company and an affiliate of H.I.G. Capital; 

          Private Notes refer to the $30 million aggregate principal amount of 6.00% unsecured notes due 2023 privately issued on August 7, 2018 to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended; 

          Note Purchase Agreement refers to the note purchase agreement, dated July 13, 2018, governing the issuance and sale of the Private Notes; 

          2020 Notes refer to the $30 million aggregate principal amount of 6.50% unsecured notes due 2020 issued on July 23, 2013; 

          2025 Notes refer to the $35 million aggregate principal amount of 6.50% unsecured notes due 2025 issued on November 13, 2018; and 

          Credit Facility refers to the $200 million secured revolving credit facility between WhiteHorse Credit, as borrower, and the Lender, which refers, collectively, to JPMorgan Chase Bank, N.A., together with any additional lenders that may join the Credit Facility in the future; We were formed on December 28, 2011 and commenced operations on January 1, 2012. On December 4, 2012, we converted from a Delaware limited liability company into a Delaware corporation. In this conversion, WhiteHorse Finance, Inc. succeeded to the business of WhiteHorse Finance, LLC, and the members of WhiteHorse Finance, LLC became stockholders of WhiteHorse Finance, Inc. In this annual report on Form 10-K, we refer to these transactions as the BDC Conversion, and, where applicable, shares refer to our units prior to the BDC Conversion and to shares of common stock in our corporation afterward. Item 1.

          Business General 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 have 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, and intend to qualify annually for such treatment. 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 market as those companies with enterprise values between $50 million and $350 million. Our investment objective is to generate attractive risk-adjusted
 1    TABLE OF CONTENTS returns primarily by originating and investing in senior secured loans, including first lien and second lien facilities, to performing lower middle market companies across a broad range of industries that typically carry a floating interest rate based on the London Interbank Offered Rate, or LIBOR, and 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 make opportunistic investments at other levels of a companys capital structure, including mezzanine loans or equity interests. We also may receive warrants to purchase common stock
in connection with our debt investments. We generate current income through the receipt of interest payments, as well as origination and other fees, capital appreciation and dividends. We invest primarily in securities that are rated below investment grade by rating agencies or that may be rated below investment grade if they were so rated. Below investment grade securities, which are often referred to as junk bonds, are viewed as speculative investments because of concerns with respect to the issuers capacity to pay interest and repay principal. As of December 31, 2018, our investment portfolio consisted primarily of senior secured loans across 53 positions in 39 companies with an aggregate fair value of approximately $469.6 million. As of December 31, 2017, our investment portfolio consisted primarily of senior secured loans across 43 positions in 32 companies with an aggregate fair value of approximately $440.7 million. At both dates, the majority of our portfolio comprised senior secured loans to lower middle market borrowers. Available Information Our address is 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131. Our phone number is (305) 381-6999, and our internet address iswww.whitehorsefinance.com. We make available on our website, free of charge, our proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or the SEC. We may publish other information on our website which has not been filed with, or furnished to, the SEC.
Information contained on our website is not incorporated by reference into this annual report on Form 10-K, and you should not consider information contained on our website to be part of this annual report on Form 10-K or any other report we file with the SEC. The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the SEC atwww.sec.gov. Our Investment Adviser Our investment activities are managed by our investment adviser, WhiteHorse Advisers. WhiteHorse Advisers is an affiliate of H.I.G. Capital and is responsible for sourcing potential investments, conducting research and diligence on prospective investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments in portfolio companies on an ongoing basis. WhiteHorse Advisers has also agreed to provide us with access to personnel and its investment committee, or the investment committee. WhiteHorse Advisers is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, or the Advisers Act. Under our investment advisory agreement with WhiteHorse Advisers, or the Investment Advisory Agreement, we pay WhiteHorse Advisers a base management fee and an incentive fee for its services. WhiteHorse Advisers entered into a staffing agreement, or the Staffing Agreement, with an affiliate of H.I.G. Capital under which the affiliate has agreed to make experienced investment professionals available to WhiteHorse Advisers and to provide access to its senior investment personnel to enable WhiteHorse Advisers to perform all of its obligations under the Investment Advisory Agreement. The Staffing Agreement provides WhiteHorse Advisers with access to deal flow generated by H.I.G. Capital in the ordinary course of business and commits certain members of H.I.G. Capitals investment committee to serve as members of
WhiteHorse Advisers investment committee. In addition, under the Staffing Agreement, H.I.G. Capital is obligated to allocate investment opportunities among its managed affiliates fairly and equitably over time in accordance with its allocation policy. The Staffing Agreement provides WhiteHorse Advisers with the deal origination, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of H.I.G. Capitals senior investment professionals.
 2    TABLE OF CONTENTS An affiliate of our investment adviser, WhiteHorse Administration, under an administration agreement, or the Administration Agreement, provides the administrative services necessary for us to operate. About H.I.G. Capital H.I.G. Capital, founded in 1993, is a leading global alternative asset manager focused on the lower middle market. As of December 31, 2018, H.I.G. Capital managed approximately $26 billion of capital (based on regulatory assets under management, as reported on Form ADV) across multiple investment funds supported by approximately 375 dedicated investment professionals. These investment professionals bring a depth of experience and skills across a broad range of industries and transaction types, including primary loan originations, secondary debt purchases and special situations and distressed debt investing. Investment Strategy Our investment strategy is to generate current income and capital appreciation primarily by originating secured loans. We seek to create a broad portfolio consisting of investments generally in the range of $5 million to $25 million primarily in debt securities and loans of U.S. based lower middle market companies. We primarily target borrowers in the United States with enterprise values of $50 million to $350 million across a broad range of industries. The proceeds of our loans are used for a variety of purposes, including refinancings of existing debt, acquisition financing, or working capital to support growth or
realignment. While we focus principally on originating senior secured loans to lower middle market companies that we believe have attractive risk adjusted returns, including first lien and second lien facilities, we may also opportunistically make investments at other levels of a companys capital structure, including mezzanine loans or equity interests. We also may receive warrants to purchase common stock in connection with our debt investments. We may also invest in assets consistent with our investment strategy indirectly through the acquisitions of interests in other investment companies. We generate current income through the
receipt of interest payments, origination and other fees, and dividends. Our typical loans carry a floating interest rate based on LIBOR plus a spread, have a term of three to six years, are secured by all tangible and intangible assets of the borrower and include covenants, monitoring and information rights in favor of the lender. Target businesses will typically exhibit some or all of the following characteristics: 

          enterprise value of between $50 million and $350 million; 

          organized in the United States; 

          experienced management team; 

          stable and predictable free cash flows; 

          discernible downside protection through recurring revenue or strong tangible asset coverage; 

          products and services with distinctive competitive advantages or other barriers to entry; 

          low technology and market risk; and 

          strong customer relationships. None of these investment policies are fundamental and they may be changed without stockholder approval. We expect that, from time to time, our investments may include certain non-qualifying assets, including assets of non-U.S. companies, certain publicly traded companies and, to a lesser extent and subject to certain limits under the 1940 Act, registered or unregistered investment companies, to the extent permissible under the 1940 Act. Investment Process Overview Sourcing.  Our deal flow and idea generation for lower middle market investments primarily originates from H.I.G. Capitals existing and extensive network of informal and unconventional deal sources in the lower middle market business community. Built over the past 25 years, this deal sourcing network includes accountants, attorneys, brokers, insurance agents, consultants and financial advisors who have access to lower
 3    TABLE OF CONTENTS middle market companies. The contacts in H.I.G. Capitals network generally operate outside of the structured investment banking infrastructure and typically play a limited introductory role to the companies and their management teams. In addition, H.I.G. Capital promotes a culture in which sourcing is considered a focus for all of its approximately 375 investment professionals in each of its 20 offices, from analysts to managing directors. Lastly, H.I.G. Capitals in-house business development group of approximately 25 dedicated deal sourcing professionals supplements this effort through an outbound calling program. Due Diligence.  We believe that the cornerstone of generating attractive risk-adjusted returns is a thorough due diligence process. We utilize the same methodology to evaluate potential investments that H.I.G. Capital has used over the past 25 years, which includes employing a highly analytical, private equity-like framework for rigorously assessing companies, extensive due diligence and a disciplined risk valuation methodology that guides investment decisions. As part of every transaction we consider and analyze the following key target company criteria: (1) cash flow generation, (2) underlying asset
valuation, (3) competitive position, (4) industry dynamics and (5) strength of management. In addition, our due diligence process for lower middle market companies will typically entail: 

          a thorough review of historical and pro forma financial information; 

          on-site visits with management; 

          a review of loan documents and material contracts; 

          third-party quality of earnings accounting due diligence, when appropriate; 

          research relating to the companys business, industry, markets, products and services of competitors; 

          background checks on key managers; and 

          the commission of third-party market studies, when appropriate. Structuring Originations.  Our investment advisers team has substantial expertise in structuring and documenting loans originated to lower middle market companies. Our investment adviser works with outside counsel to structure loans with strong creditor protections and contractual controls over borrower operations. Our investment adviser works to obtain extensive operating and financial covenants, detailed reporting requirements, governance rights and board of directors seats to protect our investment while allowing the borrower the necessary flexibility to execute its business plan successfully. We
believe that our investment advisers extensive experience investing in distressed debt and special situations allows it to anticipate the form of potential restructurings in order to maximize our potential recovery in such an event, and to better structure our loan and credit documentation to protect us from risks identified in the due diligence process. Our investment adviser also evaluates the broader capital structure of the borrower to ensure that we have strong rights as compared to other participants in the borrowers capital structure. Portfolio Management and Monitoring.  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.
 4    TABLE OF CONTENTS 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 during the underwriting process; 

          tracking portfolio company compliance with covenants as well as other metrics identified at the 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 as of December 31, 2018 and 2017.  December 31, 2018

          

          December 31, 2017Investment Performance Rating

          

          Investments at Fair Value (Dollars in Millions)

          

          Percentage of Total Portfolio

          

          Investments at Fair Value (Dollars in Millions)

          

          Percentage of Total Portfolio1

          

          $

          29.5

          

          

          

          6.3

          %

          

          $

          

          

          

          

          

          %2

          

          

          376.3

          

          

          

          80.1

          

          

          

          369.7

          

          

          

          83.93

          

          

          63.7

          

          

          

          13.6

          

          

          

          70.8

          

          

          

          16.14

          

          

          0.1

          

          

          

          0.0

          

          

          

          0.2

          

          

          

          0.05

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Total Portfolio

          

          $

          469.6

          

          

          

          100.0

          %

          

          $

          440.7

          

          

          

          100.0

          %
 Investment Committee and Decision Process The investment committee oversees our investment activities, subject to the oversight of our board of directors, and is led by senior investment professionals of H.I.G. Capital. The investment committee process is intended to bring the experience and perspectives of the various members to the analysis and consideration of each investment. The investment committee process is a highly collaborative effort, typically beginning at the term sheet phase of a transaction and continuing through the close of the transaction. When an opportunity is first discussed, the investment committee assists the investment team in exploring the
key issues requiring due diligence or deal structuring and identifying the available resources within H.I.G. Capital, including other H.I.G. investment professionals or senior managers from current and former portfolio companies with specific industry experience. Throughout the transaction process, the investment team meets regularly with the
 5    TABLE OF CONTENTS investment committee in a process which requires all of the investment committees concerns to be appropriately addressed through due diligence and transaction structuring. This collaborative process between the investment team and the investment committee means that, by the time a potential transaction is ready for final approval or rejection, the investment committee members are already deeply familiar with it and have had an opportunity to address any concerns. As a result, investment committee decisions are made by consensus. The investment committee meets regularly, including special meetings on short notice, to
approve or discuss material developments on new or existing investments. Competition Our primary competitors that provide financing to lower middle market companies include public and private investment funds, including other business development companies, commercial and investment banks, commercial financing companies, specialty finance companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. For additional information concerning the competitive risks we face, see Risk Factors  Risks Relating to our Business and Structure  The highly competitive market for investment opportunities in which we operate may limit our
investment opportunities. Administration We do not have any direct employees, and our day-to-day investment operations are managed by our investment adviser. We have a chief executive officer, chief financial officer and chief compliance officer and, to the extent necessary, our board of directors may elect to hire additional personnel going forward. Under the Investment Advisory Agreement and the Administration Agreement, WhiteHorse Advisers, WhiteHorse Administration and their affiliates, respectively, have agreed to provide us with access to personnel, an investment committee and certain other resources so that we may perform our obligations as portfolio manager.
Our officers are employees of an affiliate of WhiteHorse Administration, an affiliate of our investment adviser, and our allocable portion of the cost of our chief financial officer and chief compliance officer along with their respective staffs is paid by us pursuant to the Administration Agreement. Some of our executive officers are also officers of WhiteHorse Advisers. See Business  Management Agreements   Administration Agreement. MANAGEMENT AGREEMENTS Investment Advisory Agreement WhiteHorse Advisers serves as our investment adviser in accordance with the terms of the Investment Advisory Agreement. Subject to the overall supervision of our board of directors, our investment adviser manages our day-to-day operations and provides investment management services to us. Under the terms of the Investment Advisory Agreement, WhiteHorse Advisers: 

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

          identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and 

          closes, monitors and administers the investments we make, including the exercise of any voting or consent rights. WhiteHorse Advisers services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. Under the Investment Advisory Agreement, we pay WhiteHorse Advisers a fee for investment management services consisting of a base management fee and an incentive fee. Base Management Fee The base management fee is 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); provided, however, the base management fee shall be calculated at an annual rate of 1.25% of the average carrying value of consolidated gross assets (including cash and cash equivalents and assets purchased with
 6    TABLE OF CONTENTS borrowed funds), that exceeds the product of (i) 200% and (ii) the value of our total net assets, at the end of the two most recently completed calendar quarters, and is payable in arrears. Base management fees for any partial month or quarter is appropriately pro-rated. 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 and March 31, 2019; and for the fiscal quarter ended June 30, 2019 only to the extent that the determination of base management fees would otherwise include March 31, 2019 cash and cash equivalents and restricted cash and cash equivalents for the purpose of calculating the average carrying value of consolidated
gross assets. The waived fees are not subject to recoupment by the Investment Adviser. 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 our investment adviser for any quarter if, after such payment, the cumulative incentive fees paid to our 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 recapture 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 (as defined below) 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, we will pay no incentive fee to our investment adviser in that quarter. WhiteHorse Finance 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 our 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 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, is calculated and payable quarterly in arrears, commencing with the quarter beginning January 1, 2013, based on our Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets at the end of 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 that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under 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.
 7    TABLE OF CONTENTS The operation of the first component of the incentive fee for each quarter is as follows: 

          no incentive fee is payable to our investment adviser in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the Hurdle Rate of 1.75% (7.00% annualized); 

          100% of our 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 our investment adviser. We refer to this portion of our Pre-Incentive Fee Net Investment Income (which exceeds the Hurdle Rate but is less than 2.1875%) 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, our 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 our 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 payment-in-kind, or PIK, interest or original issue discount) is paid to our investment adviser, together with interest from the date of deferral to the date of payment, only if and to the extent we actually receive 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 Pre-Incentive Fee Net Investment Income earned in subsequent quarters is below the quarterly Hurdle Rate and there is no delay of payment if Pre-Incentive Fee Net Investment Income earned in prior quarters are below the quarterly Hurdle Rate. Since the Hurdle Rate is fixed, as interest rates rise, it will be easier for our 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 our consolidated gross assets used to calculate the base management fee. This calculation 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 following is a graphical representation of the calculation of the income-based component of the incentive fee: Quarterly Incentive Fee based on Pre-Incentive Fee Net Investment Income (expressed as a percentage of the value of net assets) [GRAPHIC MISSING] Percentage of Pre-Incentive Fee Net Investment Income allocated to first component of incentive fee The second component, the capital gains component of the incentive fee, 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), commencing on January 1, 2013, and equals 20% of our cumulative aggregate realized capital gains from the beginning of each calendar year through the end of that calendar year, computed net of
 8    TABLE OF CONTENTS our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, 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 such 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. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss subject to the Incentive Fee Cap and Deferral Mechanism. For example, if we receive Pre-Incentive Fee Net Investment Income in excess of the Hurdle Rate, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses. Examples of Quarterly Incentive Fee Calculation Each of the following examples assumes that the Incentive Fee Cap and Deferral Mechanism is met. Example 1: Income Related Portion of Incentive Fee (*) Alternative 1 Assumptions Investment income (including interest, distributions, fees, etc.) = 1.25% Hurdle Rate(1) = 1.75% Base management fee(2) = 0.50% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.25% Pre-Incentive Fee Net Investment Income (investment income  (base management fee + other expenses)) = 0.50% Pre-Incentive Fee Net Investment Income does not exceed the Hurdle Rate, therefore there is no incentive fee. Alternative 2 Assumptions Investment income (including interest, distributions, fees, etc.) = 2.70% Hurdle Rate(1) = 1.75% Base management fee(2) = 0.50% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.25% Pre-Incentive Fee Net Investment Income (investment income  (base management fee + other expenses)) = 1.95% Pre-Incentive Fee Net Investment Income exceeds the Hurdle Rate, therefore there is an incentive fee. Incentive fee

          = (100% × catch-up) + (the greater of 0%AND (20% × (Pre-Incentive Fee   Net Investment Income  2.1875%))) = (100.0% × (Pre-Incentive Fee Net Investment Income  1.75%)) + 0% = 100.0% × (1.95%  1.75%) = 100.0% × 0.20% = 0.20%
 9    TABLE OF CONTENTS Alternative 3 Assumptions Investment income (including interest, distributions, fees, etc.) = 3.00% Hurdle Rate(1) = 1.75% Base management fee(2) = 0.50% Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.25% Pre-Incentive Fee Net Investment Income (investment income  (base management fee + other expenses)) = 2.25% Pre-Incentive Fee Net Investment Income exceeds the Hurdle Rate, therefore there is an incentive fee. Incentive fee

          = (100% × catch-up) + (the greater of 0% AND (20% × (Pre-Incentive Fee   Net Investment Income  2.1875%))) = (100% × (2.1875%  1.75%)) + (20.0% × (2.25%  2.1875%)) = 0.4375% + (20.0% × 0.0625%) = 0.4375% + 0.0125% = 0.45% Example 2: Capital Gains Portion of Incentive Fee Alternative 1 Assumptions Year 1:

          $20 million investment made in Company A (Investment A), and $30 million investment made in Company B (Investment B) Year 2:

          Investment A sold for $50 million and fair market value, or FMV, of Investment B determined to be $32 million Year 3:

          FMV of Investment B determined to be $25 million Year 4:

          Investment B sold for $31 million The capital gains portion of the incentive fee would be: Year 1:

          None Year 2:

          Capital gains incentive fee of $6.0 million ($30 million realized capital gains on sale of Investment A multiplied by 20.0%) Year 3:

          None; $5.0 million (20.0% multiplied by ($30 million cumulative capital gains less $5.0 million cumulative capital depreciation)) less $6.0 million (capital gains fee paid in Year 2) Year 4:

          Capital gains incentive fee of $200,000; $6.2 million ($31 million cumulative realized capital gains multiplied by 20.0%) less $6.0 million (capital gains fee paid in Year 2)  (*)

          The hypothetical amount of Pre-Incentive Fee Net Investment Income shown is based on a percentage of net assets. (1)

          Represents 7.00% annualized Hurdle Rate. (2)

          Represents 2.00% annualized base management fee. This amount does not reflect that our Investment Adviser has agreed to exclude cash and cash equivalents from the calculation of the base management fee for the calendar quarters ending September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019.
 10    TABLE OF CONTENTS Alternative 2 Assumptions Year 1:

          $20 million investment made in Company A (Investment A), $30 million investment made in Company B (Investment B) and $25 million investment made in Company C (Investment C) Year 2:

          Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million Year 3:

          FMV of Investment B determined to be $27 million and Investment C sold for $30 million Year 4:

          FMV of Investment B determined to be $35 million Year 5:

          Investment B sold for $20 million The capital gains portion of the incentive fee would be: Year 1:

          None Year 2:

          Capital gains incentive fee of $5.0 million; 20.0% multiplied by $25 million ($30 million realized capital gains on Investment A less $5 million unrealized capital depreciation on Investment B) Year 3:

          Capital gains incentive fee of $1.4 million; $6.4 million (20.0% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capital depreciation on Investment B)) less $5.0 million (capital gains fee received in Year 2) Year 4:

          None Year 5:

          None; $5.0 million of capital gains incentive fee (20.0% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million)) less $6.4 million (cumulative capital gains fee paid in Year 2 and Year 3) Example 3: Application of the Incentive Fee Cap and Deferral Mechanism Assumptions In each of Years 1 through 4 in this example, as well as in each preceding year, Pre-Incentive Fee Net Investment Income equals $40.0 million per year, which we recognized evenly in each quarter of each year and paid quarterly. This amount exceeds the Hurdle Rate and the requirement of the catch-up in each quarter of such year. As a result, the annual income related portion of the incentive fee, before the application of the Incentive Fee Cap and Deferral Mechanism in any year is $8.0 million ($40.0 million multiplied by 20%), and the cumulative income related portion of the incentive fee before the application of
the Incentive Fee Cap and Deferral Mechanism over any Incentive Fee Look-back Period prior to any payment of incentive fees during such year is $16.0 million ($8.0 million multiplied by two). All income-related incentive fees were paid quarterly in arrears. In each year preceding Year 1, we did not generate realized or unrealized capital gains or losses, no capital gain-related incentive fee was paid and there was no deferral of incentive fees Year 1:

          We did not generate realized or unrealized capital gains or losses Year 2:

          We realized a $30.0 million capital gain and did not otherwise generate realized or unrealized capital gains or losses Year 3:

          We recognized a $5.0 million unrealized capital depreciation and did not otherwise generate realized or unrealized capital gains or losses Year 4:

          We realized a $6.0 million capital gain and did not otherwise generate realized or unrealized capital gains or losses
 11    TABLE OF CONTENTS  Income Related IncentiveFee Accrued BeforeApplication of IncentiveFee Cap and DeferralMechanism

          

          Capital Gains RelatedIncentive Fee AccruedBefore Application ofIncentive Fee Cap andDeferral Mechanism

          

          Incentive Fee Cap

          

          Incentive Fees Paid andDeferredYear 1

          

          $8.0 million ($40.0 million multiplied by 20%)

          

          None

          

          $8.0 million (20% of Cumulative Pre-Incentive Fee Net Return during Incentive Fee Look-back Period of $120.0 million less $16.0 million of cumulative incentive fees paid)

          

          Incentive fees of $8.0 million paid; no incentive fees deferredYear 2

          

          $8.0 million ($40.0 million multiplied by 20%)

          

          $6.0 million (20% of $30.0 million)

          

          $14.0 million (20% of Cumulative Pre-Incentive Fee Net Return during Incentive Fee Look-back Period of $150.0 million ($120.0 million plus $30.0 million) less $16.0 million of cumulative incentive fees paid)

          

          Incentive fees of $14.0 million paid; no incentive fees deferredYear 3

          

          $8.0 million ($40.0 million multiplied by 20%)

          

          None (20% of cumulative net capital gains of $25.0 million ($30.0 million in cumulative realized gains less $5.0 million in cumulative unrealized capital depreciation) less $6.0 million of capital gains fee paid in Year 2)

          

          $7.0 million (20% of Cumulative Pre-incentive Fee Net Return during Incentive Fee Look-back Period of $145.0 million ($120.0 million plus $25.0 million) less $22.0 million of cumulative incentive fees paid)

          

          Incentive fees of $7.0 million paid; $8.0 million of incentive fees accrued but payment restricted to $7.0 million by the Incentive Fee Cap; $1.0 million of incentive fees deferredYear 4

          

          $8.0 million ($40.0 million multiplied by 20%)

          

          $0.2 million (20% of cumulative net capital gains of $31.0 million ($36.0 million cumulative realized capital gains less $5.0 million cumulative unrealized capital depreciation) less $6.0 million of capital gains fee paid in Year 2)

          

          $9.2 million (20% of Cumulative Pre-Incentive Fee Net Return during Incentive Fee Look-back Period of $151.0 million ($120.0 million plus $31.0 million) less $21.0 million of cumulative incentive fees paid)

          

          Incentive fees of $9.2 million paid ($8.2 million of incentive fees accrued in Year 4 plus $1.0 million of deferred incentive fees); no incentive fees deferred
 Payment of Our Expenses WhiteHorse Advisers provides and pays for all investment professionals of WhiteHorse Advisers and their respective staffs, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services. We bear all other costs and expenses of our operations and transactions, including: 

          our organization; 

          calculating our net asset value, or NAV, and NAV per share (including the cost and expenses of any 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;
 12    TABLE OF CONTENTS 

          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 directors 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; 

          costs of holding stockholder meetings; 

          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, such as the allocable portion of overhead under our Administration Agreement, 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. Duration and Termination The Investment Advisory Agreement, originally approved on September 18, 2012, was re-approved by our board of directors, including a majority of our directors who are not interested persons of WhiteHorse Finance, on August 1, 2018. The Investment Advisory Agreement was amended and restated and the amended and restated Investment Advisory Agreement was approved and adopted on November 1, 2018 by our board of directors, including a majority of our directors who are not interested persons of WhiteHorse Finance. Unless terminated earlier as described below, the Investment Advisory Agreement remains in effect from year to year
thereafter if approved annually by our board of directors, or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons of WhiteHorse Finance. The Investment Advisory Agreement will automatically terminate in the event of its assignment. The Investment Advisory Agreement may be terminated by either party without penalty upon not less than 60 days written notice to the other party. Any termination by us must be authorized either by our board of directors or by vote of our stockholders. See Risk Factors  Risks Relating to our Business and Structure  We depend upon key personnel of H.I.G. Capital and its affiliates. Limitation of Liability and Indemnification The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, WhiteHorse Advisers and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with the Investment Adviser, including its general partner and the Administrator are entitled to indemnification from us for any damages, liabilities, costs and expenses
 13    TABLE OF CONTENTS (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from WhiteHorse Advisers performance of its duties and obligations under the Investment Advisory Agreement or otherwise as our investment adviser. Board of Directors Approval of the Investment Advisory Agreement On August 1, 2018, our board of directors voted unanimously to re-approve the Investment Advisory Agreement, and on November 1, 2018, our board of directors voted unanimously to amend and restate the Investment Advisory Agreement in its entirety. In reaching its decision to re-approve the Investment Advisory Agreement and amend and restate the Investment Advisory Agreement, our board of directors considered information it received relating to: 

          the nature, quality and extent of the advisory and other services to be provided to us by our Investment Adviser; 

          comparative data with respect to advisory fees or similar expenses paid by other business development companies with similar investment objectives; 

          our projected operating expenses and expense ratio compared to business development companies with similar investment objectives; 

          any existing and potential sources of indirect income to our investment adviser or WhiteHorse Administration from their relationships with us and the profitability of those relationships; 

          information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; 

          the organizational capability and financial condition of our Investment Adviser and its affiliates; 

          our investment advisers practices regarding the selection and compensation of brokers that may execute our portfolio transactions and the brokers provision of brokerage and research services to our investment adviser; and 

          the possibility of obtaining similar services from other third party service providers or through an internally managed structure. In connection with their consideration of the renewal of the Investment Advisory Agreement and the adoption of the amended and restated Investment Advisory Agreement, the board of directors gave weight to each of the factors described above, but did not identify any one particular factor as controlling its decision. Based on information that the board of directors reviewed, the considerations detailed above and further discussions, at a meeting held on August 1, 2018, the board of directors, including a majority of our directors who are not interested persons of WhiteHorse Finance or the Investment Adviser, determined that the
investment advisory fee rates were reasonable in relation to the services to be provided and re-approved the Investment Advisory Agreement. Similarly, on November 1, 2018, the board of directors, including a majority of our directors who are not interested persons of WhiteHorse Finance or the Investment Adviser, determined that the investment advisory fee rates were reasonable in relation to the services to be provided and approved and adopted the amended and restated Investment Advisory Agreement. We expect that the board of directors will undertake the same or a similar review in connection with any proposed amendment to, or further renewal of, the amended and restated Investment Advisory Agreement. Administration Agreement Pursuant to the Administration Agreement, WhiteHorse Administration and its affiliates furnish us with office facilities, equipment and clerical, bookkeeping and record keeping services to enable us to operate. WhiteHorse Administration also provides us with access to the resources necessary for us to perform our obligations as portfolio manager of WhiteHorse Credit, under the Credit Facility and for certain portfolio companies. Under the Administration Agreement, WhiteHorse Administration performs, or oversees the performance of, our required administrative services, which include being responsible for the financial records
which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, WhiteHorse Administration assists us in determining and publishing our NAV, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders and
 14    TABLE OF CONTENTS generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments in respect of the obligations of WhiteHorse Administration and its affiliates under the Administration Agreement equal an amount based upon our allocable portion of WhiteHorse Administrations overhead in performing its obligations under the Administration Agreement, including rent and our allocable portion of the cost of our chief financial officer and chief compliance officer along with their respective staffs. Under the Administration Agreement, WhiteHorse Administration also
provides managerial assistance on our behalf to portfolio companies that request such assistance. The renewal of the Administration Agreement was approved by our board of directors in November 2018. The Administration Agreement may be terminated by either party without penalty upon 60 days written notice to the other party. To the extent that our Administrator outsources any of its functions, we will pay the fees associated with such functions on a direct basis, without any profit to WhiteHorse Administration. Limitation of Liability and Indemnification The Administration Agreement provides that WhiteHorse Administration and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Administrator, including its members, are not liable to us or any of our stockholders for any act or omission by it or its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Administrator, including its members, in connection with the performance of any of the Administrators duties or obligations under the Administration Agreement or
otherwise as our administrator, or for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) or losses sustained by us or our stockholders, except that the foregoing exculpation does not extend to any act or omission constituting willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations under the Administration Agreement. The Administration Agreement also provides for indemnification by us of WhiteHorse Administration and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Administrator for damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by us or our stockholders or in our
or our stockholders right) arising out of or otherwise based on WhiteHorse Administrations duties or obligations under the Administration Agreement or otherwise as our administrator, subject to the same limitations and conditions. License Agreement We have entered into a trademark license agreement, or the 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. Under this agreement, we have a right to use the WhiteHorse name for so long as WhiteHorse Advisers or one of its affiliates remains our investment adviser. The License Agreement is terminable by either party at any time in its sole discretion upon 60 days prior written notice to the other party and is also terminable by the affiliate of H.I.G. Capital in the case of certain events of
non-compliance. Other than with respect to this limited license, we have no legal right to the WhiteHorse name.
 15    TABLE OF CONTENTS REGULATION We have elected to be treated as a business development company under the 1940 Act and as a RIC, under Subchapter M of the Code. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors of a business development company be persons other than interested persons, as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the
nature of our business so as to cease to be, or to withdraw our election as, a business development company unless such change is approved by a majority of our outstanding voting securities. Our board of directors may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a business development company, we are not generally able to issue and sell our common stock at a price below the then-current NAV per share. We may, however, issue or sell our common stock at a price below the then-current NAV of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the then-current net asset value of the common stock if our board of directors determines that such sale is in the best interests of us and our stockholders, and if
our stockholders approve such sale within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an underwriter as that term is defined in the Securities Act of 1933, as amended, or the Securities Act. Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks associated with interest rate fluctuations to the extent that we are permitted to
engage in such hedging transactions without registering with the U.S. Commodity Futures Trading Commission, as a commodity pool operator. However, we may purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition financing or other investments. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than three percent of the voting stock of any registered investment company, invest more than five percent of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of one or more investment companies. With regard to that portion of
our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of these policies is fundamental, and all may be changed without stockholder approval. Qualifying Assets Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. The principal categories of qualifying assets relevant to our business are the following: (1)

          Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: (a)

          is organized under the laws of, and has its principal place of business in, the United States;
 16    TABLE OF CONTENTS (b)

          is not an investment company (other than a small business investment company, or SBIC, wholly owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and (c)

          satisfies any of the following: 

          does not have any class of securities listed on a national securities exchange or has any class of securities listed on a national securities exchange subject to a maximum market capitalization of $250 million; or 

          is controlled by a business development company or a group of companies including a business development company, and the business development company actually exercises a controlling influence over the management or policies of the eligible portfolio company, and, as a result, the business development company has an affiliated person who is a director of the eligible portfolio company. (2)

          Securities of any eligible portfolio company which we control. (3)

          Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. (4)

          Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. (5)

          Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities. (6)

          Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. The regulations defining and interpreting qualifying assets may change over time. We expect to adjust our investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area. Managerial Assistance to Portfolio Companies In addition, a business development company must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above; except that, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the business development company must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance. However, where a business development
company purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means any arrangement whereby the business development company, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. WhiteHorse Administration provides such managerial assistance on our behalf to portfolio companies that request this assistance. We may receive fees for these services and reimburse WhiteHorse Administration for its allocated costs in providing such assistance, subject to review and approval by our board of directors, including our independent directors.
 17    TABLE OF CONTENTS Temporary Investments Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, so long as such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a
specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would generally not meet the Diversification Tests (as defined below) in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Investment Adviser monitors the creditworthiness of the counterparties with which we enter into repurchase agreement transactions. Senior Securities We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as that term is defined in the 1940 Act, is at least equal to 150% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to five percent of the value of our total
assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see Risk Factors  Risks Relating to our Business and Structure   Regulations governing our operation as a business development company, including those related to the issuance of senior securities, will affect our ability to, and the way in which we, raise additional debt or equity capital. Code of Ethics We and WhiteHorse Advisers have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. For additional information, see Item 10. Directors, Executive Officers and Corporate Governance  Code of Ethics. Compliance Policies and Procedures We and our Investment Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our chief compliance officer is responsible for administering our policies and procedures. Proxy Voting Policies and Procedures We have delegated our proxy voting responsibility to our Investment Adviser. The Proxy Voting Policies and Procedures of our Investment Adviser are described below. The guidelines are reviewed periodically by our Investment Adviser and our non-interested directors and, accordingly, are subject to change. For purposes of these Proxy Voting Policies and Procedures described below, we, our and us refers to our Investment Adviser. Introduction As an investment adviser registered under the Advisers Act, we have a fiduciary duty to act solely in the best interests of our clients. As part of this duty, we recognize that we must vote client securities in a timely manner free of conflicts of interest and in the best interests of our clients. These policies and procedures for voting proxies for our investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
 18    TABLE OF CONTENTS Proxy Policies We vote proxies relating to our clients portfolio securities in what we perceive to be the best interest of our clients stockholders. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by our clients. In most cases, we will vote in favor of proposals that we believe are likely to increase the value of our clients portfolio securities. Although we will generally vote against proposals that may have a negative impact on our clients portfolio securities, we may vote for such a proposal if there exists compelling long-term
reasons to do so. Our proxy voting decisions are made by the senior officers who are responsible for monitoring each of our clients investments. To ensure that our vote is not the product of a conflict of interest, we require that: (1) anyone involved in the decision making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted
influence from interested parties. Where conflicts of interest may be present, we will disclose such conflicts, including to us, and may request guidance on how to vote such proxies. Proxy Voting Records You may obtain information without charge about how we voted proxies during the most recent 12-month period ended June 30 (1) by making a written request for proxy voting information to: Investor Relations, 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131 or by calling us collect at (305) 381-6999; and (2) on the SECS websitehttp://www.sec.gov. Privacy Principles We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties. Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third party administrator). We restrict access to non-public personal information about our stockholders to employees of our Investment Adviser and its affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders. Other Regulatory Considerations Under the 1940 Act, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office. We will be periodically examined by the SEC for compliance with the 1940 Act. We and the Investment Adviser are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of the U.S. federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates, including the Investment Adviser, without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the prohibition
 19    TABLE OF CONTENTS on transactions by business development companies with affiliates to prohibit joint transactions among entities that share a common investment adviser. The staff of the SEC has granted no-action relief permitting purchases of a single class of privately placed securities provided that the Investment Adviser negotiates no term other than price and certain other conditions are met. Except in certain limited circumstances, we will be unable to invest in any issuer in which another account sponsored or managed by our Investment Adviser has previously invested. On July 8, 2014, we received an exemptive relief order from the SEC, or the Exemptive Relief Order, which permits us to participate in negotiated investments with our affiliates, subject to certain conditions, and therefore provides stockholders with access to a broader range of investment opportunities. We may issue and sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV per share of our common stock if our board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board, closely approximates the market value of such securities (less any distributing commission or discount). Our rights offering completed on November 20,
2015 resulted in the issuance of 3,321,033 additional shares of common stock at a price below the then-current NAV per share. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example: 

          pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our chief executive officer and chief financial officer must certify the accuracy of the financial statements contained in our periodic reports; 

          pursuant to Item 307 of Regulation S-K under the Securities Act, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures; 

          pursuant to Rule 13a-15 under the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control over financial reporting. This report must be audited by our independent registered public accounting firm beginning with the earlier of our fiscal year ending December 31, 2017 and the year in which our revenues first exceed $1.0 billion; and 

          pursuant to Item 308 of Regulation S-K under the Securities Act and Rule 13a-15 under the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated under it. We continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and take actions necessary to ensure that we are in compliance with that act. The NASDAQ Global Select Market Corporate Governance Regulations The NASDAQ Global Select Market has adopted corporate governance regulations that listed companies must comply with. As of the date of this report, we were in compliance with such corporate governance listing standards applicable to business development companies. Election to Be Taxed as a RIC As a business development company, we have elected to be treated as a RIC under Subchapter M of the Code, and intend to continue to qualify annually for such treatment. As a RIC, we generally are not subject to corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute as dividends for U.S. federal income tax purposes to our stockholders. To qualify as a RIC, we must meet
 20    TABLE OF CONTENTS certain source-of-income and asset diversification requirements (as described below). In addition, we must distribute to our stockholders, for each taxable year, dividends of an amount at least equal to 90% of the sum of our investment company taxable income, which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses, plus the excess of any gross income exempt from U.S. federal income tax under Section 103(a) of the Code over deductions related to such tax-exempt income determined without regard to any deduction for dividends paid.
In this annual report on Form 10-K, we refer to this distribution requirement as the Annual Distribution Requirement. Taxation as a RIC If we: 

          qualify as a RIC; and 

          satisfy the Annual Distribution Requirement; then we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain, defined as net long-term capital gains in excess of net short-term capital losses, we distribute as dividends for U.S. federal income tax purposes to our stockholders. We will be subject to U.S. federal income tax at regular corporate rates on any taxable income, including net capital gain, not distributed to our stockholders. We will be subject to a 4% nondeductible U.S. federal excise tax on our undistributed income unless we distribute in a timely manner dividends of an amount at least equal to the sum of (1) 98% of our ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one-year period ending October 31 in that 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 did not incur any U.S. federal income tax, or the Excise Tax
Avoidance Requirement. We intend to make sufficient distributions each taxable year to satisfy the Excise Tax Avoidance Requirement. In order to qualify as a RIC for U.S. federal income tax purposes, we must: 

          qualify to be treated as a business development company under the 1940 Act at all times during each taxable year; 

          derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities, and net income derived from interests in qualified publicly traded partnerships (partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive at least 90% of their income from interest, dividends and other permitted RIC income), or the 90% Income Test; and 

          diversify our holdings so that at the end of each quarter of the taxable year: 

          at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and 

          no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in the securities of one or more qualified publicly traded partnerships (together, the Diversification Tests). We may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or foreign income, franchise or withholding liabilities.
 21    TABLE OF CONTENTS We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt instruments that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income each taxable year a portion of the original issue discount that accrues over the life of the instruments, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our
investment company taxable income for the taxable year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount. Recent tax legislation may, pending further regulatory guidance, require us to reserve market discount currently. Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (1) treat dividends that would otherwise constitute qualified dividend income as non-qualified dividend income, (2) treat dividends that would otherwise be eligible for the corporate dividends received deduction as ineligible for such treatment, (3) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (4) convert lower-taxed long-term capital gain into higher-taxed short-term capital gain or ordinary income, (5) convert an ordinary loss or a deduction into a
capital loss (the deductibility of which is more limited), (6) cause us to recognize income or gain without a corresponding receipt of cash, (7) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (8) adversely alter the characterization of certain complex financial transactions and (9) produce income that will not be qualifying income for purposes of the 90% Income Test. We intend to monitor our transactions and may make certain tax elections to mitigate the effect of these provisions and prevent our disqualification as a RIC. Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long term or short term, depending on how long we held a particular warrant. Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain asset coverage tests are met. Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our qualification as a RIC, including the Diversification Tests. If we dispose of
assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. Investments in these types of instruments may present special tax issues for us. U.S. federal income tax rules are not entirely clear about issues such as when we may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt
obligations in a bankruptcy or workout context are taxable. These and other issues will be addressed by us to the extent necessary in order to seek to ensure that we distribute sufficient income in order to avoid the imposition of any material U.S. federal income or excise tax liability. If we acquire the equity securities of certain non-U.S. entities classified as corporations for U.S. federal income tax purposes that earn at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing such passive income (passive foreign investment companies, or PFICs), we could be subject to federal income tax and additional interest charges on excess distributions received from such PFICs or gain from the sale of stock in such PFICs, even if all income or gain actually
received by us is timely distributed to our stockholders. We would not be able to pass through to our stockholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any such
 22    TABLE OF CONTENTS election could require us to recognize taxable income or gain without the concurrent receipt of cash. We intend to limit and/or manage our holdings in PFICs to minimize our liability for any such taxes and related interest charges. If we hold greater than 10% of the interests treated as equity for U.S. federal income tax purposes in a foreign corporation that is treated as a controlled foreign corporation, or CFC, we may be treated as receiving a deemed distribution (taxable as ordinary income) each taxable year from such foreign corporation in an amount equal to our pro rata share of the corporations income for such taxable year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such taxable year. We would be required to include the amount of a deemed distribution from a CFC
when computing our investment company taxable income as well as in determining whether we satisfy the distribution requirements applicable to RICs, even to the extent the amount of our income deemed recognized from the CFC exceeds the amount of any actual distributions from the CFC and our proceeds from any sales or other dispositions of CFC stock during a taxable year. In general, a foreign corporation will be considered a CFC if greater than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. Shareholders. A U.S. Shareholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of a foreign corporation. Under recently proposed Treasury Regulations, certain income derived by us from a CFC or PFIC with respect to which we have made a qualified electing fund, or QEF, election would generally constitute qualifying income for purposes of determining our ability to be subject to tax as a RIC only to the extent the CFC or the PFIC makes distributions of that income to us. As such, we may be restricted in our ability to make QEF elections with respect to our holdings in issuers that could be treated as PFICs or implement certain restrictions with respect to any issuers that could be treated as CFCs in order to limit our tax liability
or maximize our after-tax return from these investments. Our functional currency, for U.S. federal income tax purposes, is the U.S. dollar. Under the Code, foreign exchange gains and losses realized by us in connection with certain transactions involving foreign currencies, or payables or receivables denominated in a foreign currency, as well as certain non-U.S. dollar denominated debt securities, certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, and similar financial instruments are subject to Code provisions that generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and
character of distributions to our stockholders. Any such transactions that are not directly related to our investment in securities (possibly including speculative currency positions or currency derivatives not used for hedging purposes) also could, under future Treasury regulations, produce income not among the types of qualifying income for purposes of the 90% Income Test. Some of the income and fees that we may recognize will not satisfy the 90% Income Test. In order to mitigate the risk that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may be required to recognize such income and fees indirectly through one or more entities classified as corporations for U.S. federal income tax purposes. Such corporations will be required to incur U.S. corporate income tax on their earnings, which ultimately will reduce our return on such income and fees. Failure to Qualify as a RIC If we were unable to qualify for continued treatment as a RIC and are unable to cure the failure, for example, by disposing of certain investments quickly or raising additional capital to prevent the loss of RIC status, we would be subject to tax on all of our taxable income at regular corporate rates. The Code provides certain relief from RIC disqualification due to failures of the source of income and asset diversification requirements, although there may be additional taxes due in such cases. We cannot assure you that we would qualify for any such relief should we fail the 90% Income Test or the Diversification Tests.
 23    TABLE OF CONTENTS Should failure occur, not only would all our taxable income be subject to tax at regular corporate rates, we would not be able to deduct distributions to stockholders in computing our taxable income, nor would they be required to be made. Distributions, including distributions of net long-term capital gain, would generally be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, certain corporate stockholders would be eligible to claim a dividends received deduction with respect to such dividends, and
non-corporate stockholders would generally be eligible to treat such dividends as qualified dividend income, which is subject to reduced rates of U.S. federal income tax. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of a stockholders tax basis in our shares, and any remaining distributions would be treated as a capital gain. If we fail to qualify as a RIC for a period greater than two taxable years, to qualify as a RIC in a subsequent taxable year we may be subject to regular corporate tax on any net built-in gains with respect to certain of our assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that we elect to recognize on requalification or when recognized over the next five taxable years.
 24    TABLE OF CONTENTS Item 1A.

          Risk Factors You should carefully consider these risk factors, together with all of the other information included in this annual report on Form 10-K, including our consolidated financial statements and the related notes thereto, before you decide whether to make an investment in our securities. The risks set out below are not the only risks we face. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, the NAV of our common stock and the trading price of our securities could decline, and you may lose all or part of your investment. Risks Relating to Economic Conditions Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability. The current worldwide financial market situation, as well as growing social and political tensions in the United States and around the world, may contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide through economic sanctions and otherwise. Since 2010, several European Union, or EU, countries, including Greece, Ireland, Italy, Spain, and Portugal, have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other
EU countries. In June 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, which is expected to occur on March 29, 2019. The implications of the United Kingdoms pending withdrawal from the European Union are unclear at present. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as China, may have a severe impact on the worldwide and United States financial markets. In addition, the policies of the current U.S. presidential administration may impact, among other things, the U.S. and global economy and international trade and relation, among other areas, and the impact of such policies on us, are unclear at present. We do not know how long the financial markets will be affected by these events and cannot predict the effects of these or similar
events in the future on the U.S. economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so. Risks Relating to Our Business and Structure The constraints imposed on us as a business development company and RIC may hinder the achievement of our investment objective. The 1940 Act and the Code impose numerous constraints on the operations of business development companies and RICs that do not apply to other investment vehicles managed by H.I.G. Capital and its affiliates. For example, business development companies are required, for example, to invest at least 70% of their total assets in qualifying assets, including U.S. private or thinly-traded public companies, cash, cash equivalents, U.S. government securities and other high-quality debt instruments that mature in one year or less from the date of investment. Subject to certain exceptions for follow-on investments and distressed
companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such issuer has a common equity market capitalization that is less than $250 million at the time of such investment. Moreover, qualification for taxation as a RIC requires satisfaction of source-of-income, asset diversification and distribution requirements. These constraints may hinder our and our Investment Advisers ability to take advantage of attractive investment opportunities and to achieve our investment objective. Any failure to operate under these constraints could subject us to enforcement action by the SEC, cause us to fail to satisfy the requirements associated with RIC status, cause us to fail the 70% test described above or otherwise have a material adverse effect on our business, financial condition or results of operations. We may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could be found to be in violation of the 1940 Act provisions applicable to business
 25    TABLE OF CONTENTS development companies and possibly lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, the rules applicable to business development companies could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inopportune times in order to comply with the 1940 Act. If we need to dispose of such investments quickly, it may be difficult to dispose of such investments on favorable terms, or at all.
For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss or otherwise for less than we could have received if we were able to sell them at a later time. We depend upon key personnel of H.I.G. Capital and its affiliates. We are an externally managed business development company, and therefore we do not have any internal management capacity or employees. We depend on the diligence, skill and network of business contacts of our Investment Adviser to achieve our investment objective. We expect that our Investment Adviser will evaluate, negotiate, structure, close and monitor our investments in accordance with the terms of the Investment Advisory Agreement. Our Investment Adviser is an affiliate of H.I.G. Capital and depends upon access to the investment professionals and other resources of H.I.G. Capital and its affiliates to fulfill its obligations to us under the Investment Advisory Agreement. WhiteHorse Advisers also depends upon H.I.G. Capital to obtain access to deal flow generated by the professionals of H.I.G. Capital. Under the Staffing Agreement, an affiliate of H.I.G. Capital has agreed to provide our Investment Adviser with the resources necessary to fulfill these obligations. The Staffing Agreement provides that the affiliate will make available to WhiteHorse
Advisers experienced investment professionals and access to the senior investment personnel of H.I.G. Capital for purposes of evaluating, negotiating, structuring, closing and monitoring our investments. We are not a party to the Staffing Agreement and cannot assure you that the affiliate will fulfill its obligations under the agreement. If the affiliate fails to perform, we cannot assure you that WhiteHorse Advisers will enforce the Staffing Agreement, that such agreement will not be terminated by either party or that we will continue to have access to the investment professionals of H.I.G. Capital and its affiliates or their market knowledge and deal flow. We depend upon the senior professionals of H.I.G. Capital to maintain relationships with potential sources of lending opportunities, and we intend to rely to a significant extent upon these relationships to provide us with potential investment opportunities. We cannot assure you that these individuals will continue to indirectly provide investment advice to us. If these individuals, including the members of our investment committee, do not maintain their existing relationships with H.I.G. Capital, maintain existing relationships or develop new relationships with other sources of investment opportunities, we may not be able to
grow our investment portfolio. In addition, individuals with whom the senior professionals of H.I.G. Capital have relationships are not obligated to provide us with investment opportunities. Therefore, we cannot assure you that such relationships will generate investment opportunities for us. Our business model depends to a significant extent upon H.I.G. Capitals proprietary deal-flow network of informal and unconventional potential deal sources in the lower middle market business community. Any inability of H.I.G. Capital to maintain or develop this network, or the failure of this network to generate investment opportunities, could adversely affect our business. We depend upon H.I.G. Capital to maintain its extensive, proprietary lower middle market deal sourcing network, and we expect to rely to a significant extent upon this network to provide us with investment opportunities. This network of informal and unconventional deal sources in the lower middle market business community includes accountants, attorneys, brokers, insurance agents, consultants and financial advisors who have access to lower middle market companies. If H.I.G. Capital fails to maintain such sourcing network, or to develop new relationships with other sources of investment opportunities, we will not be able to
grow our investment portfolio. In addition, individuals with whom H.I.G. Capital has relationships are not obligated to provide us with investment opportunities, and we can offer no assurance that these relationships will generate investment opportunities for us in the future.
 26    TABLE OF CONTENTS If our Investment Adviser is unable to manage our investments effectively, we may be unable to achieve our investment objective. Our ability to achieve our investment objective depends on our ability to manage our business and to grow our business. This depends, in turn, on our Investment Advisers ability to identify, invest in and monitor companies that meet our investment criteria. This, in turn, depends on the ability of H.I.G. Capitals investment professionals to identify, invest in and monitor companies that meet our investment criteria. The achievement of our investment objective on a cost-effective basis will depend upon our Investment Advisers execution of our investment process, its ability to provide competent, attentive and
efficient services to us and our access to financing on acceptable terms. Our Investment Adviser has substantial responsibilities under the Investment Advisory Agreement. The personnel of H.I.G. Capital who are made available to our Investment Adviser under the Staffing Agreement are engaged in other business activities and may be called upon to provide managerial assistance to our portfolio companies. These and other demands on their time could distract them, divert their time and attention or otherwise cause them not to dedicate a significant portion of their time to our businesses which could slow our rate of investment. Any failure to manage our business could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may not replicate the historical results achieved by other entities managed or sponsored by members of our investment committee or by H.I.G. Capital or its affiliates. Our primary focus in making investments generally differs from that of many of the investment funds, accounts or other investment vehicles that are or have been managed by members of our investment committee or sponsored by H.I.G. Capital or its affiliates. In addition, investors in our common stock do not acquire an interest in any such investment funds, accounts or other investment vehicles that are or have been managed by members of our investment committee or sponsored by H.I.G. Capital or its affiliates. We cannot assure you that we will replicate the historical results achieved by members of the investment committee, and
we caution you that our investment returns could be substantially lower than the returns achieved by them in prior periods. Additionally, all or a portion of the prior results may have been achieved in particular market conditions which may never be repeated. Moreover, current or future market volatility and regulatory uncertainty may have an adverse impact on our future performance. The highly competitive market for investment opportunities in which we operate may limit our investment opportunities. A number of entities continue to compete with us to make investments in lower middle market companies. We compete with public and private funds, including other business development companies, commercial and investment banks, commercial financing companies, specialty finance companies, hedge funds and, to the extent they provide an alternative form of financing, private equity funds. Additionally, as competition for investment opportunities has increased, alternative investment vehicles, such as hedge funds and collateralized loan obligations, have invested in lower middle market companies. As a result of these new entrants,
competition for investment opportunities in lower middle market companies has intensified. Many of our potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from
time to time, and we cannot assure you that we will be able to identify and make investments that are consistent with our investment objective. Participants in our industry compete on several factors, including price, flexibility in transaction structuring, customer service, reputation, market knowledge and speed in decision-making. We do not intend to compete primarily based on the interest rates we offer, and we believe that some of our competitors may make loans with interest rates that are lower than the rates we offer. We may lose investment opportunities if we do not match our competitors pricing, terms and structure. However, if we match our competitors pricing, terms and structure, we may reduce our net investment income and increase our risk of
credit loss.
 27    TABLE OF CONTENTS We have elected to be treated as a RIC and intend to qualify annually for such treatment. If we are unable to qualify as a RIC, we will be subject to corporate-level income tax. We have elected to be treated as a RIC under the Code and intend to qualify annually for such treatment. To qualify as a RIC under the Code, we must meet certain income source, asset diversification and annual distribution requirements. The Annual Distribution Requirement for a RIC is satisfied if we distribute 90% of our ordinary income and realized net short term capital gains in excess of realized net long term capital losses, if any, each taxable year as dividends for U.S. federal income tax purposes to our stockholders. To the extent we use preferred stock or debt financing in the future, we may be subject to certain
asset coverage ratio requirements under the 1940 Act and financial covenants that could, under certain circumstances, restrict us from making distributions necessary to be subject to tax as a RIC. If we fail to make sufficient distributions, as a result of contractual restrictions in the Credit Facility or otherwise, we may fail to qualify to be subject to tax as a RIC and, thus, may be subject to corporate-level income tax. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of our RIC status. Because we anticipate that most of our investments will be in the debt of relatively illiquid lower middle market private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to qualify as a RIC for any reason and remain or become
subject to corporate-level income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders. Our returns will be reduced by any corporate income tax that our subsidiaries pay. We may be required to recognize certain income and fees indirectly through one or more entities treated as corporations for U.S. federal income tax purposes. Such corporations will be required to incur corporate income tax on their earnings, which ultimately will reduce our return on such income and fees. In addition, we may invest in partnerships, including qualified publicly traded partnerships and limited liability companies treated as partnerships for tax purposes, which may result in our being subject to additional state, local or foreign income, franchise, withholding or other tax liabilities. We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. For U.S. federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount, which could be significant relative to our overall investment assets, and increases in loan balances as a result of PIK interest will be included in income before we receive any corresponding cash payments. In addition,
recent tax legislation requires us to recognize income for tax purposes no later than when recognized for financial reporting purposes. We also may be required to include in income certain other amounts that we do not receive in cash. In addition, after the expiration of the reinvestment period under the Credit Facility on December 29, 2020, we must use asset sales and repayment proceeds, if any (including any realized gains), to pay down any outstanding debt and certain other amounts prior to distributing cash from WhiteHorse Credit to us. Also, if we do not meet certain coverage tests under the Credit Facility, Note Purchase Agreement, or the 2025 Notes or if an event of default and acceleration occurs under the Credit Facility, then income and capital gains
which would otherwise be distributable by us to our stockholders could be diverted to pay down debt or other amounts due under the Credit Facility, the Note Purchase Agreement or the 2025 Notes. As a result, we may have difficulty meeting the annual distribution requirement to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, in order to be subject to tax as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce
 28    TABLE OF CONTENTS new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify to be subject to tax as a RIC and thus be subject to corporate level income tax. PIK interest payments we receive will increase our assets under management and, as a result, will increase the amount of base management fees payable by us to our Investment Adviser. Certain of our debt investments contain provisions providing for the payment of payment in kind, or PIK, interest, which increases the loan balance of the underlying loan in lieu of receiving cash interest, causing interest to compound on such higher loan balance. PIK interest increases our assets under management and, because the base management fee that we pay to our Investment Adviser is based on the value of our consolidated gross assets, PIK interest increases the base management fee we pay. This increase in interest income from the higher loan balance increases our pre-incentive fee net investment income and the
incentive fees that we pay to our Investment Adviser. Regulations governing our operation as a business development company, including those related to the issuance of senior securities, will affect our ability to, and the way in which we, raise additional debt or equity capital. We expect that we will require a substantial amount of capital. We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities, up to the maximum amount permitted by the 1940 Act. On May 3, 2018 and August 1, 2018, our board of directors, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved a reduced asset coverage ratio from 200% to 150% in accordance with the SBCAA, effective on August 2, 2018, 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 equity) to a maximum of 2.0x (equivalent to $2 of debt outstanding for each $1 of equity). See  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. If the value of our assets declines, we may be unable to satisfy the applicable asset coverage ratio requirement. If that happens, we may be required to sell a portion of our investments at a time when such sales may be disadvantageous and, depending on the nature of our leverage, repay a portion of our indebtedness. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss, and if we incur additional leverage as permitted by the SBCAA, these risks will be magnified. If we issue preferred stock, such
securities would rank senior to common stock in our capital structure, and preferred stockholders would have separate voting rights, dividend and liquidation rights and possibly other rights, preferences or privileges more favorable than those granted to holders of our common stock. Furthermore, the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might otherwise result in your receiving a premium price for your common stock or otherwise be in your best interest. Our board of directors may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a business development company, we are not generally able to issue and sell our common stock at a price below the then-current NAV per share. We may, however, issue or sell our common stock, at a price below the then-current NAV of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the then-current NAV of the common stock if our board of directors determines that such sale is in the best interests of us and our stockholders, and if our
stockholders approve such sale within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also conduct rights offerings at prices per share less than the NAV per share, subject to the requirements of the 1940 Act. If we raise additional funds by issuing additional common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and our stockholders may experience dilution. In addition to issuing securities to raise capital as described above, we have securitized, and may in the future seek to securitize, our loans to generate cash for funding new investments. To securitize loans, we may
 29    TABLE OF CONTENTS create one or more wholly owned subsidiaries and sell and contribute a pool of loans to such subsidiaries. This could include the sale or other issuance of debt by such subsidiaries on a non-recourse basis to purchasers who we would expect to be willing to accept a lower interest rate to invest in investment grade-rated debt secured by such loan pools, and we would retain all or a portion of the equity in any such subsidiary. An inability to securitize part of our loan portfolio could limit our ability to grow our business, fully execute our business strategy and increase our earnings. Moreover, the successful securitization of
part of our loan portfolio might expose us to losses as the loans we are not able to securitize will tend to be those that are riskier and more apt to generate losses. Any failure on our part to maintain our status as a business development company would reduce our operating flexibility. If we do not remain a business development company, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and, correspondingly, decrease our operating flexibility. 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, the Private Notes and the 2025 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 NAV 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 our Investment Adviser. 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. The
amount of leverage that we employ will depend on our Investment Advisers and our board of directors assessment of market and
 30    TABLE OF CONTENTS 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 Private Notes and the 2025 Notes or obtain other credit at all or on terms acceptable to us. For information regarding a reduction in the asset coverage ratio applicable to us, see Managements Discussion and Analysis of Financial Condition and Results of Operations   Recent Developments. In addition, the terms governing the Credit Facility, the Private Notes and the 2025 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. The Note Purchase Agreement governing the Private Notes contains additional terms and conditions for senior unsecured notes issued in a private placement, including minimum shareholders equity, minimum asset coverage ratio, maximum debt to equity ratio and prohibitions on certain fundamental changes of the Company or any subsidiary guarantor. The 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 of 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. On May 3, 2018 and August 1, 2018, our board of directors, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved a reduced asset coverage ratio from 200% to 150% in accordance with the SBCAA, effective on August 2, 2018, 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 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 December 31, 2018, assuming various annual returns, net of expenses. 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 December 31, 2018 (275.2%)(1)

          

          

          (18.2

          )%

          

          

          (10.8

          )%

          

          

          (3.3

          )%

          

          

          4.1

          %

          

          

          11.6

          %Corresponding return to common stockholder assuming 200% asset coverage(2)

          

          

          (24.8

          )%

          

          

          (15.3

          )%

          

          

          (5.7

          )%

          

          

          3.9

          %

          

          

          13.5

          %Corresponding return to common stockholder assuming 150% asset coverage(3)

          

          

          (40.3

          )%

          

          

          (25.8

          )%

          

          

          (11.2

          )%

          

          

          3.4

          %

          

          

          18.0

          %
  (1)

          Assumes $514.1 million in total assets, $180.0 million in debt outstanding and $315.3 million in net assets as of December 31, 2018, and an average cost of funds of 5.78%, which is our weighted average borrowing cost as of December 31, 2018. (2)

          Assumes $649.4 million in total assets, $315.3 million in debt outstanding and $315.3 million in net assets as of December 31, 2018, and an average cost of funds of 5.66%, which would be our weighted average borrowing cost assuming 200% asset coverage as of December 31, 2018.
 31    TABLE OF CONTENTS (3)

          Assumes $964.7 million in total assets, $630.6 million in debt outstanding and $315.3 million in net assets as of December 31, 2018, and an average cost of funds of 5.58%, which would be our weighted average borrowing cost assuming 150% asset coverage as of December 31, 2018. Based on our outstanding indebtedness of $180 million as of December 31, 2018 and an average cost of funds of 5.50%, 6.00% and 6.50%, which were the effective annualized interest rates of the Credit Facility, Private Notes and 2025 Notes, respectively, as of that date, our investment portfolio must experience an annual return of at least 2.22% to cover annual interest payments on our outstanding indebtedness. We are subject to the risk of an event of default and acceleration under our unsecured debt agreements, which would have a material adverse effect on us. On August 7, 2018, we completed a private offering of the Private Notes. The Private Notes will mature on August 7, 2023, unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. On November 13, 2018, the 2025 Notes were issued, and on November 30, 2018, the 2025 Notes began trading on the NASDAQ Global Select Market under the trading symbol WHFBZ. The 2025 Notes will mature on November 30, 2025, unless redeemed prior to such date by us or our affiliates in accordance with their terms. There are several circumstances under which an event of default may occur
under the debt agreement for the Private Notes or the indenture for the 2025 Notes, such as failure to make scheduled principal or interest payments and certain events of bankruptcy, insolvency or reorganization. Upon the occurrence of an event of default, our lenders may exercise customary remedies, including declaring all amounts due and payable. Any of these developments would have a material adverse effect on our business, financial condition and results of operations. Because we expect to distribute substantially all of our ordinary income and net realized capital gains to our stockholders, we will need additional capital to finance our growth and such capital may not be available on favorable terms, or at all. We will need additional capital to fund growth in our investment portfolio. We may issue debt or equity securities or borrow from financial institutions in order to obtain this additional capital. A reduction in the availability of new capital could limit our ability to grow. We are required to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, each taxable year to our stockholders to maintain our ability to be subject to tax as a RIC. As a result, these earnings will not be available to fund new investments. If we fail to obtain
additional capital to fund new investments, this could limit our ability to grow, which may have an adverse effect on the value of our securities. 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. Since we are using 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. As a result, a significant change in market interest rates may have a material adverse effect on our net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our net investment income. Conversely, in periods of falling interest rates, the probability that our loans and other investments in portfolio companies will be pre-paid increases. In such event, we can offer no assurance that we will be able to make new loans on the same terms, or at all. If we cannot make new loans on terms that are the same or better than the investments that are repaid, then our results of operations and financial condition will be adversely affected. We expect that our investments will be financed primarily with equity and medium to long-term debt or preferred stock. We may use interest rate risk management techniques in an effort
to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. These activities may limit our ability to benefit from lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of
 32    TABLE OF CONTENTS operations. Additionally, our ability to engage in hedging transactions may also be adversely affected by recent rules adopted by the U.S. Commodity Futures Trading Commission, or the CFTC, unless we register with the CFTC as a commodity pool operator. You should also be aware that a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee Hurdle Rate and may result in a substantial increase in the amount of incentive fees payable to our Investment Adviser with respect to Pre-Incentive Fee Net Investment Income. An increase in interest rates may decrease the value of any investments we hold which earn fixed interest rates and also may increase our interest expense, thereby decreasing our net income,
and also may make investments in our common stock less attractive if we are not able to increase our distribution rate, which may reduce the market value of our common stock. In July 2017, the head of the United Kingdom Financial Conduct Authority, or the FCA, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. In April 2018, the Federal Reserve System, in conjunction with the Alternative Reference Rates Committee, announced the replacement of LIBOR with a new index, calculated by short-term repurchase agreements collateralized by U.S. Treasury securities, called the Secured Overnight Financing Rate, or the SOFR. At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement tool, and the
future of LIBOR is still uncertain. As such, the potential effect of SOFR and LIBOR on our net investment income cannot yet be determined. There are significant potential conflicts of interest that could affect our investment returns. As a result of our arrangements with H.I.G. Capital and our investment committee, there may be times when H.I.G. Capital or our investment committee have interests that differ from those of our stockholders, giving rise to a conflict of interest. There may be conflicts related to obligations our investment committee, our Investment Adviser or its affiliates have to other clients. The members of our investment committee serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds managed by our Investment Adviser or its affiliates. Similarly, our Investment Adviser or its affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, they 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. For example, the members of our investment
committee have, and will continue to have, management responsibilities for other investment funds, accounts or other investment vehicles managed or sponsored by our Investment Adviser and its affiliates, including entities that may raise additional capital from time to time. These other investment funds, accounts or investment vehicles may have different fee and expense arrangements, including requirements to share or offset certain fees from portfolio companies, than those paid by us to the Investment Adviser. Our investment objective overlaps or may overlap with the investment objectives of such affiliated investment funds, accounts or other investment vehicles. As a result, those individuals may face conflicts in the allocation of investment opportunities among us and other investment funds or accounts advised by or affiliated with our Investment Adviser. Our Investment Adviser 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 cannot assure you that such opportunities will be allocated to us fairly or equitably in the short-term or over time. Where we are able to co-invest consistent with the requirements of the 1940 Act, including the Exemptive Relief Order, if sufficient securities or loan amounts are available to satisfy our and each such accounts proposed demand, we expect that the opportunity will be allocated in accordance with our Investment Advisers pre-transaction determination. If there is an insufficient amount of an investment opportunity to satisfy our demand and that of other accounts sponsored or managed by our Investment Adviser or its affiliates, the allocation policy further provides that allocations among us and such other accounts will generally be made pro rata based on each accounts available capital in the asset class being allocated, up to the amount proposed to be invested by each account.
However, there can be no assurance that we will be able to participate in all suitable investment opportunities. Where we are unable to co-invest consistent with the requirements of the 1940 Act, our Investment Advisers allocation
 33    TABLE OF CONTENTS policy provides for investments to be allocated on a rotational basis to assure that all clients have fair and equitable access to such investment opportunities. Our investment committee, our Investment Adviser or its affiliates may, from time to time, possess material non-public information, limiting our investment discretion. Principals of our Investment Adviser and its affiliates and members of our investment committee may serve as directors of, or in a similar capacity with, companies in which we invest, the securities of which are purchased or sold on our behalf. If we obtain material nonpublic information with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us. Our incentive fee structure may create incentives for our Investment Adviser that are not fully aligned with the interests of our stockholders and may induce our Investment Adviser to make speculative investments. In the course of our investing activities, we pay management and incentive fees to our Investment Adviser. The incentive fee payable by us to our Investment Adviser may create an incentive for our Investment Adviser to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The management fee is based on our consolidated gross assets. As a result, investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses, resulting in a lower rate of return than one might achieve
through direct investments. Because the management fee is based on our consolidated gross assets, our Investment Adviser will benefit when we incur debt or use leverage. The use of leverage increases the likelihood of default, which disfavors the holders of our common stock. Additionally, under the incentive fee structure, our Investment Adviser may benefit when capital gains are recognized and, because our Investment Adviser determines when a holding is sold, our Investment Adviser controls the timing of the recognition of such capital gains. Our board of directors is charged with protecting our interests by monitoring how our Investment Adviser addresses these and other conflicts of interest associated with its management services and compensation. While they are not expected to review or approve each investment or realization, our independent directors will periodically review our Investment
Advisers services and fees as well as its portfolio management decisions and portfolio performance. In connection with these reviews, our independent directors will consider whether such fees and our expenses (including those related to leverage) remain appropriate. As a result of this arrangement, our Investment Adviser or its affiliates may from time to time have interests that differ from those of our stockholders, giving rise to a conflict. Unlike that portion of the incentive fee based on income, there is no Hurdle Rate applicable to the incentive fee based on net capital gains. As a result, our Investment Adviser may seek to invest more capital in investments that are likely to result in capital gains as compared to income producing securities. This practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. In addition, under the terms of the Incentive Fee Cap and Deferral Mechanism, the amount of incentive fees earned by our Investment Adviser will depend, in part, upon the timing of capital gains or losses in our investment portfolio, as well as the timing of our recognition of income. Depending on the circumstances, there may be a lag of as long as 12 fiscal quarters between the occurrence of an event giving rise to an obligation to pay incentive fees to the Investment Adviser and the payment of such incentive fees. Therefore, investors who acquire shares of our common stock may pay indirectly to our Investment Adviser
incentive fees in respect of income or capital gains that were received by or paid to us prior to such investor becoming a stockholder. As a result, such investors may not participate in the income or capital gains giving rise to such indirect expense. The valuation process for certain of our portfolio holdings creates a conflict of interest. We expect to make many portfolio investments in the form of securities that are not publicly traded. As a result, our board of directors determines the fair value of these securities in good faith under our valuation policies and procedures. In connection with that determination, investment professionals from our Investment
 34    TABLE OF CONTENTS Adviser provide our board of directors with portfolio company valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company. In addition, certain members of our board of directors have an indirect pecuniary interest in our Investment Adviser. The participation of our Investment Advisers investment professionals in our valuation process, and the indirect pecuniary interest in our Investment Adviser by certain members of our board of directors, could result in a conflict of interest as the management fee paid to our Investment Adviser is
based, in part, on our consolidated gross assets. We have conflicts related to other arrangements with our Investment Adviser or its affiliates. We have entered into a license agreement with an affiliate of H.I.G. Capital under which H.I.G. Capital has granted us a non-exclusive, royalty-free license to use the name WhiteHorse. In addition, we pay to WhiteHorse Administration our allocable portion of overhead and other expenses incurred by WhiteHorse Administration in performing its obligations under the Administration Agreement, such as rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs. These arrangements create conflicts of interest that our board of directors must monitor. Our Investment Adviser may be paid incentive compensation even if we incur a net loss, and we cannot recover any portion of the incentive fee previously paid. Our Investment Adviser is entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of our Pre-Incentive Fee Net Investment Income, subject to the Hurdle Rate, a catch-up provision and the Incentive Fee Cap and Deferral Mechanism. Our Pre-Incentive Fee Net Investment Income excludes realized and unrealized capital losses that we may incur in the fiscal quarter, even if such capital losses result in a net loss for that quarter. Thus, we may be required to pay our Investment Adviser incentive compensation for a fiscal quarter even if we incur a net loss. In addition, if we pay the capital
gains portion of the incentive fee and thereafter experience additional realized capital losses or unrealized capital depreciation, we will not be able to recover any portion of the incentive fee previously paid. Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us. We are prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent directors and, in some cases, of the SEC. The Exemptive Relief Order permits us to participate in negotiated investments with our affiliates that would otherwise be prohibited by the 1940 Act, subject to certain conditions. Any person that owns, directly or indirectly, five percent or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any security from or to, or entering into certain
joint transactions (which could include investments in the same portfolio company) with such affiliates, absent the prior approval of our independent directors. Our Investment Adviser and its affiliates, including persons that control, or are under common control with, us or our Investment Adviser, are also considered to be our affiliates under the 1940 Act. We may invest alongside other clients of our Investment Adviser and its affiliates in certain circumstances where doing so is consistent with applicable law, the terms of our Exemptive Relief Order, SEC staff interpretations and/or exemptive relief issued by the SEC. For example, we may invest alongside such accounts consistent with guidance promulgated by the staff of the SEC permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that our Investment Adviser, acting on our behalf and on behalf of other clients, negotiates no
term other than price. We may also invest alongside our Investment Advisers other clients as otherwise permissible under regulatory guidance, applicable regulations and the allocation policy of H.I.G. Capital and our Investment Adviser. Under this allocation policy, a fixed calculation, based on the type of investment, will be applied to determine the amount of each opportunity to be allocated to us. This allocation policy will be periodically approved by our Investment Adviser and reviewed by our independent directors. We expect that these determinations will be made similarly for other accounts sponsored or managed by our Investment Adviser and its affiliates. If sufficient securities or loan amounts are available to satisfy our and each such accounts proposed demand, we expect that the opportunity will be allocated in accordance with our
 35    TABLE OF CONTENTS Investment Advisers pre-transaction determination. Where there is an insufficient amount of an investment opportunity to satisfy us and other accounts sponsored or managed by our Investment Adviser or its affiliates, the allocation policy further provides that, except as may otherwise be provided by the Exemptive Relief Order, allocations among us and such other accounts will generally be made pro rata based on the amount that each such party would have invested if sufficient securities or loan amounts were available. However, we can offer no assurance that investment opportunities will be allocated to us fairly or
equitably in the short-term or over time. The Exemptive Relief Order permits greater flexibility to negotiate the terms of co-investments and requires our board of directors to determine that it would be advantageous for us to co-invest with other accounts sponsored or managed by our Investment Adviser or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions, as well as regulatory requirements and other relevant factors. See Related Party Transactions and Certain Relationships. We cannot assure you, however, that we will continue to develop opportunities that comply with such limitations. In situations where co-investment with other accounts managed by our Investment Adviser or its affiliates is not permitted or appropriate, H.I.G. Capital and our Investment Adviser will need to decide which client will proceed with the investment. Our Investment Advisers allocation policy provides, in such circumstances, for investments to be allocated on a rotational basis to assure that all clients of our Investment Adviser and its affiliates have fair and equitable access to such investment opportunities. Moreover, except in certain circumstances, we will be unable to invest in any issuer in which a fund managed by
our Investment Adviser or its affiliates has previously invested. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. These restrictions may limit the scope of investment opportunities that would otherwise be available to us. Our portfolio investments will be recorded at fair value as determined in good faith by our board of directors. As a result, there will be uncertainty as to the value of our portfolio investments. Many of our portfolio investments will take the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable, and we value these securities at fair value as determined in good faith by our board of directors, including to reflect significant events affecting the value of our securities. As discussed in more detail under Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies, all of our investments (other than cash and cash equivalents)
are classified as Level 3 under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820. This means that our portfolio valuations are based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. Inputs into the determination of fair value of our portfolio investments require significant management judgment or estimation. Even if observable market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. Consensus pricing is a methodology for the determination of fair value based on quotations from market makers. These quotations include a disclaimer that the market maker would not be held to such a price in an actual transaction. The non-binding nature of
consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We have retained the services of several independent service providers to periodically review the valuation of securities for which there is no market guided price or that are thinly traded. The types of factors that the board of directors may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities, including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio companys ability to make payments and its earnings and
discounted cash flow, the markets in which the portfolio company does business and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. In addition, the determination of fair value and thus the amount of unrealized losses we may incur in any year, is, to a degree, subjective, in that it is based on unobservable inputs and certain assumptions. Our NAV could
 36    TABLE OF CONTENTS be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. We adjust quarterly the valuation of our portfolio to reflect our board of directors determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our consolidated statements of operations as net change in unrealized appreciation or depreciation. The lack of liquidity in our investments may adversely affect our business. We generally make investments in private companies. Substantially all of these investments are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company if we have
material non-public information regarding such portfolio company. Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our NAV through increased net unrealized depreciation. As a business development company, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by our board of directors under our valuation policy and process. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: 

          a comparison of the portfolio companys securities to publicly traded securities; 

          the enterprise value of the portfolio company; 

          the nature and realizable value of any collateral; 

          the portfolio companys ability to make payments and its earnings; 

          changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. We record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio may reduce our NAV by increasing net unrealized depreciation in our portfolio, and therefore creating a challenging environment in which to raise debt and
equity capital. As a business development company, we are generally not able to issue additional shares of common stock at a price less than NAV without first obtaining approval for such issuance from our stockholders and our independent directors. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may experience fluctuations in our quarterly results. We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt securities and loans we acquire, the default rate on such securities, the level of our expenses, variations in, and the timing of the recognition of, realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy. We and our portfolio companies are subject to regulation at the local, state and federal level. We are also subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions,
 37    TABLE OF CONTENTS as well as interpretations or directives from the U.S. presidential administration and others in the executive branch, that affect our operations, including maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure proceedings and other trade practices. If these laws, regulations or decisions change, or if we expand our business into additional jurisdictions, we may have to incur significant expenses in order to comply or we might have to restrict our operations. New legislation may be enacted or new interpretations, rulings or regulations
could be adopted, including those governing the types of investments we or our portfolio companies are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and related implemented regulations impact many aspects of the financial services industry. The effects of the Dodd-Frank Act on the financial services industry will depend, in large part, upon the scope of such regulations and the extent to which regulators exercise the authority granted to them. The U.S. presidential administration and certain members of Congress have amended and repealed portions of the Dodd-Frank Act, which may create regulatory uncertainty in the near term. While the impact of the Dodd-Frank Act on us and
our portfolio companies is subject to continuing uncertainty, the Dodd-Frank Act, including the implementing regulations and the interpretation of those rules, and potential repeals thereof, along with other legislative and regulatory proposals directed at the financial services industry that are proposed or pending in the U.S. Congress, may negatively impact the operations, cash flows or financial condition of us or our portfolio companies, impose additional costs on us or our portfolio companies, intensify the regulatory supervision of us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies. In that regard, significant tax reform legislation (commonly referred to as the Tax Cuts and Jobs Act) was signed into law on December 22, 2017. The Tax Cuts and Jobs Act, among other things, permanently reduces the maximum federal corporate income tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018 through 2025), restricts the deductibility of business interest expense, changes the rules regarding the calculation of net operating loss deductions that may be used to offset taxable income, expands the circumstances in which a foreign corporation will be treated as a
controlled foreign corporation and, under certain circumstances, requires accrual method taxpayers to recognize income for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable financial statement. Although we currently believe the new tax law will not have a material impact on us, the effects of the various provisions of the Tax Cuts and Jobs Act listed above on the respective tax positions of us, our stockholders and our portfolio companies depend on the factual circumstances of each, over time. Prospective investors are urged to consult their tax advisors regarding the effects of the new legislation on an investment in us. If we do not comply with applicable laws and regulations, we could lose any licenses that we then hold for the conduct of our business and may be subject to civil fines and criminal penalties. Additionally, changes to or repeal of the laws and regulations governing our operations related to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth in this annual report on Form 10-K and may shift our investment focus from the areas of expertise of our Investment Adviser to other types of investments in which our Investment Adviser may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on our
results of operations and the value of your investment. The Small Business Credit Availability Act may allow us to incur additional leverage, which may increase the risk of investing with us. Historically, the 1940 Act has permitted us 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 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. On May 3, 2018 and August 1,
2018, our board of directors, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) and our stockholders, respectively, approved a reduced asset coverage ratio from 200% to 150% in accordance
 38    TABLE OF CONTENTS with the SBCAA, effective on August 2, 2018, 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 equity) to a maximum of 2.0x (equivalent to $2 of debt outstanding for each $1 of equity). As of December 31, 2018, our asset coverage for borrowed amounts was 275.2%. As a result of the effectiveness of the decrease in the asset coverage ratio applicable to us, we are able to incur additional leverage, and the risks associated with an investment in us may increase. For example, see  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. We may expose ourselves to risks if we engage in hedging transactions. We may engage in currency or interest rate hedging transactions to the extent such transactions are permitted under the 1940 Act and applicable commodities law. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions, including the risk of counterparty default. In this regard, we may utilize instruments such as futures, forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a
decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for us to realize a gain on a net basis if the values of the underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price. While we may enter into transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates or counterparty default may result in poorer overall investment performance than if we had not engaged in any hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek or be able to establish a perfect correlation between such hedging instruments and the portfolio
holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge position and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities may also fluctuate as a result of factors not related to currency fluctuations. Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval. Our board of directors has the authority to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval (except as required by the 1940 Act). However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our stock. Nevertheless, the effects of any such changes may adversely affect our business and impact our ability to
make distributions. Additionally, changes to the laws and regulations governing our operations, including those associated with RICs, may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities or result in the imposition of corporate-level taxes on us. Such changes could result in material differences to our strategies and plans and may shift our investment focus from the areas of expertise of WhiteHorse Advisers to other types of investments in which WhiteHorse Advisers may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on our
results of operations and the value of your investment. If we invest in commodity interests in the future, WhiteHorse Advisers may determine not to use investment strategies that trigger additional regulation by the CFTC or
 39    TABLE OF CONTENTS may determine to operate subject to CFTC regulation, if applicable. If we or WhiteHorse Advisers were to operate subject to CFTC regulation, we may incur additional expenses and would be subject to additional regulation. In addition, certain regulations applicable to debt securitizations implementing credit risk retention requirements that have taken effect or will take effect in both the United States and in the European Union may adversely affect certain amendments to or new issuances by the Credit Facility and may adversely affect or prevent us from entering into any future securitization transaction. The impact of these risk retention rules on the loan securitization market are uncertain, and such rules may cause an increase in our cost of funds under or may prevent us from completing any future securitization transactions or certain
amendments to or new issuances by our existing debt securitizations. Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of no-bank credit extension could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition
and results of operations. Provisions of the General Corporation Law of the State of Delaware, our certificate of incorporation and bylaws, the Credit Facility, the Private Notes and the 2025 Notes could deter takeover attempts and have an adverse effect on the price of our common stock and the rights of our common stockholders. The General Corporation Law of the State of Delaware, or the DGCL, contains provisions that may discourage, delay or make more difficult a change in control of us or the removal of our directors. Our certificate of incorporation and bylaws contain provisions that limit liability and provide for indemnification of our directors and officers. These provisions and others also may have the effect of deterring hostile takeovers or delaying changes in control or management. We are subject to Section 203 of the DGCL, the application of which is subject to any applicable requirements of the 1940 Act. This section generally prohibits
us from engaging in mergers and other business combinations with stockholders that beneficially own 15% or more of our voting stock, or with their affiliates, unless our directors or stockholders approve the business combination in the prescribed manner. Our board of directors may adopt a resolution exempting from Section 203 of the DGCL any business combination between us and any other person, subject to prior approval of such business combination by our board of directors, including approval by a majority of our directors who are not interested persons. If the resolution exempting business combinations is repealed or our board does not approve a business combination, Section 203 of the DGCL may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our certificate of incorporation classifying our board of directors in three classes serving staggered three-year terms, and provisions of our certificate of incorporation authorizing our board of directors to classify or reclassify shares of our preferred stock in one or more classes or series and to cause the issuance of additional shares of our stock. These provisions, as well as other provisions of our certificate of incorporation and bylaws, may delay, defer or prevent a transaction or a change in
control that might otherwise be in the best interests of our stockholders. In addition, if we issue preferred stock, such securities would rank senior to common stock in our capital structure, resulting in preferred stockholders having separate voting rights, dividend and liquidation rights, and possibly other rights, preferences or privileges more favorable than those granted to holders of our common stock. If we or one of our affiliates approved by the Lender is no longer the portfolio manager under the Credit Facility or if certain change of control events occur, then an event of default will occur under the Credit Facility which could have a material adverse effect on our business, financial condition and results of operations. A change of control under the Credit Facility occurs if (1) we or our affiliates, collectively, (i) cease to possess, directly or indirectly, the right to elect or appoint managers that at all times have a majority of the votes of the board of managers (or similar governing body) of WhiteHorse Credit or
to direct the management policies and decisions of WhiteHorse Credit or (ii) cease, directly or indirectly, to own and
 40    TABLE OF CONTENTS control legally and beneficially all of the equity interests of WhiteHorse Credit or (2) WhiteHorse Advisers or its affiliates, collectively, cease to be our investment adviser. The occurrence of an event of default could result in us being unable to make distributions to our stockholders sufficient to maintain our ability to be subject to tax as a RIC, or at all, terminates the reinvestment period if then in effect, permits the facility agent on behalf of the Lender to take over management of WhiteHorse Credits portfolio and to direct the liquidation of its assets, all of which could have a material adverse effect on our
business, financial condition and results of operations. For a description of the effects of a change in control event under our Note Purchase Agreement, see Risks Relating to our Other Indebtedness  We may not be able to prepay the Private Notes upon a change in control. Our Investment Adviser can resign on 60 days notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations. Our Investment Adviser has the right, under the Investment Advisory Agreement, to resign at any time upon not less than 60 days written notice, whether we have found a replacement or not. If our Investment Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are
likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Investment Adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows. Our Administrator can resign on 60 days notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations. Our Administrator has the right, under the Administration Agreement, to resign at any time upon 60 days notice, whether we have found a replacement or not. If our Administrator resigns, we may not be able to find a new administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the
market price of our shares may decline. In addition, the coordination of our internal management and administrative activities is likely to suffer if we are unable to identify and reach an agreement with a service provider or individuals with the expertise possessed by our Administrator. Even if we are able to retain a comparable service provider or individuals to perform such services, whether internal or external, their integration into our business and lack of familiarity with our operations may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows. Efforts to comply with Section 404 of the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price of our common stock. Under current SEC rules, we are required to report on our internal control over financial reporting pursuant to Section 404(a) of the Sarbanes-Oxley Act, and related rules and regulations of the SEC. Our independent registered public accounting firm must audit this report, pursuant to Section 404(b) of the Sarbanes-Oxley Act. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial reporting. As a result, we incur additional expenses that may negatively impact our financial performance and our ability to make distributions. This process also results in a diversion of managements time and attention. We
 41    TABLE OF CONTENTS may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be effective in a timely manner. In the event that we are unable to maintain or achieve compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price of our common stock may be adversely affected. Cybersecurity risks and cyber incidents may adversely affect our business or those of our portfolio companies by causing a disruption to our operations, a compromise or corruption of confidential information and/or damage to business relationships, or those of our portfolio companies, all of which could negatively impact our business, results of operations or financial condition. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to, use, alteration or destruction of our information systems for purposes of misappropriating assets, obtaining ransom payments, stealing confidential information, corrupting data or causing operational disruption, or may involve phishing. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen
information, misappropriation of assets, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. The costs related to cybersecurity incidents may not be fully insured or indemnified. As our and our portfolio companies reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by our Investment Adviser and third-party service providers, and the information systems of our portfolio companies. We, our Investment Adviser and its affiliates have implemented
processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, may be ineffective and do not guarantee that a cyber incident will not occur or that our financial results, operations or confidential information will not be negatively impacted by such an incident. Third parties with which we do business (including, but not limited to, service providers, such as accountants, custodians, transfer agents and administrators, and the issuers of securities in which we invest) may also be sources or targets of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, we cannot control the cybersecurity plans and systems put in place
by these third parties and ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes. We are highly dependent on information systems and systems failures or interruption could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends and other distributions. We depend on the communications and information systems of our Investment Adviser and its affiliates as well as certain third-party service providers. As our reliance on these systems has increased, so have the risks posed to these communications and information systems. Any failure or interruption in these systems, including due to electrical or telecommunication outages or natural disasters such as earthquakes, tornadoes and hurricanes, could cause disruptions in our activities. We and our Investment Adviser could be the target of litigation. We and WhiteHorse Advisers could become the target of securities class action litigation or other similar claims if our common stock price fluctuates significantly or for other reasons. The outcome of any such proceedings could materially adversely affect our business, financial condition, and/or operating results and could continue without resolution for long periods of time. Any litigation or other similar claims could
 42    TABLE OF CONTENTS consume substantial amounts of our managements time and attention, and that time and attention and the devotion of associated resources could, at times, be disproportionate to the amounts at stake. Litigation and other claims are subject to inherent uncertainties, and a material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final outcome in litigation or other similar claims becomes probable and reasonably estimable. In addition, we could incur expenses associated with defending ourselves against litigation and other similar claims, and these expenses could be
material to our earnings in future periods. Risks Relating to our Investments Our investments may be risky, and you could lose all or part of your investment. We invest primarily in (1) first lien senior secured loans, (2) second lien senior secured loans, (3) one-stop or unitranche senior secured loans, (4) mezzanine loans and (5) to a lesser extent, selected equity co-investments in lower middle market companies. We invest primarily in securities that are rated below investment grade by rating agencies or that may be rated below investment grade if they were so rated. Below investment grade securities, which are often referred to as junk bonds, are viewed as speculative investments because of concerns with respect to the issuers capacity
to pay interest and repay principal. Secured Loans.  When we extend first lien senior secured, second lien senior secured and unitranche loans, we generally take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries. We expect this security interest to help mitigate the risk that we will not be repaid. However, there is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a
result of the inability of the portfolio company to raise additional capital. Also, in the case of first lien senior secured loans, our lien may be subordinated to claims of other creditors and, in the case of second lien senior secured loans, our lien will be subordinated to claims of certain other creditors. In addition, deterioration in a portfolio companys financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loans terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies. Mezzanine Loans.  Our mezzanine investments generally are subordinated to senior loans and will generally be unsecured. This may result in an above average amount of risk and volatility or a loss of principal. These investments may involve additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject us and our stockholders to non-cash income as described above under Risks Relating to Our Business and Structure  We may
have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. Since, generally, we will not receive any substantial repayments of principal prior to the maturity of our mezzanine debt investments, such investments are riskier than amortizing loans. Equity Investments.  We may make selected equity investments. In addition, when we invest in first lien, second lien, unitranche or mezzanine loans, we may acquire warrants to purchase equity securities. Our goal is ultimately to dispose of these equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any
other losses we experience. We are subject to risks associated with lower middle market companies. Investing in lower middle market companies involves a number of significant risks, including: 

          these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;
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          they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions and changing market conditions, as well as general economic downturns; 

          they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; 

          generally little public information exists about these companies, and we are required to rely on our Investment Adviser to obtain adequate information to evaluate the potential returns from investing in these companies; 

          they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and our Investment Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; and 

          they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity. We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited by the 1940 Act with respect to the proportion of our assets that may be invested in securities of a single issuer. We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. To the extent that we assume large positions in the securities of a small number of issuers, our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the markets assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment
company. Beyond the asset diversification requirements associated with our qualification as a RIC under the Code and the requirements under the documents governing the Credit Facility or other agreements, we do not have fixed guidelines for diversification, and our investments are and could be concentrated in relatively few portfolio companies. Our portfolio may be concentrated in a limited number of portfolio companies and industries, which would subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry. Our portfolio may be concentrated in a limited number of portfolio companies and industries. As a result, the aggregate returns we realize may be significantly and adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Additionally, while we are not targeting any specific industries, our investments may be concentrated in relatively few industries. As a result, a downturn in any particular industry in which we are invested could also significantly impact the aggregate returns we realize. Like many businesses in Puerto Rico, our portfolio company Grupo HIMA San Pablo, Inc., or Grupo HIMA, has been adversely affected by Puerto Ricos troubled economy, including high unemployment, population decline and high government debt. Grupo HIMAs management engaged an adviser to explore financing and strategic options designed to improve its finances and operations. We are monitoring the status of Grupo HIMAs operations and the impact of this strategic review on our investments in a first lien senior secured loan and second lien secured loan issued by Grupo HIMA. As of December 31, 2018, the fair value of
our investment in the first lien senior secured loan was approximately $12.0 million, and the fair value of our investment in the second lien secured loan was approximately $0.1 million.
 44    TABLE OF CONTENTS Our investments in the health care sector face considerable uncertainties including substantial regulatory challenges. As of December 31, 2018, our investments in portfolio companies that operate in the health care sector represented 5.76% of our total portfolio, at fair value. Our investments in the health care sector are subject to substantial risks, including the risk that the laws and regulations governing the business of health care companies, and interpretations thereof, may change frequently. Substantial latitude is given to the agencies administering those laws and regulations. Current or future laws and regulations could force our portfolio companies engaged in health care, including Grupo HIMA, to change their policies related to how
they operate, restrict revenue, change costs, change reserve levels and change business practices. Companies engaged in health care often must obtain and maintain regulatory approvals to market certain products, change prices for certain regulated products and consummate some acquisitions and divestitures. Delays in obtaining or failing to obtain or maintain such approvals could reduce revenue or increase costs. Local, state and federal policy changes, such as the governments expanding role in health care and federal health care reform initiatives involving alternative assessments and tax increases specific to the health care industry or products, could fundamentally change the dynamics of the health care industry. In
addition, insurance company and other reimbursement rates may be subject to change, often with little notice, and decreases in such rates could materially adversely affect the value of the health care companies in our portfolio. We may hold the debt securities and loans of leveraged companies that may, due to the significant volatility of such companies, enter into bankruptcy proceedings. Leveraged companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may adversely and permanently affect such portfolio company. If the proceeding is converted to a liquidation, the value of the issuer may not equal the liquidation value that was believed to exist at the time of our investment. The duration of a bankruptcy proceeding is also difficult to predict,
and a creditors return on investment can be adversely affected by delays until a plan of reorganization or liquidation ultimately becomes effective. The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtors estate prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial, eroding the value of any recovery by holders of other securities of the bankrupt entity. Depending on the facts and circumstances of our investments and the extent of our involvement in the management of a portfolio company, upon the bankruptcy of a portfolio company, a bankruptcy court may recharacterize our debt investments as equity interests and subordinate all or a portion of our claim to that of other creditors. This could occur even though we may have structured our investment as senior debt. Our portfolio companies may experience financial distress, and our investments in such portfolio companies if they are restructured. Our portfolio companies may experience financial distress from time to time. The debt investments of these companies may not produce income, may require us to bear certain expenses to protect our investment and may subject us to uncertainty as to when, in what manner and for what value such distressed debt will eventually be satisfied, including through liquidation, reorganization or bankruptcy. If an exchange offer is made or plan of reorganization is adopted with respect to the debt securities we currently hold, there can be no assurance that the securities or other assets received by us in connection with such exchange
offer or plan of reorganization will have a value or income potential similar to what we anticipated when our original investment was made or even at the time of restructuring. In addition, we may receive equity securities in exchange for the debt investment that we currently hold, which may require significantly more of our managements time and attention or carry restrictions on their disposition.
 45    TABLE OF CONTENTS Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity, and rising interest rates may make it more difficult for portfolio companies to make periodic payments on their loans. Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity. This risk and the risk of default is increased to the extent that the loan documents do not require the portfolio companies to pay down the outstanding principal of such debt prior to maturity. In addition, if general interest rates rise, there is a risk that our portfolio companies will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the
payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. Any failure of one or more portfolio companies to repay or refinance its debt at or prior to maturity or the inability of one or more portfolio companies to make ongoing payments following an increase in contractual interest rates could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, rising interest rates could also cause portfolio companies to refinance into fixed interest rate loans, which may adversely impact our selections to invest in stronger portfolio companies. Economic recessions or downturns could impair our portfolio companies and harm our operating results. Our portfolio companies are susceptible to economic slowdowns or recessions and may be unable to repay our loans during such periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the
capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm our operating results, which could have an adverse effect on our financial condition. A portfolio companys failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio companys ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, lenders in certain cases can be subject to lender liability claims for actions taken by them when
they become too involved in the borrowers business or exercise control over a borrower. It is possible that we could become subject to a lenders liability claim, including as a result of actions taken if we render significant managerial assistance to the borrower. Furthermore, if one of our portfolio companies were to file for bankruptcy protection, even though we may have structured our investment as senior secured debt, depending on the facts and circumstances, including the extent to which we provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to claims of other creditors. We may be subject to risks associated with syndicated loans. From time to time, we may acquire interests in syndicated loans. Under the documentation for syndicated loans, a financial institution or other entity typically is designated as the administrative agent and/or collateral agent. This agent is granted a lien on any collateral on behalf of the other lenders and distributes payments on the indebtedness as they are received. The agent is the party responsible for administering and enforcing the loan and generally may take actions only in accordance with the instructions of a majority or two-thirds in commitments and/or principal amount of the associated indebtedness. In most cases,
we do not expect to hold a sufficient amount of the indebtedness to be able to compel any actions by the agent. Consequently, we would only be able to direct such actions if instructions from us were made in conjunction with other holders of associated indebtedness that together with us compose the requisite percentage of the related indebtedness then entitled to take action. Conversely, if holders of the required amount of the associated indebtedness other than us desire to take certain actions, such actions may be taken even if we did not support such actions. Furthermore, if an investment is subordinated to one or more senior loans made to the applicable obligor, our
 46    TABLE OF CONTENTS ability to exercise such rights may be subordinated to the exercise of such rights by the senior lenders. Accordingly, we may be precluded from directing such actions unless we act together with other holders of the indebtedness. If we are unable to direct such actions, we cannot assure you that the actions taken will be in our best interests. If an investment is a syndicated revolving loan or delayed drawdown loan, other lenders may fail to satisfy their full contractual funding commitments for such loan, which could create a breach of contract, result in a lawsuit by the obligor against the lenders and adversely affect the fair market value, or FMV, of our investment. There is a risk that a loan agent in respect of one of our loans may become bankrupt or insolvent. Such an event would delay, and possibly impair, any enforcement actions undertaken by holders of the associated indebtedness, including attempts to realize upon the collateral securing the associated indebtedness and/or direct the agent to take actions against the related obligor or the collateral securing the associated indebtedness and actions to realize on proceeds of payments made by obligors that are in the possession or control of any other financial institution. In addition, we may be unable to remove the agent in
circumstances in which removal would be in our best interests. Moreover, agented loans typically allow for the agent to resign with certain advance notice. We may not realize gains from our equity investments. When we invest in loans, we may also invest in the equity securities of the borrower or acquire warrants or other equity securities as well. In addition, we may invest directly in the equity securities of portfolio companies. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not realize gains from our equity interests, and any gains that we do realize on the disposition of such equity interests may not be sufficient to offset any other
losses we experience. Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio, and our ability to make follow-on investments in certain portfolio companies may be restricted. Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as follow-on investments, in order to: 

          increase or maintain in whole or in part our equity ownership percentage; 

          exercise warrants, options or convertible securities that we acquired in the original or a subsequent financing; or 

          attempt to preserve or enhance the value of our investment. We have the discretion to make any follow-on investments, subject to the availability of capital resources, the limitations of the 1940 Act, the requirements associated with our status as a RIC and contractual requirements imposed on us under the Credit Facility or otherwise. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful
portfolio company. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we do not want to increase our exposure to the portfolio company, because we prefer other opportunities or because we are inhibited by compliance with business development company requirements, our contractual requirements or the desire to maintain our tax status. Because we generally do not hold controlling equity interests in our portfolio companies, we will not be in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments. We do not currently anticipate taking controlling equity positions in our portfolio companies. In addition, we may not be in a position to control any portfolio company by investing in its debt securities or loans. As a result, we are subject to the risk that a portfolio company may make business decisions with which we
 47    TABLE OF CONTENTS disagree, and the stockholders and management of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and we may therefore suffer a decrease in the value of our investments. Defaults by our portfolio companies will harm our operating results. A portfolio companys failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets. This could trigger cross-defaults under other agreements and jeopardize such portfolio companys ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company. Any such diversion of cash flow or any
event of default could result in our being unable to make distributions to our stockholders in amounts sufficient to maintain our ability to be subject to tax as a RIC, or at all, and could have a material adverse effect on our business, financial condition and results of operations. Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies. We generally intend to invest a portion of our capital in first lien and second lien, unitranche loans and, to a lesser extent in mezzanine loans and, equity securities of U.S. lower middle market companies. The portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of
insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying senior creditors, the portfolio company may not have sufficient assets to use for repaying its obligation to us in full, or at all. In the case of debt ranking equally with debt securities in which we invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. Additionally, certain loans that we make to portfolio companies may be secured on a second-priority basis by the same collateral securing senior secured debt of such companies. The first-priority liens on the collateral secure the portfolio companys obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by first-priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any realization of the
collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation depends on market and economic conditions, the availability of buyers and other factors. There can be no assurances that the proceeds, if any, from sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second-priority liens after payment in full of all obligations secured by the first-priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second-priority liens, then we, to the extent not repaid from the proceeds of the sale of the
collateral, only have an unsecured claim against the portfolio companys remaining assets, if any. The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more inter-creditor agreements that we enter into with the holders of such senior debt. Under a typical inter-creditor agreement, at any time that obligations that have the benefit of the first-priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first-priority liens:
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          the ability to cause the commencement of enforcement proceedings against the collateral; 

          the ability to control the conduct of such proceedings; 

          the approval of amendments to collateral documents; 

          releases of liens on the collateral; and 

          waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected. We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any security interest over the assets of such companies. Liens on such portfolio companies assets, if any, will secure the portfolio companys obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and
be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors claims against the portfolio companys remaining assets, if any. Our Investment Advisers liability is limited under the Investment Advisory Agreement, and we have agreed to indemnify our Investment Adviser against certain liabilities, which may lead our Investment Adviser to act in a riskier manner on our behalf than it would when acting for its own account. Under the Investment Advisory Agreement, our Investment Adviser does not assume any responsibility to us, including other than to render the services called for under those agreements, and it is not responsible for any action of our board of directors in following or declining to follow our Investment Advisers advice or recommendations. Our Investment Adviser maintains a contractual and fiduciary relationship with us. Under the terms of the Investment Advisory Agreement, our Investment Adviser, its officers, members, personnel, agents, any person controlling or controlled by our Investment Adviser are not liable to us,
any subsidiary of ours, our directors, our stockholders or any subsidiarys stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence, willful misconduct, bad faith or reckless disregard of our Investment Advisers duties under the Investment Advisory Agreement. In addition, we have agreed to indemnify our Investment Adviser and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless disregard of such persons duties under the Investment Advisory Agreement
and the sub-collateral management agreement. These protections may lead our Investment Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account. Our portfolio companies may prepay loans, which prepayment may reduce our yields if capital returned cannot be invested in transactions with equal or greater expected yields. The loans in our investment portfolio generally are prepayable at any time, some of which have no premium to par. It is not clear at this time when each loan may be prepaid. Whether a loan is prepaid will depend both on the continued positive performance of the portfolio company and the existence of favorable financing market conditions that allow such company the ability to replace existing financing with less expensive capital. As market conditions change frequently, it is unknown when, and if, this may be possible for each portfolio company. In the case of some of these loans, having the loan prepaid may reduce the
achievable yield for us if the capital returned cannot be invested in transactions with equal or greater expected yields, which could have a material adverse effect on our business, financial condition and results of operations.
 49    TABLE OF CONTENTS The disposition of our investments may result in contingent liabilities. We currently expect that a significant portion of our investments will involve private securities. In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding
obligations that must be satisfied through our return of certain distributions previously made to us. Investments in securities of foreign companies, if any, may involve significant risks in addition to the risks inherent in U.S. investments. We may make investments in securities of foreign companies. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing
standards and greater price volatility. In addition, any investments that we make that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we cannot assure you that we will, in fact, hedge currency risk, or, that if we do,
such strategies will be effective. Risks Relating to the Credit Facility Our interests in WhiteHorse Credit are subordinated. We own 100% of the equity interests in WhiteHorse Credit and consolidate the financial statements of WhiteHorse Credit in our consolidated financial statements. We treat the indebtedness of WhiteHorse Credit as our leverage for purposes of compliance with the 1940 Act. Our equity interests in WhiteHorse Credit are subordinated in priority of payment to its obligations to its debt holders and its service providers. All of these persons have claims superior to our claims as equity interest holder in any liquidation of WhiteHorse Credit. Credit or market value deterioration in our portfolio companies will harm our operating results. A payment default on a loan to a portfolio company or a default leading to the acceleration of debt of a portfolio company could cause the loan to such portfolio company held by us to become, or to be deemed to be, a defaulted obligation under the Credit Facility. This, in turn, could result in a coverage test under the Credit Facility not being met and the diversion of distributions of assets held by WhiteHorse Credit to pay down debt under the Credit Facility rather than to make distributions. Such a portfolio company default could also lead to an event of default and acceleration under the Credit Facility and liquidation by
the related lender of the assets securing the Credit Facility. Any such diversion of cash flow or any event of default could result in our being unable to make distributions to our stockholders in amounts sufficient to maintain our ability to be subject to tax as a RIC, or at all, and could have a material adverse effect on our business, financial condition and results of operations. We may not receive cash from WhiteHorse Credit. We expect to receive cash from WhiteHorse Credit as distributions on our equity interests in WhiteHorse Credit. We will receive distributions on our equity interests in WhiteHorse Credit only to the extent cash is available and permitted to be distributed under the Credit Facility. WhiteHorse Credit may not receive sufficient cash to make distributions, in which case we would not be entitled to receive distributions from WhiteHorse Credit and, as a result, we would be unable to make distributions to our stockholders in amounts
 50    TABLE OF CONTENTS sufficient to maintain our status as a RIC, or at all. Limitations under the Credit Facility will impair our ability to sell investments owned by WhiteHorse Credit, and we may not be able to sell such investments. These limitations include prior satisfaction of certain coverage tests and collateral quality tests, the minimum price at which we may sell such investments and the amount of investments we may sell within a certain timeframe. 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 under the Credit Facility and to make distributions to us 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 NAV 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. If either of these coverage tests is not met on a compliance date, then WhiteHorse Credit may sell portfolio investments or apply cash until such coverage tests are satisfied. If we fail to receive cash from WhiteHorse Credit, we may be unable to make distributions to our stockholders in amounts sufficient to maintain our ability to be subject to tax as a RIC, or at all. We may experience an event of default and acceleration under the Credit Facility, which would have a material adverse effect on us. There are several circumstances under which an event of default may occur under the Credit Facility, some of which relate to the performance of the assets of WhiteHorse Credit or the performance by WhiteHorse Credit of its obligations under the Credit Facility. 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 ratios required under the Credit Facility. The occurrence of an event of default could, among
other consequences, (a) prevent us from making distributions to our stockholders sufficient to maintain our ability to be subject to tax as a RIC, or at all, (b) terminate the reinvestment period under the Credit Facility, if it is then in effect, and (c) permit the facility agent to assume the management of WhiteHorse Credits portfolio and to direct the liquidation of its assets. Any of these developments could or would have a material adverse effect on our business, financial condition and results of operations. Upon the occurrence of an event of default, the Lender may exercise customary remedies, including declaring all amounts due and payable under the Credit Facility, blocking distributions in respect of the equity of WhiteHorse Credit or selling assets, including selling assets at a lower price than what might otherwise be achieved in an orderly liquidation. The ability of WhiteHorse Credit to purchase and sell investments is limited. The Credit Facility restricts the portfolio managers ability to purchase and sell investments for WhiteHorse Credit. As a result, the portfolio manager may be unable to purchase or sell investments or take other actions that might be in our best interests, which could impair our performance and result in losses. During the reinvestment period, WhiteHorse Credit will have the ability to borrow funds for the acquisition of investments that meet the eligibility criteria set forth in the Credit Facility. Such funds may be repaid and re-borrowed during the reinvestment period, subject to compliance with the terms of the
Credit Facility. We may lose the ability to manage WhiteHorse Credit even if we continue to own its equity. If an event of default occurs under the Credit Facility or if we resign or are terminated for cause as portfolio manager under the loan agreement, we may no longer manage the WhiteHorse Credit portfolio investments even though we are required to continue to own the equity interests in WhiteHorse Credit. If an agent for the Lender or the successor portfolio manager does not manage WhiteHorse Credits portfolio in the same manner that we would have, our performance may not meet expectations and result in losses.
 51    TABLE OF CONTENTS Risks Relating to our Other Indebtedness The Private Notes and the 2025 Notes are unsecured and therefore effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future. The Private Notes mature on August 7, 2023 and bear interest at an annual rate of 6.00% and the 2025 Notes mature on November 30, 2025 and bear interest at an annual rate of 6.50%. The Private Notes and the 2025 Notes are not secured by any of our assets or any of the assets of our subsidiaries and rank equally in right of payment with all of our existing and future unsubordinated, unsecured senior indebtedness. As a result, the Private Notes and the 2025 Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is
initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Private Notes and the 2025 Notes. The Private Notes and the 2025 Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries. The Private Notes and the 2025 Notes are obligations exclusively of WhiteHorse Finance, Inc. and not of any of our subsidiaries. None of our subsidiaries currently is or acts as a guarantor of the Private Notes and the 2025 Notes, although any subsidiary that guarantees or otherwise becomes liable at any time for any indebtedness under a material credit facility in the future (other than the Credit Facility or any replacement of the Credit Facility) will be required to guarantee the Private Notes and the 2025 Notes. Such guaranty must rank equally in right of payment with all other unsecured and unsubordinated indebtedness of
us and our subsidiaries. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including holders of preferred stock, if any, of our subsidiaries) will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Private Notes and the 2025 Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities
of any such subsidiary senior to our claims. Consequently, the Private Notes and the 2025 Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of our subsidiaries and any subsidiaries that we may in the future acquire or establish. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Private Notes and the 2025 Notes. The indenture for the 2025 Notes contains limited protection for holders of the 2025 Notes. The indenture for the 2025 Notes offers limited protection to holders of the 2025 Notes. The terms of the applicable indenture for the 2025 Notes do not restrict our or any of our subsidiaries ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment in the 2025 Notes. In particular, the terms of the applicable indenture, the 2025 Notes do not place any restrictions on our or our subsidiaries ability to: 

          issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2025 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2025 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore would rank structurally senior to the 2025 Notes and (4) securities, indebtedness or other obligations issued or incurred by our subsidiaries that would be senior in right of payment to our equity interests in our subsidiaries and therefore would rank structurally senior in right of payment to the
 52    TABLE OF CONTENTS 2025 Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of the asset coverage requirement under Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions; 

          pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the 2025 Notes; 

          sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); 

          create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; 

          make investments; or 

          create restrictions on the payment of dividends or other amounts to us from our subsidiaries. In addition, the indenture does not require us to offer to purchase the 2025 Notes in connection with a change of control or any other event. Furthermore, the terms of the indenture, the 2025 Notes do not protect holders of the 2025 Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow or liquidity, except as required under the 1940 Act. Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2025 Notes may have important consequences for you as a holder of the 2025 Notes, including making it more difficult for us to satisfy our obligations with respect to the 2025 Notes or negatively affecting the trading value of the 2025 Notes. Certain of our current debt instruments include more protections for their holders than the indenture and the 2025 Notes. In addition, other debt we issue or incur in the future could contain more protections for its holders than the applicable indenture, the 2025 Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the 2025 Notes. An active trading market for the 2025 Notes may not develop or be sustained, which could limit the market price of the 2025 Notes or your ability to sell them Although the 2025 Notes are listed on the NASDAQ Global Select Market under the symbol WHFBZ, we cannot provide any assurances that an active trading market will develop or be sustained for the 2025 Notes or that the 2025 Notes will be able to be sold. At various times, the 2025 Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. To the extent an active trading market is not sustained, the liquidity and trading
price for the 2025 Notes may be harmed. We may not be able to prepay the Private Notes upon a change in control. In addition, the Note Purchase Agreement governing the Private Notes requires us to offer to prepay all of the issued and outstanding Private Notes upon a change in control and election by the holders, which could have a material adverse effect on our business, financial condition and results of operations. A change in control under the Note Purchase Agreement occurs upon (i) the direct or indirect transfer or other disposition of all of the property or assets held by us and our subsidiaries, subject to certain exceptions (ii) the consummation of a transaction which results in a person or group (as
those terms are used in Section 13(d)(3) of the Exchange Act) becoming the beneficial owner of more than 50% of our outstanding voting stock or (iii) the approval by our stockholders of any plan or proposal relating to the liquidation of the Company.
 53    TABLE OF CONTENTS Upon a change in control event, holders of the Private Notes may require us to prepay for cash some or all of the Private Notes at a prepayment price equal to 100% of the aggregate principal amount of the Private Notes being prepaid, plus accrued and unpaid interest to, but not including, the date of prepayment. If a change in control were to occur, we may not have sufficient funds to prepay any such accelerated indebtedness. We may choose to prepay the Private Notes and the 2025 Notes when prevailing interest rates are relatively low. At any time on or after February 7, 2023, the Private Notes may be prepaid, at our option, at 100% of the principal amount, together with accrued and unpaid interest to the prepayment date. Prior to February 7, 2023, we may prepay all or any principal amount of the Private Notes, together with accrued and unpaid interest, subject a make-whole premium. At any time on or after November 30, 2021, the 2025 Notes may be redeemed, at our option, in whole or in part, at a redemption price of $25 per security plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption. We may choose to prepay the Private Notes and redeem the 2025 Notes from time to time, especially when prevailing interest rates are lower than the rate borne by the Private Notes and the 2025 Notes. If prevailing rates are lower at the time of prepayment, holders would not be able to reinvest the proceeds in a comparable security at an effective interest rate as high as the interest rate on the Private Notes being repaid and the 2025 Notes being redeemed. Our prepayment and redemption right may adversely impact holders ability to sell Private Notes and 2025 Notes as the applicable prepayment date and redemption date
approaches. If we choose to prepay the Private Notes prior to the date of maturity on August 7, 2023 and redeem the 2025 Notes prior to the date of maturity on November 30, 2025, we will need to obtain sufficient liquidity, through available cash, refinancings of our existing indebtedness or otherwise, to repay the principal or redemption price, together with any accrued and unpaid interest and applicable make-whole premiums, on the Private Notes and the 2025 Notes. If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Private Notes and the 2025 Notes. Any default under the agreements governing our indebtedness, including a default under the Credit Facility, any indenture or under other indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Private Notes and the 2025 Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with
the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under the agreements relating to the Credit Facility, or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the Credit Facility or other debt and seek a waiver, we may not be able
to obtain a waiver from the required lenders or holders. If this occurs, we would be in default and our lenders or debt holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under the Credit Facility, could proceed against the collateral securing the debt. Because the Credit Facility has, and any future debt will likely have, customary cross-default provisions, if the indebtedness thereunder or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
 54    TABLE OF CONTENTS FATCA withholding may apply to payments to certain foreign entities. Payments made under the Private Notes and the 2025 Notes to a foreign financial institution or non-financial foreign entity (including such an institution or entity acting as an intermediary) may be subject to a U.S. withholding tax of 30% under the Foreign Account Tax Compliance Act provisions of the Code, or FATCA. This tax may apply to certain payments of interest as well as (beginning January 1, 2019) payments made upon maturity, redemption, or sale of the Private Notes and the 2025 Notes, unless the foreign financial institution or non-financial foreign entity complies with certain information reporting, withholding,
identification, certification and related requirements imposed by FATCA. Holders should consult their tax advisors regarding FATCA and how it may affect an investment in the Private Notes and the 2025 Notes. The trading market or market value of any publicly issued debt securities may fluctuate. Our publicly issued debt securities, if any, may or may not have an established trading market. We cannot assure you that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include the following: 

          the time remaining to the maturity of these debt securities; 

          the outstanding principal amount of debt securities with terms identical to these debt securities; 

          the ratings assigned by national statistical ratings agencies, if any; 

          the general economic environment; 

          the supply of debt securities trading in the secondary market, if any; 

          the redemption or repayment features, if any, of these debt securities; 

          the level, direction and volatility of market interest rates generally; and 

          market rates of interest higher or lower than rates borne by the debt securities. You should also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities. Terms relating to redemption may materially adversely affect your return on any debt securities that we may issue. If your debt securities are redeemable at our option, we may choose to redeem your debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In addition, if your debt securities are subject to mandatory redemption, we may be required to redeem your debt securities also at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In this circumstance, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as your debt securities being redeemed. Our credit ratings may not reflect all risks of an investment in our debt securities. Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our debt securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the market value of or trading market for the publicly issued debt securities.
 55    TABLE OF CONTENTS Risks Relating to an Investment in our Common Stock We may obtain the approval of our stockholders to issue shares of our common stock at prices below the then-current NAV per share of our common stock. If we receive such approval from stockholders in the future, we may issue shares of our common stock at a price below the then current NAV per share of common stock. Any such issuance could materially dilute your interest in our common stock and reduce our NAV per share. We may seek to obtain the approval of our stockholders, and they may approve a proposal that authorizes us, to issue shares of our common stock at prices below the then-current NAV per share of our common stock in one or more offerings for a twelve-month period. Such approval would allow us to access the capital markets in a way that we are typically unable to do as a result of restrictions that, absent stockholder approval, apply to business development companies under the 1940 Act. Any sale or other issuance of shares of our common stock at a price below NAV per share will result in an immediate dilution to your interest in our common stock and a reduction of our NAV per share. This dilution would occur as a result of a proportionately greater decrease in a stockholders interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because the number of future shares of common stock that may be issued below our NAV per share and the price and timing of such issuances are not currently known, we cannot predict the actual dilutive effect of
any such issuance. We also cannot determine the resulting reduction in our NAV per share of any such issuance at this time. We caution you that such effects may be material, and we undertake to describe all the material risks and dilutive effects of any offering that we make at a price below our then-current NAV in the future in a prospectus supplement issued in connection with any such offering. Investing in our common stock may involve an above average degree of risk. The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher risk of volatility or loss of principal. Our investments in portfolio companies involve higher levels of risk, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance. In addition, our common stock is intended for long-term investors and should not be treated as a trading vehicle. Our shares may trade at a price that is less than the offering price. This risk may be greater for investors who sell their shares in a relatively short
period of time after completion of an offering. Shares of closed-end investment companies, including business development companies, often trade at a discount to their NAV. Shares of closed-end investment companies, including business development companies, may trade at a discount from NAV. This characteristic of closed-end investment companies and business development companies is separate and distinct from the risk that our NAV per share may decline. We cannot predict whether our common stock will trade at, above or below NAV. There is a risk that investors in our equity securities may not receive distributions or that our distributions may not grow over time and a portion of our distributions may be a return of capital. We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If the amount of any distribution exceeds the sum of our investment company taxable income, determined without regard to any deduction for distributions paid, and net capital gains, if any, then all or a portion of such distribution could constitute a return of capital to stockholders rather than dividend income for tax purposes. A
return of capital is a return to investors of a portion of their original investment in the company rather than income or capital gains. A return of capital will have the effect of reducing a stockholders basis in its shares of common stock, which may, if such stockholder sells or otherwise disposes such stock at a price greater than its then-current basis, result in a higher taxable gain to such stockholder at the time of sale. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this annual report on Form 10-K. Due to the asset coverage test applicable to us under the
 56    TABLE OF CONTENTS 1940 Act as a business development company, we may be limited in our ability to make distributions. If we declare a dividend and if more stockholders opt to receive cash distributions rather than participate in our distribution reinvestment plan, we may be forced to sell some of our investments in order to make cash dividend payments. In addition, after the reinvestment period under the Credit Facility, asset sales proceeds, if any (including any realized gains), must be used to pay down any outstanding debt and certain other amounts prior to distributing cash from WhiteHorse Credit to us. Also, if certain coverage tests are
not met under the Credit Facility, the Private Notes or the 2025 Notes or if an event of default and acceleration occurs under the Credit Facility, the Private Notes or the 2025 Notes, then income and capital gains which would otherwise be distributable by us to our stockholders will be diverted to pay down debt or other amounts due under the Credit Facility, the Private Notes or the 2025 Notes, as applicable. All distributions will be paid at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our ability to be subject to tax as a RIC, compliance with applicable business development company regulations and such other factors as our board of directors may deem relevant from time to time. We cannot assure investors that we will pay distributions to our stockholders in the future. FATCA withholding may apply to payments to certain foreign entities. Withholding of U.S. tax at a 30% rate is currently required on payments of dividends and, as of January 1, 2019, will be required on redemption proceeds and certain capital gain dividends paid to certain non-U.S. entities that fail to comply with certain information reporting, identification, certification, and related requirements imposed by FATCA. Stockholders and persons intended to hold common stock should consult their tax advisors regarding FATCA and how it may affect an investment in our stock. Our stockholders could experience dilution in their ownership percentage if they do not participate in our distribution reinvestment plan. All distributions declared in cash payable to stockholders that are participants in our distribution reinvestment plan are automatically reinvested in shares of our common stock. As a result, our stockholders that do not participate in our distribution reinvestment plan could experience dilution in their ownership percentage of our common stock over time if we issue additional shares of our common stock. Our stockholders may receive shares of our common stock as dividends, which could result in adverse tax consequences to them. In order to satisfy the Annual Distribution Requirement, we may declare a large portion of a dividend in shares of our common stock instead of in cash. Historically, we have not declared any portion of our dividends in shares of our common stock. As long as at least 20% of such dividend is paid in cash 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. Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock. Sales of substantial amounts of our common stock, including by any selling stockholders, adoption of an at the market issuance program, or the availability of such common stock for sale, whether or not actually sold, could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so. If we issue preferred stock, debt securities or convertible debt securities, the NAV and market value of our common stock may become more volatile. We cannot assure you that the issuance of preferred stock and/or debt securities would result in a higher yield or return to the holders of our common stock. The issuance of preferred stock, debt securities or convertible debt would likely cause the NAV and market value of our common stock to become more volatile. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our common stock would
 57    TABLE OF CONTENTS be reduced. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to exceed the net rate of return on our portfolio, the use of leverage would result in a lower rate of return to the holders of common stock than if we had not issued the preferred stock or debt securities. Any decline in the NAV of our investment would be borne entirely by the holders of our common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in NAV to the holders of our common stock than if we were not leveraged through the issuance of preferred
stock. This decline in NAV would also tend to cause a greater decline in the market price for our common stock. There is also a risk that, in the event of a sharp decline in the value of our net assets, we would be in danger of failing to maintain required asset coverage ratios which may be required by the preferred stock, debt securities, convertible debt or of a downgrade in the ratings of the preferred stock, debt securities, convertible debt or our current investment income might not be sufficient to meet the dividend requirements on the preferred stock or the interest payments on the debt securities. In order to counteract such an event, we might need to liquidate investments in order to fund redemption of some or all of the
preferred stock, debt securities or convertible debt. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, debt securities, convertible debt or any combination of these securities. Holders of preferred stock, debt securities or convertible debt may have different interests than holders of common stock and may at times have disproportionate influence over our affairs. Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our NAV per share, then you will experience an immediate dilution of the aggregate NAV of your shares. In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to this annual report on Form 10-K, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering. In addition, if the subscription price is less than the NAV per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate NAV of their shares as a result of the offering. The amount of any decrease in NAV is not predictable because it is not known at this time what the subscription price and NAV per share will be on the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial. These dilutive effects may be exacerbated if we were to conduct multiple subscription rights offerings, particularly if such offerings were to occur over a short period of time. In addition, subscription rights offerings and the prospect of future subscription rights offerings may create downward pressure on the secondary market price of our common stock due to the potential for the issuance of shares at a price below our NAV, without a corresponding change to our NAV. Risks Relating to Our Offerings The market price of our securities may fluctuate significantly. The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include: 

          significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of the companies; 

          changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to RICs and business development companies; 

          loss of our qualification or ability to be subject to tax as a RIC or qualification as a business development company;
 58    TABLE OF CONTENTS 

          changes in earnings or variations in operating results; 

          changes in the value of our portfolio investments; 

          changes in accounting guidelines governing valuation of our investments; 

          any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; 

          departure of WhiteHorse Advisers or any of its affiliates key personnel; 

          operating performance of companies comparable to us; 

          general economic trends and other external factors; and 

          loss of a major funding source or an event of default under a material financing contract. See Risks Relating to an Investment in our Common Stock above for additional risks you should carefully consider before deciding to invest in shares of our common stock. We are a holding company and depend on payments from our subsidiaries in order to make payments on any debt securities that we may issue as well as to pay dividends on our common stock. Any debt securities that we issue will be structurally subordinated to the obligations of our subsidiaries. We are a holding company and fund a majority of our investments through wholly-owned subsidiaries, and a majority of the assets that we hold directly are the equity interests in such subsidiaries. We depend upon the cash flow from our subsidiaries and the receipt of funds from them, any of which may be subject to restriction or limitations based on the organizational documents of the subsidiaries and the agreements governing the debt of any such subsidiary. In addition, because we are a holding company, any debt securities that we issue will be structurally subordinated to the obligations of our subsidiaries. In the event that
one of our subsidiaries becomes insolvent, liquidates, reorganizes, dissolves or otherwise winds up, its assets will be used first to satisfy the claims of its creditors. Consequently, any claim by us or our creditors, including holders of any debt securities that we may issue, against any subsidiary will be structurally subordinated to all of the claims of the creditors of such subsidiary. We cannot assure security holders that they will receive any payments required to be made under the terms of any debt securities that we may issue, dividends or other distributions. Holders of preferred stock that we issue, if any, would have the right to elect members of the board of directors and have class voting rights on certain matters. The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of
dividends or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair our ability to maintain our ability to be subject to tax as a RIC. Item 1B.

          Unresolved Staff Comments None. Item 2.

          Properties Our executive offices are located at 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131 and are provided by our administrator in accordance with the terms of the Administration Agreement. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted. Item 3.

          Legal Proceedings WhiteHorse Finance, WhiteHorse Advisers and WhiteHorse Administration are not currently subject to any material legal proceedings.
 59    TABLE OF CONTENTS Item 4.

          Mine Safety Disclosures Not applicable.
 60    TABLE OF CONTENTS PART II Item 5.

          Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock Our common stock began trading on December 5, 2012 and is currently traded on the NASDAQ Global Select Market under the symbol WHF. As of March 8, 2019, we had 16 stockholders of record. Distributions We intend to continue making quarterly distributions to our stockholders. The timing and amount of our quarterly distributions, if any, are determined by our board of directors. We have elected to be treated as a RIC under Subchapter M of the Code and intend to maintain such treatment. To maintain our ability to be subject to tax as a RIC, we must meet the Annual Distribution Requirement. We maintain an opt out distribution reinvestment plan for our common stockholders. If we declare a dividend or other distribution, then stockholders cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the distribution reinvestment plan so as to receive cash distributions. As a result, stockholders that do not participate in the distribution reinvestment plan may experience dilution over time. Stockholders who do not elect to receive distributions in shares of common stock may experience accretion to the NAV of their
shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or dilution would depend on various factors, including the proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the distribution payable to a stockholder. Sale of Unregistered Securities None. Issuer Purchases of Equity Securities None.
 61    TABLE OF CONTENTS Stock Performance Graph This graph compares the stockholder return on our common stock from December 5, 2012 (initial public offering) to December 31, 2018 with that of the NASDAQ Financial 100, the Standard & Poors 500 and the Wells Fargo Business Development Company Stock Indices. This graph assumes that on December 5, 2012, $100 was invested in our common stock, the NASDAQ Financial 100, the Standard & Poors 500 and the Wells Fargo Business Development Company Stock Indices. The stock price information reflected in the graph is based upon market closing prices, which for our common stock was $13.90 on December 5, 2012. The
graph also assumes the reinvestment of all cash dividends prior to any tax effect. The graph and other information furnished under this Part II Item 5 of this annual report on Form 10-K shall not be deemed to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the below graph is not necessarily indicative of future stock performance. [GRAPHIC MISSING]
 62    TABLE OF CONTENTS Item 6.

          Selected Consolidated Financial Data The selected consolidated financial and other data below should be read in conjunction with our Managements Discussion and Analysis of Financial Condition and Results of Operations and the related financial statements and notes thereto. Financial information is presented for the fiscal years ended December 31, 2018, 2017, 2016, 2015 and 2014, and has been derived from our financial statements that were audited by Crowe LLP, an independent registered public accounting firm.  As of and for the years ended December 31,2018

          

          2017

          

          2016

          

          2015

          

          2014(In thousands, except per share data)Statement of Operations Data:Total investment income

          

          $

          63,246

          

          

          $

          54,804

          

          

          $

          53,849

          

          

          $

          47,074

          

          

          $

          37,546Base management fees, net of fees waived

          

          

          10,241

          

          

          

          9,508

          

          

          

          8,990

          

          

          

          8,560

          

          

          

          7,110Performance-based incentive fees

          

          

          12,134

          

          

          

          6,553

          

          

          

          6,755

          

          

          

          4,323

          

          

          

          3,387All other expenses

          

          

          14,929

          

          

          

          12,531

          

          

          

          11,093

          

          

          

          13,436

          

          

          

          10,048Net investment income before excise tax

          

          

          25,942

          

          

          

          26,212

          

          

          

          27,011

          

          

          

          20,755

          

          

          

          17,001Excise tax

          

          

          942

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Net investment income

          

          

          25,000

          

          

          

          26,212

          

          

          

          27,011

          

          

          

          20,755

          

          

          

          17,001Net realized (gains) losses on investments

          

          

          32,734

          

          

          

          108

          

          

          

          (478

          )

          

          

          (379

          )

          

          

          (64

          )Net change in unrealized appreciation (depreciation) on investments

          

          

          (433

          )

          

          

          8,128

          

          

          

          4,796

          

          

          

          (23,204

          )

          

          

          2,607Net increase (decrease) in net assets resulting from operations

          

          

          57,301

          

          

          

          34,448

          

          

          

          31,329

          

          

          

          (2,828

          )

          

          

          19,544Per share data:Net asset value

          

          

          15.35

          

          

          

          13.98

          

          

          

          13.63

          

          

          

          13.33

          

          

          

          15.04Net investment income

          

          

          1.22

          

          

          

          1.36

          

          

          

          1.48

          

          

          

          1.36

          

          

          

          1.13Net realized gains (losses) on investments

          

          

          1.59

          

          

          

          0.01

          

          

          

          (0.02

          )

          

          

          (0.02

          )

          

          

          Net change in unrealized (depreciation) appreciation on investments

          

          

          (0.02

          )

          

          

          0.40

          

          

          

          0.26

          

          

          

          (1.45

          )

          

          

          0.17Net increase (decrease) in net assets resulting from operations

          

          

          2.79

          

          

          

          1.77

          

          

          

          1.72

          

          

          

          (0.18

          )

          

          

          1.30Per share distributions declared

          

          

          1.42

          

          

          

          1.42

          

          

          

          1.42

          

          

          

          1.42

          

          

          

          1.42Dollar amount of distributions declared

          

          

          29,165

          

          

          

          27,573

          

          

          

          25,992

          

          

          

          22,455

          

          

          

          21,276Balance Sheet data at period end:Investments, at fair value

          

          

          469,564

          

          

          

          440,680

          

          

          

          411,714

          

          

          

          415,343

          

          

          

          403,500Cash and cash equivalents

          

          

          24,148

          

          

          

          35,219

          

          

          

          17,036

          

          

          

          22,769

          

          

          

          11,647Restricted cash and cash equivalents

          

          

          9,584

          

          

          

          3,717

          

          

          

          11,858

          

          

          

          

          

          

          

          4,495Other assets

          

          

          10,799

          

          

          

          5,915

          

          

          

          5,626

          

          

          

          3,599

          

          

          

          7,200Total assets

          

          

          514,095

          

          

          

          485,531

          

          

          

          446,234

          

          

          

          441,711

          

          

          

          426,842Total liabilities

          

          

          198,799

          

          

          

          198,579

          

          

          

          196,845

          

          

          

          197,659

          

          

          

          201,484Total net assets

          

          

          315,296

          

          

          

          286,952

          

          

          

          249,389

          

          

          

          244,052

          

          

          

          225,358Other data:Weighted average effective yield on income producing debt investments(1)

          

          

          11.9

          %

          

          

          11.9

          %

          

          

          11.8

          %

          

          

          11.8

          %

          

          

          11.3

          %Weighted average effective yield on total portfolio, including equities(1)

          

          

          11.8

          %

          

          

          11.4

          %

          

          

          11.1

          %

          

          

          11.0

          %

          

          

          10.9

          %Number of portfolio investments at period end

          

          

          53

          

          

          

          43

          

          

          

          37

          

          

          

          35

          

          

          

          37
  (1)

          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 investments.
 63    TABLE OF CONTENTS Item 7.

          Managements Discussion and Analysis of Financial Condition and Results of Operations The information contained in this section should be read in conjunction with the Selected Financial Data and our Consolidated Financial Statements and Supplementary Data appearing elsewhere in this annual report on Form 10-K. Forward-Looking Statements Some of the statements in this annual report on Form 10-K constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties, including statements as to: 

          our future operating results; 

          our business prospects and the prospects of our prospective portfolio companies; 

          the ability of our portfolio companies to achieve their objectives; 

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

          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; 

          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; 

          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 Risk Factors and elsewhere in this annual report on Form 10-K. We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report on Form 10-K, 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 in the future may file with the SEC, 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 and Sections 21E(b)(2)(B) and (D) of 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 annual report on Form 10-K or any periodic reports we file under the Exchange Act.
 64    TABLE OF CONTENTS 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 1940 Act. In addition, for tax purposes, we elected to be treated as a RIC under Subchapter M of 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. 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. As part of the BDC
Conversion, all outstanding units in WhiteHorse Finance, LLC were converted to 7,826,284 shares of common stock of WhiteHorse Finance, Inc. On December 4, 2012, we priced our initial public offering, or the IPO, selling 6,666,667 shares. Concurrent with the IPO, certain of our directors and officers, the managers of our investment adviser 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 transaction exempt from the Securities Act, or the Concurrent Private Placement. Our shares are currently listed on the NASDAQ Global Select Market under the symbol WHF. On November 20, 2015, we completed a non-transferable subscription rights offering, or the Rights Offering, to our stockholders of record as of October 23, 2015. The rights entitled record stockholders to subscribe for up to an aggregate of 3,321,033 shares of our common stock at a price equal to $13.55 per share, the closing price of the Companys stock as of October 16, 2015. Record stockholders received one right for each share of common stock owned on the record date. The rights entitled the holders to purchase one new share of common stock for every 4.511505 rights held, and record stockholders who fully exercised
their rights were entitled to subscribe, subject to certain limitations and allotment, for additional shares that remained unsubscribed as a result of any unexercised rights. The Rights Offering was fully subscribed, and net proceeds, after payment of the dealer manager fees and other offering expenses, was approximately $44.0 million. On June 30, 2017, we completed an offering of 2,200,000 shares of our common stock at a public offering price of $13.97 per share. Our Investment Adviser agreed to bear a portion of the underwriting discounts and commissions in connection with the offering, such that the issuance of shares resulted in net proceeds to us of approximately $30.3 million, which was at or above our NAV per share at the time of the offering. We are a direct lender targeting debt investments in privately held, lower middle market companies located in North America. 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 that typically carry a floating interest rate based on LIBOR plus a spread and 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 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 supervised by our board of directors, a majority of whom are independent of us, WhiteHorse Advisers and its affiliates. Under our 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. See Business  Management Agreements  Investment Advisory Agreement. We have also entered into an Administration Agreement with WhiteHorse Administration. Under our Administration
Agreement, we have
 65    TABLE OF CONTENTS 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. As of December 31, 2018, our investment portfolio consisted primarily of senior secured loans across 53 positions in 39 companies with an aggregate fair value of approximately $469.6 million. As of December 31, 2017, our investment portfolio consisted primarily of senior secured loans across 43 positions in 32 companies with an aggregate fair value of approximately $440.7 million. At both dates, the majority of our portfolio comprised senior secured loans to lower middle market borrowers. 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 originated 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 LIBOR. 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 interest income when we receive such amounts. 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. See Business  Management Agreements  Investment Advisory Agreement and Business  Management Agreements  Administration
Agreement. We bear all other costs and expenses of our operations and transactions, including: 

          our organization; 

          calculating our NAV and NAV 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;
 66    TABLE OF CONTENTS 

          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; 

          costs of holding stockholder meetings; 

          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 or WhiteHorse Administration may pay for certain expenses that we incur, which are subject to reimbursement by us. Recent Developments On January 14, 2019, we entered into a limited liability company operating agreement with State Teachers Retirement System of Ohio, a public pension fund established under Ohio law, or STRS Ohio, to co-manage a newly formed joint venture entity, WHF STRS Ohio Senior Loan Fund LLC, or the Joint Venture. STRS Ohio and we have committed to provide up to $125 million of subordinated notes and equity to the Joint Venture, with STRS Ohio providing up to $50 million and WhiteHorse Finance providing up to $75 million. The Joint Venture will invest primarily in lower middle market, senior secured debt facilities. Consolidated Results of Operations Comparison of the Years Ended December 31, 2018, December 31, 2017 and December 31, 2016 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, comparisons of net increases in net assets resulting from operations may not be meaningful. Investment Income Investment income for the years ended December 31, 2018, 2017 and 2016, respectively, totaled $63.2 million, $54.8 million and $53.8 million and was attributable to interest, fees and dividends earned from investments in portfolio companies. Investment income included fee income, primarily related to amendments and prepayments, of $4.9 million, $2.9 million and $2.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Non-recurring fee income for the years ended December 31, 2018, 2017 and 2016 totaled $4.5 million, $2.4 million and $1.8 million, respectively. Investment income excluding fee income
increased due to larger investment portfolio balances, offset partially by the impact of spread compression. We expect to generate some level of non-recurring fee income each quarter from prepayments, amendments and other sources.
 67    TABLE OF CONTENTS Operating Expenses Expenses, excluding excise tax, were $37.3 million, $28.6 million and $26.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. Interest expense totaled $11.6 million, $9.8 million and $8.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. The increase was primarily due to higher interest rates resulting from an increase in LIBOR. Base management fees (net of fees waived, if any) and performance-based incentive fees totaled $10.2 million and $12.1 million, respectively, for the year ended December 31, 2018, $9.5 million and $6.6 million, respectively, for the year ended December 31, 2017, and $9.0 million and $6.8 million, respectively, for the year ended December 31, 2016. Base management fees increased year over year due to the increase in total gross assets. The increase in performance-based incentive fees during the year ended December 31, 2018 was attributable to an increase in pre-incentive net investment income as well as an additional $4.7
million accrual for the capital gains incentive fee component, which was primarily a result of the realized gain generated from the disposition from our investment in Aretec Group, Inc. Administrative service fees totaled approximately $0.7 million, $0.7 million and $0.7 million for the years ended December 31, 2018, 2017 and 2016, 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 years ended December 31, 2018, 2017 and 2016, we incurred
a net excise tax expense of $0.9 million, $0.0 million and $0.0 million, respectively, for U.S. federal excise tax. Net Realized and Unrealized Gains and Losses on Investments Net realized gains (losses) on investments for the years ended December 31, 2018, 2017 and 2016 were $32.7 million $0.1 million and $(0.5) million, respectively. Our net realized gain during the year ended December 31, 2018 was attributable to the realization of our equity investment in Aretec Group, Inc., which generated a realized gain of approximately $33.0 million. We generated net unrealized depreciation of $0.4 million, net unrealized appreciation of $8.1 million and net unrealized appreciation of $4.8 million, respectively, for the years ended December 31, 2018, 2017 and 2016, due to credit related adjustments, which caused changes in fair value, as well as the reversal of unrealized appreciation or depreciation on investments disposed of during each of those years. The unrealized depreciation on investments during the year ended December 31, 2018 was primarily attributable to fair value decreases in our investments in StackPath, LLC and AG Kings Holdings Inc. This was partially
offset by fair value increases in our investments in Caelus Energy Alaska O3, LLC and the reversal of prior unrealized depreciation upon the full disposal on our investment in Aretec Group, Inc. The increase in unrealized appreciation on investments during the year ended December 31, 2017 was primarily attributable to fair value increases in our investments in Aretec Group, Inc., Caelus Energy Alaska O3, LLC, as well as the reversal of prior unrealized depreciation upon the full repayment on our investment in ProPetro Services, Inc. This was partially offset by fair value markdowns in our investments in Crews of California, Inc. and Outcome Health. The increase in net unrealized appreciation on investments during the year ended December 31, 2016 was
 68    TABLE OF CONTENTS primarily attributable to increases in the recognition of unrealized gains in our investments in Crews of California, Inc. and Securus Technologies Holdings, Inc., partially offset by the recognition of unrealized loss in our investment in Grupo HIMA San Pablo, Inc. Financial Condition, Liquidity and Capital Resources As a business development company, we generally distribute substantially all of our net income to our stockholders. We generate cash primarily from offerings of securities, 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 under the Credit Facility. In the future, we may obtain borrowings under other credit facilities and from issuances of senior securities. 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. 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 once a quarter after the payment of operating expenses and amounts due under the Credit Facility. Comparison of the Years Ended December 31, 2018, December 31, 2017 and December 31, 2016 Our operating activities provided cash and cash equivalents of approximately $31.1 million during the year ended December 31, 2018, primarily from proceeds received from realization of investments partially offset by net cash deployed for the acquisition of investments. Our financing activities used cash and cash equivalents of approximately $36.3 million during the year ended December 31, 2018. During the year ended December 31, 2018, we refinanced and increased our existing fixed rate debt within our capital structure by redeeming our 2020 Notes and replacing them with the issuance of $30.0 million of aggregate principal
amount of Private Notes as well as by issuing an additional $35.0 million of aggregate principal amount of 2025 Notes. We also had net repayments of $40.0 million on our Credit Facility and made cash payments in respect of net distributions to our stockholders of approximately $29.0 million. Our operating activities generated cash and cash equivalents of approximately $7.2 million during the year ended December 31, 2017, primarily from cash collected on our net investment income partially offset by net cash deployed for the acquisition of investments. Our financing activities generated cash and cash equivalents of approximately $2.9 million during the year ended December 31, 2017, primarily from the issuance of common stock partially offset by the payment of distributions to stockholders. Our operating activities generated cash and cash equivalents of approximately $34.1 million during the year ended December 31, 2016, primarily from the net proceeds from principal repayments and sale of portfolio investments. Our financing activities used cash and cash equivalents of approximately $28.0 million during the year ended December 31, 2016, primarily for the payment of distribution to stockholders. As of December 31, 2018, we had cash and cash equivalent resources, including restricted cash, of $33.7 million. As of the same date, we had $85.0 million undrawn under the Credit Facility based on the collateral and portfolio quality requirements stipulated in the related credit and security agreement. As of December 31, 2017, we had cash and cash equivalent resources, including restricted cash, of $38.9 million. As of the same date, we had $45.0 million undrawn under the Credit Facility based on the collateral and portfolio quality requirements stipulated in the related credit and security agreement. As of December 31, 2016, we had cash and cash equivalent resources, including restricted cash, of $28.9 million. As of the same date, we had $45.0 million undrawn under the Credit Facility based on the collateral and portfolio quality requirements stipulated in the related credit and security agreement.
 69    TABLE OF CONTENTS Capital Raises On June 30, 2017, we completed an offering of 2,200,000 shares of our common stock at a public offering price of $13.97 per share. Our investment adviser agreed to bear a portion of the underwriting discounts and commissions in connection with the offering, such that the issuance of shares resulted in net proceeds to us of approximately $30.3 million, which was at or above our NAV per share at the time of the offering. On November 20, 2015, we completed a non-transferable subscription rights offering, or the Rights Offering, to our stockholders of record as of October 23, 2015. The rights entitled record stockholders to subscribe for up to an aggregate of 3,321,033 shares of our common stock at a price equal to $13.55 per share, the closing price of the Companys stock as of October 16, 2015. Record stockholders received one right for each share of common stock owned on the record date. The rights entitled the holders to purchase one new share of common stock for every 4.511505 rights held, and record stockholders who fully exercised
their rights were entitled to subscribe, subject to certain limitations and allotment, for additional shares that remained unsubscribed as a result of any unexercised rights. The Rights Offering was fully subscribed, and net proceeds, after payment of the dealer manager fees and other offering expenses, was approximately $44.0 million. Credit Facility On December 23, 2015, WhiteHorse Credit entered into a $200 million revolving credit and security agreement 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 California. 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. As of December 31, 2018, there was $115 million in outstanding borrowings under the Credit Facility and, based on collateral and portfolio requirements stipulated in the Credit Facility agreement, approximately $85 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 $432.2 million as of December 31, 2018. As of December 31, 2017, there was $155 million in outstanding borrowings under the Credit Facility and, based on collateral and portfolio requirements stipulated in the Credit Facility agreement, approximately $45 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 $376.1 million as of December 31, 2017. As of December 31, 2016, there was $155 million in outstanding borrowings under the Credit Facility and, based on collateral and portfolio requirements stipulated in the Credit Facility agreement, approximately $40 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 $356.9 million as of December 31, 2016. The Credit Facility provides for borrowings in an aggregate principal amount up to $200 million with an accordion feature which allows for the expansion of the borrowing limit up to $235 million, subject to consent from the lender and other customary conditions. Prior to December 29, 2020, the required minimum outstanding borrowings under the Credit Facility are $155 million, unless the accordion feature is exercised, at which time the required minimum outstanding borrowings will be $175 million. On November 19, 2018, in conjunction with the amendment to the credit and security agreement governing the Credit Facility, the
required minimum outstanding borrowings were reduced to $115 million through May 19, 2019 and then will be increased to $135 million until August 20, 2019. Thereafter, the required minimum borrowings will be $155 million again. 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
 70    TABLE OF CONTENTS 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 NAV 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 one-month LIBOR plus an annual spread of 2.75%. Interest is payable quarterly in arrears. WhiteHorse Credit is required to pay a non-usage fee which accrues at 1.00% per annum (or 0.60% per annum with respect to any date in which the aggregated amount of outstanding borrowings is greater than 77.5% of the total commitments), on the average daily unused amount of the financing commitments, to the extent the aggregate principal amount available under the Credit Facility has not been borrowed. The non-usage fee was waived through September 22, 2016 while borrowings under the
Credit Facility exceeded $100 million. 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 December 29, 2021. 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 under the credit agreement, 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 Facility. Any such developments could have a material adverse effect on our financial conditions 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. 2020 Notes On July 23, 2013, we completed a public offering of $30.0 million of aggregate principal amount of the 2020 Notes, the net proceeds of which were used to reduce outstanding obligations under an unsecured term loan. Interest on the 2020 Notes had paid quarterly on March 31, June 30, September 30 and December 31, at an annual rate of 6.50%. On July 10, 2018, we notified American Stock Transfer & Trust Company, LLC, the trustee of our 2020 Notes, of our election to redeem the $30 million of aggregate principal amount of the 2020 Notes outstanding, and instructed the trustee to provide notice of such redemption to the holders
of the 2020 Notes in accordance with the terms of the indenture agreement under which the 2020 Notes were issued. The redemption was completed on August 9, 2018, and the 2020 Notes were delisted from the NASDAQ Global Select Market where they were previously listed under the symbol WHFBL. Private Notes On July 13, 2018, we entered into the Note Purchase Agreement, to sell in a private offering $30 million of aggregate principal amount of unsecured notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. Interest on the 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 Private Notes cease to have an investment grade rating. The 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 Private Notes are general
 71    TABLE OF CONTENTS unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness that we may issue. The closing of the transaction occurred on August 7, 2018. We used the net proceeds from this offering, together with cash on hand, to redeem all of the 2020 Notes, as discussed above. 2025 Notes On November 13, 2018, we completed a public offering of $35.0 million of aggregate principal amount of unsecured 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 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. Distributions During each of the years ended December 31, 2018, 2017 and 2016, we declared distributions of $1.42 per share for total distributions of $29.2 million, $27.6 million and $26.0 million, respectively. We monitor available net investment income to determine if a return of capital for taxation purposes may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for a 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. Notices to stockholders will be provided in accordance with Section 19(a) of the 1940 Act. For the year ended December 31, 2018, distributions to stockholders did not include a return of capital, but did include approximately $11.6 million relating to long-term
capital gains, for tax purposes. For the year ended December 31, 2017, distributions to stockholders did not include a return of capital, but did include approximately $0.9 million relating to long-term capital gains, for tax purposes. For the year ended December 31, 2016, distributions to stockholders did not include a return of capital for tax purposes. The specific tax characteristics of the distribution are reported to stockholders subject to tax reporting on Form 1099-DIV after the end of each calendar year 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 our ordinary income or gains. Portfolio Investments and Yield As of December 31, 2018, our investment portfolio consisted primarily of senior secured loans across 53 positions in 39 companies with an aggregate fair value of $469.6 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 less than 0.1% based on fair value. As of December 31, 2018, our portfolio had an average investment size of $8.9 million (average debt investment size of $10.1 million), with investment sizes
ranging from less than $0.1 million to $24.7 million and a weighted average effective yield of 11.8% (and a weighted average effective yield on income-producing debt investments of 11.9%). As of December 31, 2017, our investment portfolio consisted primarily of senior secured loans across 43 positions in 32 companies with an aggregate fair value of $440.7 million. As of that date, the majority of our portfolio was comprised of senior secured loans to lower middle market borrowers and approximately 99.9% of those loans were variable-rate investments (primarily indexed to LIBOR). As of December 31, 2017, our portfolio had an average investment size of $10.2 million (average debt investment size of $10.9 million), with investment sizes ranging from less than $0.1 million to $25.7 million and a weighted average
effective yield of 11.4% (and a weighted average effective yield on income-producing debt investments of 11.9%).
 72    TABLE OF CONTENTS For the year ended December 31, 2018, we invested $277.0 million in new and existing portfolio companies, offset by repayments and sales of $285.8 million. Proceeds from sales totaled $70.4 million and repayments included $9.8 million of scheduled repayments and $205.6 million of unscheduled repayments. For the year ended December 31, 2017, we invested $137.6 million in new and existing portfolio companies, offset by repayments and sales of $120.6 million. Proceeds from sales totaled $11.7 million while repayments included $25.9 million of scheduled repayments and $83.0 million of unscheduled repayments. For the year ended December 31, 2016, we invested $121.5 million in new and existing portfolio companies, offset by repayments and sales of $133.7 million. Repayments included $23.4 million of scheduled repayments and $110.3 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.
 73    TABLE OF CONTENTS The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value:  December 31, 2018

          

          December 31, 2017Investment Performance Rating

          

          Investments at Fair Value (Dollars in Millions)

          

          Percentage of Total Portfolio

          

          Investments at Fair Value (Dollars in Millions)

          

          Percentage of Total Portfolio1

          

          $

          29.5

          

          

          

          6.3

          %

          

          $

          

          

          

          

          

          %2

          

          

          376.3

          

          

          

          80.1

          

          

          

          369.7

          

          

          

          83.93

          

          

          63.7

          

          

          

          13.6

          

          

          

          70.8

          

          

          

          16.14

          

          

          0.1

          

          

          

          0.0

          

          

          

          0.2

          

          

          

          0.05

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Total Portfolio

          

          $

          469.6

          

          

          

          100.0

          %

          

          $

          440.7

          

          

          

          100.0

          %
 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 statements of assets and liabilities. As of December 31, 2018, we had commitments to fund approximately $1.6 million of revolving lines of credit or delayed draw facilities. During the year ended December 31, 2018, we funded approximately $3.5 million, on a net basis, of commitments that were outstanding as of
December 31, 2017. As of December 31, 2017, we had commitments to fund approximately $6.4 million of revolving lines of credit or delayed draw facilities. As of December 31, 2016, we had no commitments to fund revolving lines of credit or delayed draw facilities to our portfolio companies. During the year ended December 31, 2016, we funded commitments of $14.0 million that were outstanding as of December 31, 2015. During the year ended December 31, 2015, we funded commitments of $10.8 million that were outstanding as of December 31, 2014. Distributions In order to maintain our ability to be subject to tax as a RIC and to avoid corporate-level tax on income, we must meet the Annual Distribution Requirement. 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. 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.
 74    TABLE OF CONTENTS Contractual Obligations A summary of our significant contractual payment obligations as of December 31, 2018 is as follows:  Payments Due by Period (Dollars in millions)Total

          

          Less Than 1 Year

          

          1  3 Years

          

          3  5 Years

          

          More Than 5 YearsCredit Facility

          

          $

          115.0

          

          

          $

          

          

          

          $

          115.0

          

          

          $

          

          

          

          $

          Private Notes

          

          

          30.0

          

          

          

          

          

          

          

          

          

          

          

          30.0

          

          

          

          2025 Notes

          

          

          35.0

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          35.0Total contractual obligations

          

          $

          180.0

          

          

          $

          

          

          

          $

          115.0

          

          

          $

          30.0

          

          

          $

          35.0
 As of December 31, 2018, we had $85.0 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. The Investment Advisory Agreement became effective upon the pricing of the IPO. 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 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 a percentage of
the value of our consolidated gross assets and (2) an incentive fee based on our performance. See Business  Management Agreements  Investment Advisory Agreement. 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 the 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. See Business  Management Agreements  Administration Agreement. Related Party Transactions We have entered into a number of business relationships with affiliated or related parties, including the following: 

          WhiteHorse Advisers manages the day-to-day operations of, 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 as portfolio manager of WhiteHorse Credit under the Credit Facility and for certain portfolio companies, pursuant to the Administration Agreement. 

          We entered into the 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. 

          Concurrent with the closing of our IPO, certain of our directors and officers, the managers of our investment adviser 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 the Concurrent Private Placement for proceeds to us of approximately $7.1 million. We received the full proceeds from the sale of these shares, and no underwriting discounts or commissions were paid in respect of these shares. 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
 75    TABLE OF CONTENTS 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. Impact of Tax Reform On December 22, 2017, the Tax Cuts and Jobs Act was enacted. The Tax Cuts and Jobs Act, among other things, permanently reduces the maximum federal corporate income tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018 through 2025), restricts the deductibility of business interest expense, changes the rules regarding the calculation of net operating loss deductions that may be used to offset taxable income, expands the circumstances in which a foreign corporation will be treated as a controlled foreign corporation and, under certain circumstances, requires accrual method
taxpayers to recognize income for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable financial statement. 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 its wholly owned subsidiary, WhiteHorse California) 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
 76    TABLE OF CONTENTS 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 NAV 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 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 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 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 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 valuation being initially reviewed by investment professionals of our investment adviser responsible for credit monitoring. 

          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. 

          At least once annually, the valuation for each significant 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. 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 the independent valuation firms each quarter. When an external event occurs with respect to one of our portfolio companies, such as 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. 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
 77    TABLE OF CONTENTS 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 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. 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 arms-length transaction, (iii) a discounted cash flow analysis, (iv) the guideline
public company method, (v) the similar transaction method or (vi) the option pricing method. 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,
 78    TABLE OF CONTENTS 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. Item 7A.  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. 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 financial condition as of December 31, 2018 were 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):  Basis point increase

          

          Increase in Interest Income

          

          Increase in Interest Expense

          

          Net Increase100

          

          $

          6,392

          

          

          $

          1,150

          

          

          $

          5,242200

          

          

          11,119

          

          

          

          2,300

          

          

          

          8,819300

          

          

          15,845

          

          

          

          3,450

          

          

          

          12,395400

          

          

          20,572

          

          

          

          4,600

          

          

          

          15,972500

          

          

          25,298

          

          

          

          5,750

          

          

          

          19,548
 As of December 31, 2018, 100.0% of the 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. 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
 79    TABLE OF CONTENTS 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 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.
 80    TABLE OF CONTENTS Item 8.

          Consolidated Financial Statements and Supplementary Data Index to Consolidated Financial Statements  Report of Independent Registered Public Accounting Firm





82Consolidated Statements of Assets and Liabilities as of December 31, 2018 and 2017





84Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016





85Consolidated Statements of Changes in Net Assets for the years ended December 31, 2018, 2017 and 2016





86Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016





87Consolidated Schedules of Investments as of December 31, 2018 and 2017





88Notes to the Consolidated Financial Statements





97
 81    TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of WhiteHorse Finance, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of WhiteHorse Finance, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in net assets, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and the consolidated financial highlights for each of the five years in the period then ended (collectively referred to as the financial statements). We also have audited the Companys internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control  Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations, the changes in its net assets and its cash flows for each of the years in the three-year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control  Integrated Framework: (2013) issued by COSO. Basis for Opinions The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys financial statements and an opinion on the Companys internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. These procedures include confirmation of investments owned as of December 31, 2018 and 2017, by correspondence with the custodian, loan agent, borrower and other auditing procedures where replies were not received. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
 82    TABLE OF CONTENTS in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Crowe LLP Crowe LLP As a result of affiliated fund relationships, we have served as auditor since 2006. New York, New York March 14, 2019
 83    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Statements of Assets and Liabilities(in thousands, except share and per share data)  December 31, 2018

          

          December 31, 2017AssetsInvestments, at fair valueNon-controlled/non-affiliate company investments

          

          $

          459,399

          

          

          $

          404,434Non-controlled affiliate company investments

          

          

          10,165

          

          

          

          36,246Total investments, at fair value (amortized cost $477,839 and $448,522, respectively)

          

          

          469,564

          

          

          

          440,680Cash and cash equivalents

          

          

          24,148

          

          

          

          35,219Restricted cash and cash equivalents

          

          

          9,584

          

          

          

          3,717Interest receivable

          

          

          4,616

          

          

          

          4,947Receivables from investments sold

          

          

          5,608

          

          

          

          783Prepaid expenses and other receivables

          

          

          575

          

          

          

          185Total assets

          

          $

          514,095

          

          

          $

          485,531LiabilitiesDebt

          

          $

          175,953

          

          

          $

          182,122Distributions payable

          

          

          7,294

          

          

          

          7,289Management fees payable

          

          

          11,193

          

          

          

          7,848Payables for investments purchased

          

          

          445

          

          

          

          Interest payable

          

          

          1,562

          

          

          

          527Accounts payable and accrued expenses

          

          

          2,322

          

          

          

          701Advances received from unfunded credit facilities

          

          

          30

          

          

          

          92Total liabilities

          

          

          198,799

          

          

          

          198,579Commitments and contingencies (See Note 7)Net assetsCommon stock, 20,546,032 and 20,531,948 shares issued and outstanding, par value $0.001 per share, respectively, and 100,000,000 shares authorized

          

          

          21

          

          

          

          20Paid-in capital in excess of par

          

          

          301,557

          

          

          

          302,292Accumulated undistributed (overdistributed) earnings

          

          

          13,718

          

          

          

          (15,360

          )Total net assets

          

          

          315,296

          

          

          

          286,952Total liabilities and total net assets

          

          $

          514,095

          

          

          $

          485,531Number of shares outstanding

          

          

          20,546,032

          

          

          

          20,531,948Net asset value per share

          

          $

          15.35

          

          

          $

          13.98
 See notes to consolidated financial statements
 84    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Statements of Operations(in thousands, except share and per share data)  Years ended December 31,2018

          

          2017

          

          2016Investment incomeFrom non-controlled/non-affiliate company investmentsInterest income

          

          $

          56,208

          

          

          $

          49,233

          

          

          $

          48,649Fee income

          

          

          4,906

          

          

          

          2,858

          

          

          

          2,290From non-controlled affiliate company investmentsDividend income

          

          

          2,132

          

          

          

          2,713

          

          

          

          2,910Total investment income

          

          

          63,246

          

          

          

          54,804

          

          

          

          53,849ExpensesInterest expense

          

          

          11,599

          

          

          

          9,811

          

          

          

          8,188Base management fees

          

          

          10,511

          

          

          

          9,508

          

          

          

          8,990Performance-based incentive fees

          

          

          12,134

          

          

          

          6,553

          

          

          

          6,755Administrative service fees

          

          

          684

          

          

          

          696

          

          

          

          684General and administrative expenses

          

          

          2,646

          

          

          

          2,024

          

          

          

          2,221Total expenses, before fees waived

          

          

          37,574

          

          

          

          28,592

          

          

          

          26,838Base management fees waived

          

          

          (270

          )

          

          

          

          

          

          

          Total expenses, net of fees waived

          

          

          37,304

          

          

          

          28,592

          

          

          

          26,838Net investment income before excise tax

          

          

          25,942

          

          

          

          26,212

          

          

          

          27,011Excise tax

          

          

          942

          

          

          

          

          

          

          

          Net investment income after excise tax

          

          

          25,000

          

          

          

          26,212

          

          

          

          27,011Realized and unrealized gains (losses) on investmentsNet realized gains (losses)Non-controlled/non-affiliate company investments

          

          

          (247

          )

          

          

          108

          

          

          

          (478

          )Non-controlled affiliate company investments

          

          

          32,981

          

          

          

          

          

          

          

          Net realized gains (losses)

          

          

          32,734

          

          

          

          108

          

          

          

          (478

          )Net change in unrealized appreciation (depreciation)Non-controlled/non-affiliate company investments

          

          

          (5,136

          )

          

          

          (1,620

          )

          

          

          5,767Non-controlled affiliate company investments

          

          

          4,703

          

          

          

          9,748

          

          

          

          (971

          )Net change in unrealized appreciation (depreciation)

          

          

          (433

          )

          

          

          8,128

          

          

          

          4,796Net realized and unrealized gains (losses) on investments

          

          

          32,301

          

          

          

          8,236

          

          

          

          4,318Net increase (decrease) in net assets resulting from operations

          

          $

          57,301

          

          

          $

          34,448

          

          

          $

          31,329Per Common Share DataBasic and diluted earnings (loss) per common share

          

          $

          2.79

          

          

          $

          1.77

          

          

          $

          1.72Dividends and distributions declared per common share

          

          $

          1.42

          

          

          $

          1.42

          

          

          $

          1.42Basic and diluted weighted average common shares outstanding

          

          

          20,538,971

          

          

          

          19,433,003

          

          

          

          18,303,890
 See notes to consolidated financial statements
 85    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Statements of Changes in Net Assets(in thousands, except share and per share data)  Common Stock

          

          Paid-in Capital in Excess of Par

          

          Accumulated Undistributed (Overdistributed) Earnings

          

          Total Net AssetsShares

          

          Par amountBalance at December 31, 2015

          

          

          18,303,890

          

          

          $

          18

          

          

          $

          271,679

          

          

          $

          (27,645

          )

          

          $

          244,052Stock issued in connection with rights offering

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Stock issued in connection with distribution reinvestment plan

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Net increase in net assets resulting from operations:Net investment income after excise tax

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          27,011

          

          

          

          27,011Net realized gains (losses) on investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (478

          )

          

          

          (478

          )Net change in unrealized appreciation (depreciation) on investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          4,796

          

          

          

          4,796Distributions declared

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (25,992

          )

          

          

          (25,992

          )Tax reclassification of stockholders equity

          

          

          

          

          

          

          

          

          

          

          563

          

          

          

          (563

          )

          

          

          Balance at December 31, 2016

          

          

          18,303,890

          

          

          

          18

          

          

          

          272,242

          

          

          

          (22,871

          )

          

          

          249,389Stock issued in connection with public offering

          

          

          2,200,000

          

          

          

          2

          

          

          

          30,285

          

          

          

          

          

          

          

          30,287Stock issued in connection with distribution reinvestment plan

          

          

          28,058

          

          

          

          

          

          

          

          401

          

          

          

          

          

          

          

          401Net increase in net assets resulting from operations:Net investment income after excise tax

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          26,212

          

          

          

          26,212Net realized gains (losses) on investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          108

          

          

          

          108Net change in unrealized appreciation (depreciation) on investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          8,128

          

          

          

          8,128Distributions declared

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (27,573

          )

          

          

          (27,573

          )Tax reclassification of stockholders equity

          

          

          

          

          

          

          

          

          

          

          (636

          )

          

          

          636

          

          

          

          Balance at December 31, 2017

          

          

          20,531,948

          

          

          

          20

          

          

          

          302,292

          

          

          

          (15,360

          )

          

          

          286,952Stock issued in connection with public offering

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Stock issued in connection with distribution reinvestment plan

          

          

          14,084

          

          

          

          1

          

          

          

          207

          

          

          

          

          

          

          

          208Net increase in net assets resulting from operations:Net investment income after excise tax

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          25,000

          

          

          

          25,000Net realized gains (losses) on investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          32,734

          

          

          

          32,734Net change in unrealized appreciation (depreciation) on investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (433

          )

          

          

          (433

          )Distributions declared

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (29,165

          )

          

          

          (29,165

          )Tax reclassification of stockholders equity

          

          

          

          

          

          

          

          

          

          

          (942

          )

          

          

          942

          

          

          

          Balance at December 31, 2018

          

          

          20,546,032

          

          

          $

          21

          

          

          $

          301,557

          

          

          $

          13,718

          

          

          $

          315,296
 See notes to consolidated financial statements
 86    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Statements of Cash Flows(in thousands)  Years ended December 31,2018

          

          2017

          

          2016Cash flows from operating activitiesNet increase (decrease) in net assets resulting from operations

          

          $

          57,301

          

          

          $

          34,448

          

          

          $

          31,329Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:Paid-in-kind income

          

          

          (584

          )

          

          

          (662

          )

          

          

          (1,037

          )Net realized gains (losses) on investments

          

          

          (32,734

          )

          

          

          (108

          )

          

          

          478Net unrealized (appreciation) depreciation on investments

          

          

          433

          

          

          

          (8,128

          )

          

          

          (4,796

          )Accretion of discount

          

          

          (4,740

          )

          

          

          (3,073

          )

          

          

          (3,258

          )Amortization of deferred financing costs

          

          

          1,155

          

          

          

          817

          

          

          

          856Acquisition of investments

          

          

          (277,035

          )

          

          

          (137,641

          )

          

          

          (121,476

          )Proceeds from principal payments and sales of portfolio investments

          

          

          285,776

          

          

          

          120,646

          

          

          

          133,718Net changes in operating assets and liabilities:Interest receivable

          

          

          (661

          )

          

          

          (1,056

          )

          

          

          (484

          )Prepaid expenses and other receivables

          

          

          (390

          )

          

          

          669

          

          

          

          (662

          )Receivable from investments sold

          

          

          (3,833

          )

          

          

          98

          

          

          

          (881

          )Payable for investments purchased

          

          

          445

          

          

          

          (995

          )

          

          

          (1,870

          )Management fees payable

          

          

          3,345

          

          

          

          2,372

          

          

          

          1,663Accounts payable and accrued expenses

          

          

          1,621

          

          

          

          (357

          )

          

          

          57Interest payable

          

          

          1,035

          

          

          

          47

          

          

          

          480Advances received from unfunded credit facilities

          

          

          (62

          )

          

          

          92

          

          

          

          Net cash provided by (used in) operating activities

          

          

          31,072

          

          

          

          7,169

          

          

          

          34,117Cash flows from financing activitiesProceeds from sales of common stock, net of underwriting costs

          

          

          

          

          

          

          30,287

          

          

          

          Proceeds from notes issued

          

          

          65,000

          

          

          

          

          

          

          

          Borrowings

          

          

          100,400

          

          

          

          102,567

          

          

          

          113,250Repayments of debt

          

          

          (170,400

          )

          

          

          (102,567

          )

          

          

          (115,250

          )Deferred financing costs

          

          

          (2,324

          )

          

          

          (1,033

          )

          

          

          Distributions paid to common stockholders, net of distributions reinvested

          

          

          (28,952

          )

          

          

          (26,381

          )

          

          

          (25,992

          )Net cash provided by (used in) financing activities

          

          

          (36,276

          )

          

          

          2,873

          

          

          

          (27,992

          )Net change in cash, cash equivalents and restricted cash

          

          

          (5,204

          )

          

          

          10,042

          

          

          

          6,125Cash, cash equivalents and restricted cash at beginning of year

          

          

          38,936

          

          

          

          28,894

          

          

          

          22,769Cash, cash equivalents and restricted cash at end of year

          

          $

          33,732

          

          

          $

          38,936

          

          

          $

          28,894Supplemental disclosure of cash flow information:Interest paid

          

          $

          9,409

          

          

          $

          8,947

          

          

          $

          6,852Taxes, including excise tax, paid during the year

          

          

          

          

          

          

          

          

          

          

          Supplemental noncash disclosures:Distributions declared

          

          $

          29,165

          

          

          $

          27,573

          

          

          $

          25,992Distributions reinvested

          

          

          208

          

          

          

          401

          

          

          

          
 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:  December 31,2018

          

          2017

          

          2016Cash and cash equivalents

          

          $

          24,148

          

          

          $

          35,219

          

          

          $

          17,036Restricted cash

          

          

          9,584

          

          

          

          3,717

          

          

          

          11,858Total cash, cash equivalents and restricted cash presented in consolidated statements of cash flows

          

          $

          33,732

          

          

          $

          38,936

          

          

          $

          28,894
 See notes to consolidated financial statements
 87    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments December 31, 2018(in thousands)  Investment Type(1)

          

          SpreadAboveIndex(2)

          

          InterestRate(3)

          

          Acquisition Date(10)

          

          MaturityDate

          

          Principal/ShareAmount

          

          AmortizedCost

          

          FairValue(11)

          

          Fair ValueAs APercentageof NetAssetsNorth AmericaDebt InvestmentsAdvertisingFluent, LLCFirst Lien Secured Term Loan

          

          

          L+ 7.00% (0.50% Floor)

          

          

          

          9.52%

          

          

          

          03/26/18

          

          

          

          03/27/23

          

          

          

          10,771

          

          

          $

          10,771

          

          

          $

          10,771

          

          

          

          3.42

          %Outcome HealthFirst Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          12.31% (3.00% PIK)

          

          

          

          12/22/16

          

          

          

          12/22/21

          

          

          

          7,943

          

          

          

          7,581

          

          

          

          6,408

          

          

          

          2.0318,714

          

          

          

          18,352

          

          

          

          17,179

          

          

          

          5.45Automotive RetailTeam Car Care Holdings, LLCFirst Lien Secured Term Loan(12)

          

          

          base rate+ 7.99% (1.00% Floor)

          

          

          

          10.54%

          

          

          

          02/26/18

          

          

          

          02/23/23

          

          

          

          17,183

          

          

          

          16,862

          

          

          

          16,840

          

          

          

          5.34BroadcastingAlpha Media, LLCFirst Lien Secured Term Loan

          

          

          L+ 6.50% (1.00% Floor)

          

          

          

          9.00%

          

          

          

          08/14/18

          

          

          

          02/25/22

          

          

          

          10,877

          

          

          

          10,546

          

          

          

          10,493

          

          

          

          3.33Multicultural Radio Broadcasting, Inc.First Lien Secured Term Loan

          

          

          L+ 8.00% (1.00% Floor)

          

          

          

          10.52%

          

          

          

          12/28/17

          

          

          

          12/28/22

          

          

          

          17,882

          

          

          

          17,597

          

          

          

          17,739

          

          

          

          5.63Rural Media Group, Inc.First Lien Secured Term Loan

          

          

          L+ 7.86% (1.00% Floor)

          

          

          

          10.38%

          

          

          

          12/29/17

          

          

          

          12/29/22

          

          

          

          7,000

          

          

          

          6,888

          

          

          

          6,860

          

          

          

          2.1835,759

          

          

          

          35,031

          

          

          

          35,092

          

          

          

          11.14Cable & SatelliteBulk Midco, LLCFirst Lien Secured Term Loan

          

          

          L+ 7.33% (1.00% Floor)

          

          

          

          10.10%

          

          

          

          06/08/18

          

          

          

          06/08/23

          

          

          

          15,000

          

          

          

          14,801

          

          

          

          14,700

          

          

          

          4.66Data Processing & Outsourced ServicesFPT Operating Company, LLC/ TLabs Operating Company, LLCFirst Lien Secured Term Loan

          

          

          L+ 8.25% (1.00% Floor)

          

          

          

          10.60%

          

          

          

          12/23/16

          

          

          

          12/23/21

          

          

          

          25,394

          

          

          

          25,096

          

          

          

          24,707

          

          

          

          7.84Department StoresMills Fleet Farm Group, LLCFirst Lien Secured Term Loan

          

          

          L+ 6.25% (1.00% Floor)

          

          

          

          8.77%

          

          

          

          10/24/18

          

          

          

          10/24/24

          

          

          

          15,000

          

          

          

          14,708

          

          

          

          14,707

          

          

          

          4.66Diversified Support ServicesAccount Control Technology Holdings, Inc.First Lien Secured Term Loan

          

          

          L+ 8.75% (1.00% Floor)

          

          

          

          11.28%

          

          

          

          04/28/17

          

          

          

          04/28/22

          

          

          

          3,933

          

          

          

          3,857

          

          

          

          3,920

          

          

          

          1.24ImageOne Industries, LLCFirst Lien Secured Term Loan

          

          

          L+ 10.00% (1.00% Floor)

          

          

          

          12.52% (2.00% PIK)

          

          

          

          01/11/18

          

          

          

          01/11/23

          

          

          

          7,264

          

          

          

          7,082

          

          

          

          6,683

          

          

          

          2.12NNA Services, LLCFirst Lien Secured Term Loan

          

          

          L+ 7.00%

          

          

          

          9.80%

          

          

          

          10/16/18

          

          

          

          10/16/23

          

          

          

          10,434

          

          

          

          10,234

          

          

          

          10,202

          

          

          

          3.24
 See notes to consolidated financial statements
 88    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments  (continued) December 31, 2018(in thousands)  Investment Type(1)

          

          SpreadAboveIndex(2)

          

          InterestRate(3)

          

          Acquisition Date(10)

          

          MaturityDate

          

          Principal/ShareAmount

          

          AmortizedCost

          

          FairValue(11)

          

          Fair ValueAs APercentageof NetAssetsQuest Events, LLCFirst Lien Secured Term Loan

          

          

          L+ 6.00%

          

          

          

          8.81%

          

          

          

          12/28/18

          

          

          

          12/28/24

          

          

          

          10,942

          

          

          $

          10,724

          

          

          $

          10,724

          

          

          

          3.40

          %First Lien Secured Revolving Loan(7)

          

          

          L+ 6.00%

          

          

          

          8.81%

          

          

          

          12/28/18

          

          

          

          12/28/24

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          32,573

          

          

          

          31,897

          

          

          

          31,529

          

          

          

          10.00Food RetailAG Kings Holdings, Inc.First Lien Secured Term Loan

          

          

          L+ 9.95% (1.00% Floor)

          

          

          

          12.75%

          

          

          

          08/10/16

          

          

          

          08/10/21

          

          

          

          13,031

          

          

          

          12,737

          

          

          

          11,076

          

          

          

          3.51Crews of California, Inc.First Lien Secured Term Loan

          

          

          L+ 11.00% (1.00% Floor)

          

          

          

          13.44% (1.00% PIK)

          

          

          

          11/20/14

          

          

          

          11/20/19

          

          

          

          10,354

          

          

          

          10,320

          

          

          

          10,251

          

          

          

          3.25First Lien Secured Revolving Loan

          

          

          L+ 11.00% (1.00% Floor)

          

          

          

          13.44% (1.00% PIK)

          

          

          

          06/05/15

          

          

          

          11/20/19

          

          

          

          5,171

          

          

          

          5,148

          

          

          

          5,120

          

          

          

          1.62First Lien Secured Delayed Draw Loan

          

          

          L+ 11.00% (1.00% Floor)

          

          

          

          13.44% (1.00% PIK)

          

          

          

          03/27/15

          

          

          

          11/20/19

          

          

          

          2,974

          

          

          

          2,961

          

          

          

          2,944

          

          

          

          0.9331,530

          

          

          

          31,166

          

          

          

          29,391

          

          

          

          9.31Health Care FacilitiesGrupo HIMA San Pablo, Inc.First Lien Secured Term Loan

          

          

          L+ 9.00% (1.50% Floor)

          

          

          

          11.52%

          

          

          

          04/01/18

          

          

          

          05/31/19

          

          

          

          14,065

          

          

          

          14,065

          

          

          

          11,955

          

          

          

          3.79Second Lien Secured Term Loan(8)

          

          

          N/A

          

          

          

          15.75% (2.00% PIK)

          

          

          

          02/01/13

          

          

          

          07/31/18

          

          

          

          1,028

          

          

          

          1,024

          

          

          

          103

          

          

          

          0.0315,093

          

          

          

          15,089

          

          

          

          12,058

          

          

          

          3.82Health Care ServicesPMA Holdco, LLCFirst Lien Secured Term Loan

          

          

          L+ 7.50% (1.00% Floor)

          

          

          

          10.30%

          

          

          

          06/28/18

          

          

          

          06/28/23

          

          

          

          14,875

          

          

          

          14,591

          

          

          

          14,577

          

          

          

          4.62Home FurnishingsSure Fit Home Products, LLCFirst Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          12.31%

          

          

          

          10/26/18

          

          

          

          07/13/22

          

          

          

          5,530

          

          

          

          5,424

          

          

          

          5,392

          

          

          

          1.71Internet RetailClarus Commerce, LLCFirst Lien Secured Term Loan

          

          

          L+ 8.42% (1.00% Floor)

          

          

          

          10.95%

          

          

          

          03/09/18

          

          

          

          03/09/23

          

          

          

          17,100

          

          

          

          16,930

          

          

          

          17,100

          

          

          

          5.42Internet Software & ServicesLondon Trust Media IncorporatedFirst Lien Secured Term Loan

          

          

          L+ 8.00% (1.00% Floor)

          

          

          

          10.53%

          

          

          

          02/01/18

          

          

          

          02/01/23

          

          

          

          10,925

          

          

          

          10,791

          

          

          

          10,816

          

          

          

          3.43StackPath, LLC & Highwinds Capital, Inc.Second Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          12.33%

          

          

          

          02/03/17

          

          

          

          02/02/24

          

          

          

          18,000

          

          

          

          17,673

          

          

          

          14,760

          

          

          

          4.6828,925

          

          

          

          28,464

          

          

          

          25,576

          

          

          

          8.11
 See notes to consolidated financial statements
 89    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments  (continued) December 31, 2018(in thousands) Investment Type(1)

          

          SpreadAboveIndex(2)

          

          InterestRate(3)

          

          Acquisition Date(10)

          

          MaturityDate

          

          Principal/ShareAmount

          

          AmortizedCost

          

          FairValue(11)

          

          Fair ValueAs APercentageof NetAssetsInvestment Banking & BrokerageJVMC Holdings Corp. (f/k/a RJO Holdings Corp)First Lien First Out Secured Term Loan

          

          

          L+ 8.02% (1.00% Floor)

          

          

          

          10.54%

          

          

          

          05/05/17

          

          

          

          05/05/22

          

          

          

          12,488

          

          

          $

          12,300

          

          

          $

          12,726

          

          

          

          4.04

          %First Lien Last Out Secured Term Loan

          

          

          L+ 12.00% (1.00% Floor)

          

          

          

          14.52%

          

          

          

          05/05/17

          

          

          

          05/05/22

          

          

          

          4,625

          

          

          

          4,555

          

          

          

          4,713

          

          

          

          1.4917,113

          

          

          

          16,855

          

          

          

          17,439

          

          

          

          5.53IT Consulting & Other ServicesAST-Applications Software Technology LLCFirst Lien Secured Term Loan

          

          

          L+ 8.00%(1.00% Floor)

          

          

          

          10.52%(1.00% PIK)

          

          

          

          01/10/17

          

          

          

          01/10/23

          

          

          

          4,214

          

          

          

          4,148

          

          

          

          4,088

          

          

          

          1.30Leisure FacilitiesPlanet Fit Indy 10 LLCFirst Lien Incremental Term Loan

          

          

          L+ 7.25%(1.00% Floor)

          

          

          

          10.04%

          

          

          

          11/30/17

          

          

          

          03/07/22

          

          

          

          9,892

          

          

          

          9,735

          

          

          

          9,841

          

          

          

          3.12First Lien Initial Delayed Draw Loan

          

          

          L+ 7.25%(1.00% Floor)

          

          

          

          9.82%

          

          

          

          11/30/17

          

          

          

          03/07/22

          

          

          

          6,183

          

          

          

          6,163

          

          

          

          6,153

          

          

          

          1.95First Lien Initial Term Loan

          

          

          L+ 7.25%(1.00% Floor)

          

          

          

          10.02%

          

          

          

          11/30/17

          

          

          

          03/07/22

          

          

          

          130

          

          

          

          129

          

          

          

          130

          

          

          

          0.04Lift Brands, Inc.First Lien Secured Term Loan

          

          

          L+ 7.00%(1.00% Floor)

          

          

          

          9.80%

          

          

          

          04/16/18

          

          

          

          04/16/23

          

          

          

          10,858

          

          

          

          10,663

          

          

          

          10,433

          

          

          

          3.31First Lien Secured Revolving Loan(7)

          

          

          L+ 7.00%(1.00% Floor)

          

          

          

          9.09%

          

          

          

          04/16/18

          

          

          

          04/16/23

          

          

          

          128

          

          

          

          126

          

          

          

          110

          

          

          

          0.03Honors Holdings, LLC (Orange Theory)First Lien Secured Term Loan

          

          

          L+ 8.94%(0.00% Floor)

          

          

          

          11.37%

          

          

          

          07/17/18

          

          

          

          07/17/23

          

          

          

          7,500

          

          

          

          7,398

          

          

          

          7,355

          

          

          

          2.3334,691

          

          

          

          34,214

          

          

          

          34,022

          

          

          

          10.78Oil & Gas Exploration & ProductionCaelus Energy Alaska O3, LLCSecond Lien Secured Term Loan

          

          

          L+ 7.50%

          

          

          

          10.30%

          

          

          

          04/04/14

          

          

          

          04/15/20

          

          

          

          17,342

          

          

          

          16,876

          

          

          

          17,342

          

          

          

          5.50Other Diversified Financial ServicesArcole Acquisition Corp(5)First Lien Secured Term Loan A

          

          

          L+ 7.25%(1.00% Floor)

          

          

          

          9.96%

          

          

          

          11/29/18

          

          

          

          11/30/23

          

          

          

          7,588

          

          

          

          7,451

          

          

          

          7,448

          

          

          

          2.36First Lien Secured Term Loan B

          

          

          L+ 14.50%(1.00% Floor)

          

          

          

          17.21%(1.50% PIK)

          

          

          

          11/29/18

          

          

          

          11/30/23

          

          

          

          1,870

          

          

          

          1,837

          

          

          

          1,836

          

          

          

          0.58Sigue Corporation(4)Second Lien Secured Term Loan

          

          

          L+ 12.00%(1.00% Floor)

          

          

          

          14.80%

          

          

          

          12/27/13

          

          

          

          09/30/19

          

          

          

          24,904

          

          

          

          24,904

          

          

          

          24,344

          

          

          

          7.7234,362

          

          

          

          34,192

          

          

          

          33,628

          

          

          

          10.66Packaged Foods & MeatsLenny & Larrys, LLCFirst Lien Secured Term Loan

          

          

          L+ 6.84%(1.00% Floor)

          

          

          

          9.29%

          

          

          

          05/15/18

          

          

          

          05/15/23

          

          

          

          13,449

          

          

          

          13,214

          

          

          

          12,777

          

          

          

          4.05
 See notes to consolidated financial statements
 90    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments  (continued) December 31, 2018(in thousands) Investment Type(1)

          

          SpreadAboveIndex(2)

          

          InterestRate(3)

          

          Acquisition Date(10)

          

          MaturityDate

          

          Principal/ShareAmount

          

          AmortizedCost

          

          FairValue(11)

          

          Fair ValueAs APercentageof NetAssetsResearch & Consulting ServicesNelson Worldwide, LLCFirst Lien Secured Term Loan

          

          

          L+ 8.75%(1.00% Floor)

          

          

          

          11.16%

          

          

          

          01/09/18

          

          

          

          01/09/23

          

          

          

          14,303

          

          

          $

          14,016

          

          

          $

          13,903

          

          

          

          4.41

          %RestaurantsLS GFG Holdings Inc.First Lien Secured Term Loan

          

          

          L+ 6.00%

          

          

          

          8.47%

          

          

          

          11/30/18

          

          

          

          11/19/25

          

          

          

          10,340

          

          

          

          10,033

          

          

          

          10,020

          

          

          

          3.18Specialized FinanceGolden Pear Funding Assetco, LLC(5)Second Lien Secured Term Loan

          

          

          L+ 10.50%(1.00% Floor)

          

          

          

          12.85%

          

          

          

          09/20/18

          

          

          

          03/20/24

          

          

          

          17,500

          

          

          

          17,168

          

          

          

          17,150

          

          

          

          5.44Oasis Legal Finance, LLC(5)Second Lien Secured Term Loan

          

          

          L+ 10.75%(1.00% Floor)

          

          

          

          13.10%

          

          

          

          09/09/16

          

          

          

          03/09/22

          

          

          

          20,000

          

          

          

          19,768

          

          

          

          20,000

          

          

          

          6.3437,500

          

          

          

          36,936

          

          

          

          37,150

          

          

          

          11.78Technology Hardware, Storage & PeripheralsSource Code Midco, LLCFirst Lien Secured Term Loan

          

          

          L+ 8.75%(1.00% Floor)

          

          

          

          11.28%

          

          

          

          05/04/18

          

          

          

          05/04/23

          

          

          

          14,182

          

          

          

          13,874

          

          

          

          13,898

          

          

          

          4.41TruckingSunteck / TTS Holdings, LLCSecond Lien Secured Term Loan

          

          

          L+ 9.00%(1.00% Floor)

          

          

          

          11.79%

          

          

          

          12/15/16

          

          

          

          06/15/22

          

          

          

          3,500

          

          

          

          3,462

          

          

          

          3,468

          

          

          

          1.10Total Debt Investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          473,672

          

          

          

          466,231

          

          

          

          456,583

          

          

          

          144.78Equity InvestmentsAdvertisingFluent, Inc. (f/k/a Cogint, Inc.)(4)(9)

          

          

          N/A

          

          

          

          N/A

          

          

          

          11/28/17

          

          

          

          12/08/25

          

          

          

          187

          

          

          

          560

          

          

          

          706

          

          

          

          0.22

          %Diversified Support ServicesQuest Events, LLCPreferred Units(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          12/28/18

          

          

          

          12/08/25

          

          

          

          317

          

          

          

          317

          

          

          

          317

          

          

          

          0.10Food RetailCrews of California, Inc. Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          11/20/14

          

          

          

          12/31/24

          

          

          

          

          

          

          

          

          

          

          

          6

          

          

          

          Nicholas & Associates, LLC Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          11/20/14

          

          

          

          12/31/24

          

          

          

          2

          

          

          

          

          

          

          

          131

          

          

          

          0.04Pinnacle Management Group, LLC Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          11/20/14

          

          

          

          12/31/24

          

          

          

          2

          

          

          

          

          

          

          

          131

          

          

          

          0.04RC3 Enterprises, LLC Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          11/20/14

          

          

          

          12/31/24

          

          

          

          2

          

          

          

          

          

          

          

          131

          

          

          

          0.046

          

          

          

          

          

          

          

          399

          

          

          

          0.12Health Care ServicesPMA Holdco, LLC Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          06/28/18

          

          

          

          N/A

          

          

          

          8

          

          

          

          

          

          

          

          393

          

          

          

          0.12
 See notes to consolidated financial statements
 91    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments  (continued) December 31, 2018(in thousands) Investment Type(1)

          

          SpreadAboveIndex(2)

          

          InterestRate(3)

          

          Acquisition Date(10)

          

          MaturityDate

          

          Principal/ShareAmount

          

          AmortizedCost

          

          FairValue(11)

          

          Fair ValueAs APercentageof NetAssetsOther Diversified Financial ServicesRCS Creditor Trust Class B Units(4)(6)

          

          

          N/A

          

          

          

          N/A

          

          

          

          10/01/17

          

          

          

          N/A

          

          

          

          143

          

          

          $

          

          

          

          $

          535

          

          

          

          0.17

          %SFS Global Holding Company Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          06/28/18

          

          

          

          N/A

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Sigue Corporation Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          06/28/18

          

          

          

          N/A

          

          

          

          7

          

          

          

          702

          

          

          

          901

          

          

          

          0.29150

          

          

          

          702

          

          

          

          1,436

          

          

          

          0.46Specialized FinanceNMFC Senior Loan Program I LLC Units(4)(5)(6)

          

          

          N/A

          

          

          

          N/A

          

          

          

          08/13/14

          

          

          

          06/13/20

          

          

          

          10,000

          

          

          

          10,029

          

          

          

          9,630

          

          

          

          3.05TruckingFox Rent A Car, Inc. Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          10/26/16

          

          

          

          N/A

          

          

          

          

          

          

          

          

          

          

          

          100

          

          

          

          0.03Total Equity Investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          10,668

          

          

          

          11,608

          

          

          

          12,981

          

          

          

          4.10Total Investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          $

          484,340

          

          

          $

          477,839

          

          

          $

          469,564

          

          

          

          148.88

          %
  (1)

          Except as otherwise noted, all investments are non-controlled/non-affiliate investments as defined by the Investment Company Act of 1940, as amended (the 1940 Act), and provide collateral for the Companys credit facility. (2)

          The investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (LIBOR or L), which resets monthly, quarterly or semiannually, or the U.S. Prime Rate as published by the Wall Street Journal (Prime or P). The one, three and six-month LIBOR were 2.5%, 2.8% and 2.9%, respectively, as of December 31, 2018. The Prime was 5.5% as of December 31, 2018. (3)

          The interest rate is the all-in-rate including the current index and spread, the fixed rate, and the payment-in-kind (PIK) interest rate, as the case maybe. (4)

          The investment or a portion of the investment does not provide collateral for the Companys credit facility. (5)

          Not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of total assets. Qualifying assets represented 89%, of total assets as of the date of the consolidated schedule of investments. (6)

          Investment is a non-controlled/affiliate investment as defined by the 1940 Act. (7)

          The investment has an unfunded commitment in addition to any amounts presented in the consolidated schedule of investments as of December 31, 2018. See Note 7. (8)

          The investment is on non-accrual status. (9)

          The fair value of the investment was determined using observable inputs. See Note 4. There are no legal restrictions on sales of the investment. (10)

          Except as otherwise noted, all of the Companys portfolio company investments, which as of the date of the consolidated schedule of investments represented 149% of the Companys net assets or 91% of the Companys total assets, are subject to legal restrictions on sales. (11)

          Except as otherwise noted, the fair value of each investment was determined using significant unobservable inputs. See Note 4. (12)

          The investment was comprised of two contracts, which were indexed to different base rates, L and P, respectively. The Spread Above Index and Interest Rate presented represent the weighted average of both contracts. See notes to consolidated financial statements
 92    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments December 31, 2017(in thousands)  Investment Type(1)

          

          Spread Above Index(2)

          

          Interest Rate(3)

          

          Maturity Date

          

          Principal/ Share Amount

          

          Amortized Cost

          

          Fair Value(7)

          

          Fair Value As A Percentage of Net AssetsNorth AmericaDebt InvestmentsAdvertisingFluent, LLC (f/k/a Fluent Acquisition II, LLC)First Lien Secured Term Loan

          

          

          L+ 11.50% (0.50% Floor)

          

          

          

          13.05% (1.00% PIK)

          

          

          

          12/08/20

          

          

          

          25,650

          

          

          $

          25,352

          

          

          $

          25,651

          

          

          

          8.94%Outcome HealthFirst Lien Secured Term Loan

          

          

          L+ 6.50% (1.00% Floor)

          

          

          

          8.13%

          

          

          

          12/22/21

          

          

          

          14,853

          

          

          

          13,667

          

          

          

          12,372

          

          

          

          4.3140,503

          

          

          

          39,019

          

          

          

          38,023

          

          

          

          13.25Application SoftwareIntermedia Holdings, Inc.Second Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          10.88%

          

          

          

          02/03/25

          

          

          

          18,000

          

          

          

          17,680

          

          

          

          17,892

          

          

          

          6.24Auto Parts & EquipmentCrowne Group, LLCFirst Lien Secured Term Loan

          

          

          L+ 9.25% (1.00% Floor)

          

          

          

          10.73%

          

          

          

          05/26/21

          

          

          

          12,031

          

          

          

          11,747

          

          

          

          12,031

          

          

          

          4.19BroadcastingMulticultural Radio Broadcasting, Inc.First Lien Secured Term Loan

          

          

          L+ 8.00% (1.00% Floor)

          

          

          

          9.56%

          

          

          

          12/28/22

          

          

          

          20,000

          

          

          

          19,601

          

          

          

          19,600

          

          

          

          6.83Rural Media Group, Inc.First Lien Secured Term Loan

          

          

          P+ 5.75% (1.00% Floor)

          

          

          

          10.25%

          

          

          

          12/29/22

          

          

          

          7,133

          

          

          

          6,991

          

          

          

          6,991

          

          

          

          2.44First Lien Secured Delayed Draw Loan

          

          

          P+ 5.75% (1.00% Floor)

          

          

          

          10.25%

          

          

          

          12/29/22

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          27,133

          

          

          

          26,592

          

          

          

          26,591

          

          

          

          9.27Data Processing & Outsourced ServicesFPT Operating Company, LLC/TLabs Operating Company, LLCFirst Lien Secured Term Loan

          

          

          L+ 8.25% (1.00% Floor)

          

          

          

          9.61%

          

          

          

          12/23/21

          

          

          

          23,305

          

          

          

          22,975

          

          

          

          23,188

          

          

          

          8.08Department StoresMills Fleet Farm Group, LLCSecond Lien Secured Term Loan

          

          

          L+ 9.75% (1.00% Floor)

          

          

          

          11.32%

          

          

          

          02/26/23

          

          

          

          7,146

          

          

          

          7,038

          

          

          

          7,146

          

          

          

          2.49Diversified Support ServicesAccount Control Technology Holdings, Inc.First Lien Secured Term Loan

          

          

          L+ 8.50% (1.00% Floor)

          

          

          

          9.88%

          

          

          

          04/28/22

          

          

          

          14,329

          

          

          

          13,971

          

          

          

          14,180

          

          

          

          4.94Sitel Worldwide CorporationSecond Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          10.88%

          

          

          

          09/18/22

          

          

          

          8,670

          

          

          

          8,553

          

          

          

          8,651

          

          

          

          3.0122,999

          

          

          

          22,524

          

          

          

          22,831

          

          

          

          7.95Environmental & Facilities ServicesMontrose Environmental Group, Inc.Second Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          10.88%

          

          

          

          09/30/20

          

          

          

          8,500

          

          

          

          8,345

          

          

          

          8,423

          

          

          

          2.94
 See notes to consolidated financial statements
 93    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments  (continued) December 31, 2017(in thousands)  Investment Type(1)

          

          Spread Above Index(2)

          

          Interest Rate(3)

          

          Maturity Date

          

          Principal/ Share Amount

          

          Amortized Cost

          

          Fair Value(7)

          

          Fair Value As A Percentage of Net AssetsFood RetailAG Kings Holdings, Inc.First Lien Secured Term Loan

          

          

          L+ 9.95% (1.00% Floor)

          

          

          

          11.64%

          

          

          

          08/10/21

          

          

          

          13,615

          

          

          $

          13,190

          

          

          $

          13,479

          

          

          

          4.70

          %Crews of California, Inc.First Lien Secured Term Loan

          

          

          L+ 11.00% (1.00% Floor)

          

          

          

          12.48% (1.00% PIK)

          

          

          

          11/20/19

          

          

          

          16,853

          

          

          

          16,732

          

          

          

          16,516

          

          

          

          5.76First Lien Secured Revolving Loan

          

          

          L+ 11.00% (1.00% Floor)

          

          

          

          12.48% (1.00% PIK)

          

          

          

          11/20/19

          

          

          

          5,119

          

          

          

          5,070

          

          

          

          5,017

          

          

          

          1.75First Lien Secured Delayed Draw Loan

          

          

          L+ 11.00% (1.00% Floor)

          

          

          

          12.48% (1.00% PIK)

          

          

          

          11/20/19

          

          

          

          4,884

          

          

          

          4,840

          

          

          

          4,786

          

          

          

          1.6740,471

          

          

          

          39,832

          

          

          

          39,798

          

          

          

          13.88Health Care FacilitiesGrupo HIMA San Pablo, Inc.First Lien Secured Term Loan

          

          

          L+ 9.00% (1.50% Floor)

          

          

          

          10.50%

          

          

          

          01/31/18

          

          

          

          14,250

          

          

          

          14,245

          

          

          

          12,430

          

          

          

          4.33Second Lien Secured Term Loan

          

          

          N/A

          

          

          

          15.75% (2.00% PIK)

          

          

          

          07/31/18

          

          

          

          1,027

          

          

          

          1,023

          

          

          

          239

          

          

          

          0.0815,277

          

          

          

          15,268

          

          

          

          12,669

          

          

          

          4.41Internet RetailClarus Commerce, LLCFirst Lien Secured Term Loan

          

          

          L+ 9.77% (1.00% Floor)

          

          

          

          11.34%

          

          

          

          03/17/21

          

          

          

          6,000

          

          

          

          5,923

          

          

          

          6,000

          

          

          

          2.09Internet Software & ServicesStackPath, LLC & Highwinds Capital, Inc.Second Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          10.88%

          

          

          

          02/02/24

          

          

          

          18,000

          

          

          

          17,608

          

          

          

          17,576

          

          

          

          6.13Investment Banking and BrokerageJVMC Holdings Corp. (f/k/a RJO Holdings Corp)First Lien First Out Secured Term Loan

          

          

          L+ 8.02% (1.00% Floor)

          

          

          

          9.59%

          

          

          

          05/05/22

          

          

          

          13,163

          

          

          

          12,905

          

          

          

          13,042

          

          

          

          4.55First Lien Last Out Secured Term Loan

          

          

          L+ 12.00% (1.00% Floor)

          

          

          

          13.57%

          

          

          

          05/05/22

          

          

          

          4,875

          

          

          

          4,780

          

          

          

          4,830

          

          

          

          1.6818,038

          

          

          

          17,685

          

          

          

          17,872

          

          

          

          6.23IT Consulting & Other ServicesAST-Applications Software Technology LLCFirst Lien Secured Term Loan

          

          

          L+ 9.00% (1.00% Floor)

          

          

          

          10.57% (2.00% PIK)

          

          

          

          01/10/23

          

          

          

          4,150

          

          

          

          4,067

          

          

          

          3,901

          

          

          

          1.36Leisure FacilitiesPlanet Fit Indy 10 LLCFirst Lien Initial Secured Term Loan

          

          

          L+ 7.25% (1.00% Floor)

          

          

          

          8.77%

          

          

          

          03/07/22

          

          

          

          132

          

          

          

          131

          

          

          

          131

          

          

          

          0.05First Lien Incremental Secured Term Loan

          

          

          L+ 7.25% (1.00% Floor)

          

          

          

          8.94%

          

          

          

          03/07/22

          

          

          

          1,935

          

          

          

          1,916

          

          

          

          1,916

          

          

          

          0.67First Lien Initial Secured Delayed Draw Term Loan

          

          

          L+ 7.25% (1.00% Floor)

          

          

          

          8.73%

          

          

          

          03/07/22

          

          

          

          2,658

          

          

          

          2,632

          

          

          

          2,632

          

          

          

          0.924,725

          

          

          

          4,679

          

          

          

          4,679

          

          

          

          1.64
 See notes to consolidated financial statements
 94    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments  (continued) December 31, 2017(in thousands) Investment Type(1)

          

          Spread Above Index(2)

          

          Interest Rate(3)

          

          Maturity Date

          

          Principal/ Share Amount

          

          Amortized Cost

          

          Fair Value(7)

          

          Fair Value As A Percentage of Net AssetsOffice Services & SuppliesKatun CorporationSecond Lien Secured Term Loan

          

          

          L+ 11.25% (1.00% Floor)

          

          

          

          12.61%

          

          

          

          01/25/21

          

          

          

          4,422

          

          

          $

          4,402

          

          

          $

          4,466

          

          

          

          1.56

          %Oil & Gas Exploration & ProductionCaelus Energy Alaska O3, LLCSecond Lien Secured Term Loan

          

          

          L+ 7.50% (1.25% Floor)

          

          

          

          9.10%

          

          

          

          04/15/20

          

          

          

          13,000

          

          

          

          12,929

          

          

          

          10,837

          

          

          

          3.78Other Diversified Financial ServicesSigue Corporation(4)Second Lien Secured Term Loan

          

          

          L+ 11.50% (1.00% Floor)

          

          

          

          13.19%

          

          

          

          12/27/18

          

          

          

          25,000

          

          

          

          24,901

          

          

          

          24,872

          

          

          

          8.67The Pay-O-Matic Corp.First Lien Secured Term Loan

          

          

          L+ 11.00% (1.00% Floor)

          

          

          

          12.38%

          

          

          

          04/02/18

          

          

          

          12,044

          

          

          

          12,003

          

          

          

          12,044

          

          

          

          4.2037,044

          

          

          

          36,904

          

          

          

          36,916

          

          

          

          12.87Research & Consulting ServicesProject Time & Cost, LLCFirst Lien Secured Term Loan

          

          

          L+ 12.00% (0.50% Floor)

          

          

          

          13.53%

          

          

          

          10/09/20

          

          

          

          9,104

          

          

          

          9,004

          

          

          

          8,440

          

          

          

          2.94Security & Alarm ServicesSecurAmerica, LLCFirst Lien Secured Term Loan

          

          

          L+ 9.50% (1.00% Floor)

          

          

          

          10.92%

          

          

          

          11/17/22

          

          

          

          11,320

          

          

          

          11,044

          

          

          

          11,084

          

          

          

          3.86Specialized Consumer ServicesPre-Paid Legal Services, Inc.Second Lien Secured Term Loan

          

          

          L+ 9.00% (1.25% Floor)

          

          

          

          10.57%

          

          

          

          07/01/20

          

          

          

          19,000

          

          

          

          18,912

          

          

          

          19,000

          

          

          

          6.62Specialized FinanceGolden Pear Funding III, LLC(5)Second Lien Secured Term Loan

          

          

          L+ 10.25% (1.00% Floor)

          

          

          

          11.63%

          

          

          

          06/25/20

          

          

          

          25,000

          

          

          

          24,855

          

          

          

          24,760

          

          

          

          8.63Second Lien Secured Revolving Loan

          

          

          L+ 10.25% (1.00% Floor)

          

          

          

          11.63%

          

          

          

          06/25/20

          

          

          

          5,000

          

          

          

          4,971

          

          

          

          4,952

          

          

          

          1.73Oasis Legal Finance, LLC(5)Second Lien Secured Term Loan

          

          

          L+ 10.75%(1.00% Floor)

          

          

          

          12.11%

          

          

          

          03/09/22

          

          

          

          20,000

          

          

          

          19,696

          

          

          

          20,000

          

          

          

          6.9750,000

          

          

          

          49,522

          

          

          

          49,712

          

          

          

          17.33TruckingSunteck/TTS Holdings, LLCSecond Lien Secured Term Loan

          

          

          L+ 9.00% (1.00% Floor)

          

          

          

          10.59%

          

          

          

          06/15/22

          

          

          

          3,500

          

          

          

          3,450

          

          

          

          3,456

          

          

          

          1.20Total Debt Investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          413,668

          

          

          

          407,149

          

          

          

          402,531

          

          

          

          140.31Equity InvestmentsAdvertisingCogint, Inc. (f/k/a IDI, Inc.)(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          12/08/25

          

          

          

          187

          

          

          

          560

          

          

          

          821

          

          

          

          0.29Food RetailCrews of California, Inc. Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          12/31/24

          

          

          

          

          

          

          

          

          

          

          

          14

          

          

          

          0.00Nicholas & Associates, LLC Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          12/31/24

          

          

          

          3

          

          

          

          

          

          

          

          296

          

          

          

          0.10
 See notes to consolidated financial statements
 95    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Consolidated Schedule of Investments  (continued) December 31, 2017(in thousands) Investment Type(1)

          

          Spread Above Index(2)

          

          Interest Rate(3)

          

          Maturity Date

          

          Principal/ Share Amount

          

          Amortized Cost

          

          Fair Value(7)

          

          Fair Value As A Percentage of Net AssetsPinnacle Management Group, LLC Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          12/31/24

          

          

          

          3

          

          

          $

          

          

          

          $

          296

          

          

          

          0.10

          %RC3 Enterprises, LLC Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          12/31/24

          

          

          

          3

          

          

          

          

          

          

          

          296

          

          

          

          0.109

          

          

          

          

          

          

          

          902

          

          

          

          0.30Other Diversified Financial ServicesAretec Group, Inc.(4)(5)(6)

          

          

          N/A

          

          

          

          N/A

          

          

          

          N/A

          

          

          

          536

          

          

          

          20,693

          

          

          

          17,314

          

          

          

          6.03RCS Creditor Trust Class B Units(4)(6)

          

          

          N/A

          

          

          

          N/A

          

          

          

          N/A

          

          

          

          143

          

          

          

          

          

          

          

          428

          

          

          

          0.15679

          

          

          

          20,693

          

          

          

          17,742

          

          

          

          6.18Specialized FinanceNMFC Senior Loan Program I LLC Units(4)(5)(6)

          

          

          N/A

          

          

          

          N/A

          

          

          

          06/13/20

          

          

          

          20,000

          

          

          

          20,120

          

          

          

          18,504

          

          

          

          6.45TruckingFox Rent A Car, Inc. Warrants(4)

          

          

          N/A

          

          

          

          N/A

          

          

          

          N/A

          

          

          

          

          

          

          

          

          

          

          

          180

          

          

          

          0.06Total Equity Investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          20,875

          

          

          

          41,373

          

          

          

          38,149

          

          

          

          13.28Total Investments

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          434,543

          

          

          $

          448,522

          

          

          $

          440,680

          

          

          

          153.59

          %
  (1)

          Except as otherwise noted, all investments are non-controlled/non-affiliate investments as defined by the Investment Company Act of 1940, as amended (the 1940 Act), and provide collateral for the Companys credit facility. (2)

          The investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (LIBOR or L), which resets monthly, quarterly or semiannually, or the U.S. Prime Rate as published by the Wall Street Journal (Prime or P). The one, three and six-month LIBOR were 1.6%, 1.7% and 1.8%, respectively, as of December 31, 2017. The Prime was 4.5% as of December 31, 2017. (3)

          The interest rate is the all-in-rate including the current index and spread, the fixed rate, and the payment-in-kind (PIK) interest rate, as the case may be. (4)

          The investment or a portion of the investment does not provide collateral for the Companys credit facility. (5)

          Not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of total assets. Qualifying assets represented 82% of total assets as of the date of the consolidated schedule of investments. (6)

          Investment is a non-controlled/affiliate investment as defined by the 1940 Act. (7)

          Except as otherwise noted, the fair value of each investment was determined using significant unobservable inputs. See Note 4. See notes to consolidated financial statements
 96    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 1  ORGANIZATION WhiteHorse Finance, Inc. (WhiteHorse Finance and, together with its subsidiaries, the Company) is an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the 1940 Act). In addition, for tax purposes, WhiteHorse Finance elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). WhiteHorse Finances common stock trades on
the NASDAQ Global Select Market under the symbol WHF. The Companys investment objective is to generate attractive risk-adjusted returns primarily by originating and investing in senior secured loans, including first lien and second lien facilities, to performing lower middle market companies across a broad range of industries that typically carry a floating interest rate based on the London Interbank Offered Rate (LIBOR) and have a term of three to six years. While the Company focuses principally on originating senior secured loans to lower middle market companies, it may also opportunistically make investments at other levels of a companys capital
structure, including mezzanine loans or equity interests and may receive warrants to purchase common stock in connection with its debt investments. WhiteHorse Finances investment activities are managed by H.I.G. WhiteHorse Advisers, LLC (WhiteHorse Advisers). H.I.G. WhiteHorse Administration, LLC (WhiteHorse Administration) provides administrative services necessary for the Company to operate. NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation:  The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of WhiteHorse Finance, Inc. and its wholly owned subsidiaries, WhiteHorse Finance Credit I, LLC (WhiteHorse Credit), and 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-K and Articles 6, 10 and 12 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial results as of and for the periods presented. Principles of Consolidation:  Under the investment company rules and regulations pursuant to ASC Topic 946, WhiteHorse Finance is precluded from consolidating any entity other than another investment company. As provided under ASC Topic 946, WhiteHorse Finance generally consolidates any investment company when it owns 100% of its partners or members capital or equity units. Use of Estimates:  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates. Fair Value of Financial Instruments:  The Company determines the fair value of its financial instruments in accordance with ASC Topic 820,Fair Value Measurements and Disclosures. ASC Topic 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC Topic 820, the Company has categorized its financial instruments
 97    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) 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 the Companys investment committee, generally on a quarterly basis, and such valuations are reviewed by the audit committee of the board of directors and ultimately approved by the board of directors, based on, among other factors, consistently applied valuation procedures on each measurement date. Any changes to the valuation methodology are reviewed by management and the Companys board of directors to confirm that the changes are justified. The Company continues to review and refine its valuation procedures in response to market changes. The Company engages independent external valuation firms to periodically review material investments. These external reviews are used by the board of directors to review the Companys internal valuation of investments over the year. Investment Transactions:  The Company records investment transactions on a trade date basis. These transactions may settle subsequent to the trade date depending on the transaction type. Certain expenses related to legal and tax consultation, due diligence, rating fees, valuation expenses and independent collateral appraisals may arise when the Company makes certain investments. These expenses are recognized in the consolidated statements of operations as they are incurred. Revenue Recognition:  The Companys revenue recognition policies are as follows: Sales:  Realized gains or losses on the sales of investments are calculated by using the specific identification method. Investment Income:  Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. The Company may also receive closing, commitment, prepayment, amendment and other fees from portfolio companies in the ordinary course of business. Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Closing fees associated with investments in portfolio companies are deferred and recognized as interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any unamortized loan closing fees are recorded as part of interest income. Commitment fees are based upon the undrawn portion committed by the Company and are recorded as interest income on an accrual basis. Prepayment, amendment and other fees are recognized when earned, generally when such fees are receivable, and are included in fee income on the consolidated statements of operations. The Company may invest in loans that contain a PIK interest rate provision. PIK interest is accrued at the contractual rates and added to loan principal on the reset dates to the extent such amounts are expected to be collected. Non-accrual loans:  Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. The Company may conclude that non-accrual status is not required if the loan has sufficient collateral value and is in the process of collection. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal
 98    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) depending upon managements judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in managements judgment, are likely to remain current. Cash and Cash Equivalents:  Cash and cash equivalents include cash, deposits with financial institutions, and short-term liquid investments in money market funds with original maturities of three months or less. Restricted Cash and Cash Equivalents:  Restricted cash and cash equivalents include amounts that are collected and held by the trustee appointed as custodian of the assets securing the Companys revolving credit facility. Restricted cash is held by the trustee for the payment of interest expense and principal on the outstanding borrowings or reinvestment into new assets. Restricted cash that represents interest or fee income is transferred to unrestricted cash accounts by the trustee generally once a quarter after the payment of operating expenses and amounts due under the Companys revolving credit
facility. Offering Costs:  The Company may incur legal, accounting, regulatory, investment banking and other costs in relation to equity offerings. Offering costs are deferred and charged against paid-in capital in excess of par on completion of the related offering. Deferred Financing Costs:  Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Companys borrowings. These amounts are amortized and are included in interest expense in the consolidated statements of operations over the estimated life of the borrowings. Deferred financing costs are presented in the consolidated statements of assets and liabilities as a direct reduction from the carrying amount of the related debt liability. Income Taxes:  The Company elected to be treated as a RIC under Subchapter M of the Code. In order to maintain its status as a RIC, among other requirements, the Company is required to distribute dividends for U.S. federal income tax purposes to its shareholders each taxable year generally of an amount at least equal to 90% of the sum of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, the Company will incur a nondeductible excise tax equal to 4% of the amount by which (1) 98%
of ordinary income for the calendar year (taking into account certain deferrals and elections), (2) 98.2% of capital gains in excess of capital losses, adjusted for certain ordinary losses, for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and capital gain income for preceding years that were not distributed during such years and on which the Company incurred no U.S. federal income tax exceed distributions for the year. The Company accrues estimated excise tax on the amount, if any, that estimated taxable income is expected to exceed the level of stockholder distributions described above. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements 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 December 31, 2018 and December 31, 2017. Penalties or interest that may be assessed related to any income taxes would be classified as general and administrative expenses on the consolidated statements of operations. The Company had no amounts accrued for interest or penalties as of December 31, 2018 or December 31, 2017. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months. The Companys tax returns are subject to examination by federal, state and local taxing authorities. Because many types of
 99    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) transactions are susceptible to varying interpretations under U.S. federal and state income tax laws and regulations, the amounts reported in the accompanying consolidated financial statements may be subject to change at a later date by the respective taxing authorities. Tax returns for each of the federal tax years since 2014 remain subject to examination by the Internal Revenue Service. Dividends and Distributions:  Dividends and distributions to common stockholders are recorded on the ex-dividend date. Quarterly distribution payments are determined by the board of directors and are paid from taxable earnings estimated by management and may include a return of capital and/or capital gains. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. The Company maintains an opt out distribution reinvestment plan for common stockholders. As a result, if the Company declares a distribution or other dividend, stockholders cash distributions will be automatically reinvested in additional shares of common stock, unless they specifically opt out of the distribution reinvestment plan so as to receive cash distributions. Earnings per Share:  The Company calculates earnings per share as earnings available to stockholders divided by the weighted average number of shares outstanding during the period. Risks and Uncertainties:  In the normal course of business, the Company encounters primarily two significant types of economic risks: credit and market. Credit risk is the risk of default on the Companys investments that result from an issuers, borrowers or derivative counterpartys inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments due to changes in interest rates, spreads or other market factors, including the value of the collateral underlying investments held by the Company. Management believes that the
carrying value of the Companys investments are fairly stated, taking into consideration these risks along with estimated collateral values, payment histories and other market information. Recent Accounting Pronouncements:  In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The Company has adopted
this ASU effective December 31, 2018. No significant changes were made to the Companys fair value disclosures in the notes to the consolidated financial statements in order to comply with ASU 2018-13. During March 2017, the FASB issued ASU 2017-08,Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, to amend the amortization period for certain purchased callable debt securities held at a premium. Under current guidance, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new guidance shortened the amortization period for the premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized
to maturity. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted the provisions of the ASU 2017-08 effective January 1, 2019 and determined adoption of this standard did not have a material impact as the Company does not hold any material purchased callable debt securities at a premium. Securities and Exchange Commission Disclosure Update and Simplification:  In August 2018, the Securities and Exchange Commission adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification (the SEC Release) amending certain disclosure requirements that were redundant,
 100    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) duplicative, overlapping, outdated or superseded. The amendments are intended to facilitate the disclosure of information to investors and simplify compliance. The effective date for the SEC Release is effective for all filings on or after November 5, 2018. The Company adopted the final rule under SEC Release No. 33-10532 as of December 31, 2018. The Company has evaluated the impact of the amendments and determined the effect of the adoption of the simplification rules on financial statements will be limited to the modification and removal of certain disclosures. NOTE 3  INVESTMENTS Investments consisted of the following:  December 31, 2018

          

          December 31, 2017Cost

          

          Fair Value

          

          Cost

          

          Fair ValueFirst lien secured loans

          

          $

          365,356

          

          

          $

          359,416

          

          

          $

          232,786

          

          

          $

          230,261Second lien secured loans

          

          

          100,875

          

          

          

          97,167

          

          

          

          174,363

          

          

          

          172,270Equity

          

          

          11,608

          

          

          

          12,981

          

          

          

          41,373

          

          

          

          38,149Total

          

          $

          477,839

          

          

          $

          469,564

          

          

          $

          448,522

          

          

          $

          440,680
 The following table shows the portfolio composition by industry grouping at fair value:  December 31, 2018

          

          December 31, 2017Advertising

          

          $

          17,885

          

          

          

          3.81

          %

          

          $

          38,844

          

          

          

          8.81

          %Application Software

          

          

          

          

          

          

          

          

          

          

          17,892

          

          

          

          4.06Auto Parts & Equipment

          

          

          16,840

          

          

          

          3.59

          

          

          

          12,031

          

          

          

          2.73Broadcasting

          

          

          35,092

          

          

          

          7.47

          

          

          

          26,591

          

          

          

          6.03Cable & Satellite

          

          

          14,700

          

          

          

          3.13

          

          

          

          

          

          

          

          Data Processing & Outsourced Services

          

          

          24,707

          

          

          

          5.26

          

          

          

          23,188

          

          

          

          5.26Department Stores

          

          

          14,707

          

          

          

          3.13

          

          

          

          7,146

          

          

          

          1.62Diversified Support Services

          

          

          31,846

          

          

          

          6.78

          

          

          

          22,831

          

          

          

          5.18Environmental & Facilities Services

          

          

          

          

          

          

          

          

          

          

          8,423

          

          

          

          1.91Food Retail

          

          

          29,790

          

          

          

          6.34

          

          

          

          40,700

          

          

          

          9.24Health Care Facilities

          

          

          12,058

          

          

          

          2.57

          

          

          

          12,669

          

          

          

          2.87Health Care Services

          

          

          14,970

          

          

          

          3.19

          

          

          

          

          

          

          

          Home Furnishings

          

          

          5,392

          

          

          

          1.15

          

          

          

          

          

          

          

          Internet Retail

          

          

          17,100

          

          

          

          3.64

          

          

          

          6,000

          

          

          

          1.36Internet Software & Services

          

          

          25,576

          

          

          

          5.45

          

          

          

          17,576

          

          

          

          3.99Investment Banking & Brokerage

          

          

          17,439

          

          

          

          3.71

          

          

          

          17,872

          

          

          

          4.06IT Consulting & Other Services

          

          

          4,088

          

          

          

          0.87

          

          

          

          3,901

          

          

          

          0.89Leisure Facilities

          

          

          34,022

          

          

          

          7.25

          

          

          

          4,679

          

          

          

          1.06Office Services & Supplies

          

          

          

          

          

          

          

          

          

          

          4,466

          

          

          

          1.01Oil & Gas Exploration & Production

          

          

          17,342

          

          

          

          3.69

          

          

          

          10,837

          

          

          

          2.46Other Diversified Financial Services

          

          

          35,064

          

          

          

          7.47

          

          

          

          54,658

          

          

          

          12.40Packaged Foods & Meats

          

          

          12,777

          

          

          

          2.72

          

          

          

          

          

          

          

          Research & Consulting Services

          

          

          13,903

          

          

          

          2.96

          

          

          

          8,440

          

          

          

          1.92Restaurants

          

          

          10,020

          

          

          

          2.13

          

          

          

          

          

          

          

          Security & Alarm Services

          

          

          

          

          

          

          

          

          

          

          11,084

          

          

          

          2.52Specialized Consumer Services

          

          

          

          

          

          

          

          

          

          

          19,000

          

          

          

          4.31Specialized Finance

          

          

          46,780

          

          

          

          9.97

          

          

          

          68,216

          

          

          

          15.48Technology Hardware, Storage & Peripherals

          

          

          13,898

          

          

          

          2.96

          

          

          

          

          

          

          

          Trucking

          

          

          3,568

          

          

          

          0.76

          

          

          

          3,636

          

          

          

          0.83Total

          

          $

          469,564

          

          

          

          100.00

          %

          

          $

          440,680

          

          

          

          100.00

          %
 101    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 3  INVESTMENTS   (continued) As of December 31, 2018, the portfolio companies underlying the Companys investments are all located in the United States and its territories, except for Arcole Acquisition Corp (which is located in Canada). As of December 31, 2017, the portfolio companies underlying the Companys investments are all located in the United States and its territories. As of December 31, 2018 and 2017, the weighted average remaining term of the Companys debt investments was approximately 3.6 years and 3.4 years, respectively. As of December 31, 2018, the total fair value of non-accrual loans was $103. As of December 31, 2017, the Company had no non-accrual loans. The following table presents the schedule of investments in and advances to affiliated persons (as defined by the 1940 Act) as of and for the year ended December 31, 2018:  Affiliated Person(1)

          

          Type ofAsset

          

          Amount ofdividends andinterestincluded inincome

          

          BeginningFair Value atDecember 31,2017

          

          Purchases

          

          Sales

          

          NetRealizedGain (Loss)

          

          Net Change inUnrealizedAppreciation(Depreciation)

          

          Ending FairValue atDecember 31,2018Aretec Group, Inc.

          

          

          Equity

          

          

          $

          

          

          

          $

          17,314

          

          

          $

          

          

          

          $

          (53,734

          )

          

          $

          33,041

          

          

          $

          3,379

          

          

          $

          NMFC Senior Loan Program I LLC Units

          

          

          Equity

          

          

          

          2,132

          

          

          

          18,504

          

          

          

          

          

          

          

          (10,000

          )

          

          

          (91

          )

          

          

          1,217

          

          

          

          9,630RCS Creditor Trust Class B Units

          

          

          Equity

          

          

          

          

          

          

          

          428

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          107

          

          

          

          535Total

          

          

          

          

          

          $

          2,132

          

          

          $

          36,246

          

          

          $

          

          

          

          $

          (63,734

          )

          

          $

          32,950

          

          

          $

          4,703

          

          

          $

          10,165
 The following table presents the schedule of investments in and advances to affiliated persons (as defined by the 1940 Act) as of and for the year ended December 31, 2017:  Affiliated Person(1)

          

          Type ofAsset

          

          Amount ofdividends andinterestincluded inincome

          

          BeginningFair Value atDecember 31,2016

          

          Purchases

          

          Sales

          

          NetRealizedGain (Loss)

          

          Net Change inUnrealizedAppreciation(Depreciation)

          

          Ending FairValue atDecember 31,2017Aretec Group, Inc.

          

          

          Equity

          

          

          $

          

          

          

          $

          7,505

          

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          9,809

          

          

          $

          17,314NMFC Senior Loan Program I LLC Units

          

          

          Equity

          

          

          

          2,713

          

          

          

          18,993

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (489

          )

          

          

          18,504RCS Creditor Trust Class B Units

          

          

          Equity

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          428

          

          

          

          428Total

          

          

          

          

          

          $

          2,713

          

          

          $

          26,498

          

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          9,748

          

          

          $

          36,246
  (1)

          Refer to the consolidated schedule of investments for the principal amount, industry classification and other security detail of each portfolio company. During the fourth quarter of 2015, the Company placed its second lien investment in RCS Capital Corporation on non-accrual status in anticipation of a voluntary petition for a pre-packaged Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Delaware, which was filed on January 31, 2016. On May 23, 2016, the Companys second lien investment, with a cost basis of $20,693, converted to 536,042 shares of common stock in Aretec Group, Inc. (previously known as RCS Capital Corporation). As of December 31, 2017, the fair value of the Companys investment in Aretec Group, Inc. was $17,314. In
October 2018, the Company realized its investment in Aretec Group, Inc. and sold all 536,042 shares of common stock.
 102    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 4  FAIR VALUE MEASUREMENTS Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active public markets that the entity has the ability to access as of the measurement date. Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3:  Significant unobservable inputs that reflect a reporting entitys own assumptions about what market participants would use in pricing an asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instruments categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the financial instrument. A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the years ended December 31, 2018 and 2017, there were no changes in the observability of valuation inputs that would have resulted in a reclassification of assets into or out of Level 3. Fair value for each investment is derived using a combination of valuation methodologies that, in the judgment of the investment committee of the Companys investment adviser are most relevant to such investment, including, without limitation, being based on one or more of the following: (i) market prices obtained from market makers for which the investment committee has deemed there to be enough breadth (number of quotes) and depth (firm bids) to be indicative of fair value, (ii) the price paid or realized in a completed transaction or binding offer received in an arms-length transaction, (iii) a discounted cash
flow analysis, (iv) the guideline public company method, (v) the similar transaction method or (vi) the option pricing method. The following table presents investments (as shown on the consolidated schedule of investments) that have been measured at fair value as of December 31, 2018:  Level 1

          

          Level 2

          

          Level 3

          

          TotalFirst lien secured loans

          

          

          

          

          

          

          

          

          

          $

          359,416

          

          

          $

          359,416Second lien secured loans

          

          

          

          

          

          

          

          

          

          

          97,167

          

          

          

          97,167Equity

          

          

          706

          

          

          

          

          

          

          

          12,275

          

          

          

          12,981Total investments

          

          

          706

          

          

          

          

          

          

          $

          468,858

          

          

          $

          469,564
 The following table presents investments (as shown on the consolidated schedule of investments) that have been measured at fair value as of December 31, 2017:  Level 1

          

          Level 2

          

          Level 3

          

          TotalFirst lien secured loans

          

          

          

          

          

          

          

          

          

          $

          230,261

          

          

          $

          230,261Second lien secured loans

          

          

          

          

          

          

          

          

          

          

          172,270

          

          

          

          172,270Equity

          

          

          821

          

          

          

          

          

          

          

          37,328

          

          

          

          38,149Total investments

          

          

          821

          

          

          

          

          

          

          $

          439,859

          

          

          $

          440,680
 103    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 4  FAIR VALUE MEASUREMENTS   (continued) The following table presents the changes in investments measured at fair value using Level 3 inputs for the year ended December 31, 2018:  First LienSecuredLoans

          

          Second LienSecuredLoans

          

          Equity

          

          TotalInvestmentsFair value, beginning of period

          

          $

          230,261

          

          

          $

          172,270

          

          

          $

          37,328

          

          

          $

          439,859Funding of investments

          

          

          252,678

          

          

          

          23,207

          

          

          

          1,150

          

          

          

          277,035Non-cash interest income

          

          

          584

          

          

          

          

          

          

          

          

          

          

          

          584Accretion of discount

          

          

          3,432

          

          

          

          1,339

          

          

          

          (31

          )

          

          

          4,740Proceeds from paydowns and sales

          

          

          (123,753

          )

          

          

          (98,034

          )

          

          

          (63,865

          )

          

          

          (285,652

          )Realized (losses) gains

          

          

          (371

          )

          

          

          

          

          

          

          32,981

          

          

          

          32,610Net unrealized (depreciation) appreciation

          

          

          (3,415

          )

          

          

          (1,615

          )

          

          

          4,712

          

          

          

          (318

          )Fair value, end of period

          

          $

          359,416

          

          

          $

          97,167

          

          

          $

          12,275

          

          

          $

          468,858Change in unrealized appreciation (depreciation) on investments still held as of December 31, 2018

          

          

          (3,238

          )

          

          

          (1,081

          )

          

          

          1,333

          

          

          

          (2,986

          )
 The following table presents the changes in investments measured at fair value using Level 3 inputs for the year ended December 31, 2017:  First LienSecuredLoans

          

          Second LienSecuredLoans

          

          Equity

          

          TotalInvestmentsFair value, beginning of period

          

          $

          245,213

          

          

          $

          135,895

          

          

          $

          30,606

          

          

          $

          411,714Funding of investments

          

          

          93,561

          

          

          

          43,520

          

          

          

          

          

          

          

          137,081Non-cash interest income

          

          

          634

          

          

          

          28

          

          

          

          

          

          

          

          662Accretion of discount

          

          

          2,575

          

          

          

          498

          

          

          

          

          

          

          

          3,073Proceeds from paydowns and sales

          

          

          (110,978

          )

          

          

          (9,668

          )

          

          

          

          

          

          

          (120,646

          )Realized gains

          

          

          85

          

          

          

          23

          

          

          

          

          

          

          

          108Net unrealized (depreciation) appreciation

          

          

          (829

          )

          

          

          1,974

          

          

          

          6,722

          

          

          

          7,867Fair value, end of period

          

          $

          230,261

          

          

          $

          172,270

          

          

          $

          37,328

          

          

          $

          439,859Change in unrealized appreciation (depreciation) on investments still held as of December 31, 2017

          

          

          (1,902

          )

          

          

          1,753

          

          

          

          6,722

          

          

          

          6,573
 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.
 104    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 4  FAIR VALUE MEASUREMENTS   (continued) Quantitative Information about Level 3 fair value measurements is as follows:  Investment Type

          

          Fair Value atDecember 31, 2018

          

          ValuationTechniques

          

          UnobservableInputs

          

          Range (Weighted Average)First lien secured loans

          

          $

          107,291

          

          

          

          Discounted cash flows

          

          

          

          Discount rate

          

          

          

          11.8%  23.5% (15.2%)Exit multiple

          

          

          

          4.5x  7.0x (6.2x)11,955

          

          

          

          Market multiples

          

          

          

          Exit multiple

          

          

          

          2.9x17,439

          

          

          

          Weighting of discounted cash

          

          

          

          Discount rate

          

          

          

          10.5%  14.9% (11.7%)cash flows and expected repayment price

          

          

          

          Repayment price

          

          

          

          101.9Exit multiple

          

          

          

          4.5x222,731

          

          

          

          Weighting of discounted cash

          

          

          

          Discount rate

          

          

          

          8.7%  21.2% (11.5%)flows and consensus market pricing or recent transaction

          

          

          

          Market quotes or transaction price

          

          

          

          79.8  100.0 (97.5)Exit multiple

          

          

          

          4.0x  10.0x (7.2x)$

          359,416Second lien secured loans

          

          $

          62,572

          

          

          

          Discounted cash flows

          

          

          

          Discount rate

          

          

          

          12.9%  21.6% (18.2%)Exit multiple

          

          

          

          5.5x  8.0x (6.6x)103

          

          

          

          Market multiples

          

          

          

          Exit multiple

          

          

          

          2.9x17,150

          

          

          

          Weighting of discounted cash

          

          

          

          Discount rate

          

          

          

          14.7%flows and consensus pricing or recent transaction

          

          

          

          Market quotes or transaction price

          

          

          

          98.017,342

          

          

          

          Expected repayment

          

          

          

          Repayment price

          

          

          

          100.0$

          97,167Preferred Equity

          

          $

          317

          

          

          

          Market multiples

          

          

          

          Exit multiple

          

          

          

          9.4x$

          317Common Equity

          

          $

          9,630

          

          

          

          Weighting of discounted cash flows and recent transaction

          

          

          

          Discount rate

          

          

          

          10.2%Transaction price

          

          

          

          100.0Discount for lack of marketability

          

          

          

          2.0%535

          

          

          

          Consensus pricing

          

          

          

          Market quotes

          

          

          $

          3.8/s$

          10,165Warrant

          

          $

          1,693

          

          

          

          Discounted cash flows and

          

          

          

          Discount rate

          

          

          

          22.0%  30.3% (25.1%)Option-pricing method

          

          

          

          Exit multiple

          

          

          

          4.8x  8.0x (5.9x)Volatility

          

          

          

          2.3%  25.0% (8.7%)Discount for lack of marketability

          

          

          

          13.0%  55.0% (22.9%)100

          

          

          

          Market multiples

          

          

          

          Exit multiple

          

          

          

          5.5xDiscount for lack of marketability

          

          

          

          15.0%$

          1,793Total Level 3 Investments

          

          $

          468,858
 105    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 4  FAIR VALUE MEASUREMENTS   (continued)   Investment Type

          

          Fair Value at December 31, 2017

          

          Valuation Techniques

          

          Unobservable Inputs

          

          Range (Weighted Average)First lien secured loans

          

          $

          143,483

          

          

          

          Discounted cash flows

          

          

          

          Discount rateExit multiple

          

          

          

          10.8%  79.8% (20.4%)2.6x  7.0x (5.8x)86,778

          

          

          

          Weighting of discounted cashflows and consensus pricing

          

          

          

          Discount rateMarket quotesExit multiple

          

          

          

          9.7%  15.2% (12.2%)81.0  99.0 (94.9)5.0x  8.5x (6.4x)230,261Second lien secured loans

          

          

          96,021

          

          

          

          Discounted cash flows

          

          

          

          Discount rateExit multiple

          

          

          

          11.7%  112.2% (14.1%)2.6x  8.0x (7.3x)46,911

          

          

          

          Weighting of discounted cashflows and consensus pricing

          

          

          

          Discount rateMarket quotesExit multiple

          

          

          

          9.7%  15.3% (12.5%)89.0  100.3 (96.5)5.0x  8.5x (6.5x)4,466

          

          

          

          Expected repayment

          

          

          

          Repayment price

          

          

          

          101.024,872

          

          

          

          Weighting of discounted cashflows and expected repayment

          

          

          

          Discount rateRepayment price

          

          

          

          15.4%100.0172,270Common Equity

          

          

          18,504

          

          

          

          Discounted cash flows

          

          

          

          Discount rate

          

          

          

          11.3%428

          

          

          

          Consensus pricing

          

          

          

          Market quotes

          

          

          $

          3.0/s17,314

          

          

          

          Weighting of discounted cashflows, market multiple andconsensus pricing

          

          

          

          Discount rateExit multipleMarket quotes

          

          

          

          19.0%7.3x$38.0/s36,246Warrant

          

          

          902

          

          

          

          Discounted cash flows andOption-pricing method

          

          

          

          Discount rateExit multipleVolatility

          

          

          

          27.0%4.5x25.0%180

          

          

          

          Market multiple

          

          

          

          Exit multiple

          

          

          

          7.5x1,082Total Level 3 investments

          

          $

          439,859
 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.
 106    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 4  FAIR VALUE MEASUREMENTS   (continued) 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 values of the Companys borrowings as of December 31, 2018 and 2017. The amortized cost disclosed below excludes debt issuance costs. The fair values of the credit facility (as defined in Note 5) was estimated by discounting remaining payments using applicable market rates or market quotes for similar instruments at the measurement date, if available. The fair value of the 6.5% notes due 2020, (the 2020 Notes) was estimated using the trailing 10-day volume weighted average quoted price as of the valuation date. The fair value of the Companys 6.0%
private notes due 2023 (the 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 Value Level

          

          December 31, 2018

          

          December 31, 2017AmortizedCost

          

          Fair Value

          

          AmortizedCost

          

          Fair ValueJPM Credit Facility

          

          

          3

          

          

          $

          115,000

          

          

          $

          116,759

          

          

          $

          155,000

          

          

          $

          157,1392020 Notes

          

          

          2

          

          

          

          

          

          

          

          

          

          

          

          30,000

          

          

          

          30,666Private Notes

          

          

          3

          

          

          

          30,000

          

          

          

          30,724

          

          

          

          

          

          

          

          2025 Notes

          

          

          2

          

          

          

          35,000

          

          

          

          34,350

          

          

          

          

          

          

          

          $

          180,000

          

          

          $

          181,833

          

          

          $

          185,000

          

          

          $

          187,805
 NOTE 5  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 December 31, 2018, the Companys asset coverage for borrowed amounts was 275.2%.
 107    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 5  BORROWINGS   (continued) Total borrowings outstanding and available as of December 31, 2018, was as follows:  Maturity

          

          Rate

          

          Face Amount

          

          AvailableJPM Credit Facility

          

          

          2021

          

          

          

          L+2.75

          %

          

          $

          115,000

          

          

          $

          85,000Private Notes

          

          

          2023

          

          

          

          6.0

          %

          

          

          30,000

          

          

          

          2025 Notes

          

          

          2025

          

          

          

          6.5

          %

          

          

          35,000

          

          

          

          Total debt

          

          

          

          

          

          

          

          

          

          

          180,000

          

          

          $

          85,000Debt issuance cost

          

          

          

          

          

          

          

          

          

          

          (4,047

          )Total debt net issuance cost

          

          

          

          

          

          

          

          

          

          $

          175,953
 Total borrowings outstanding and available as of December 31, 2017, was as follows:  Maturity

          

          Rate

          

          Face Amount

          

          AvailableJPM Credit Facility

          

          

          2021

          

          

          

          L+2.75

          %

          

          $

          155,000

          

          

          $

          45,0002020 Notes

          

          

          2020

          

          

          

          6.50

          %

          

          

          30,000

          

          

          

          Total debt

          

          

          

          

          

          

          

          

          

          

          185,000

          

          

          $

          45,000Debt issuance cost

          

          

          

          

          

          

          

          

          

          

          (2,878

          )Total debt net issuance cost

          

          

          

          

          

          

          

          

          

          $

          182,122
 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. The Credit Facility bears interest at LIBOR plus 2.75% on outstanding borrowings. The Company is required to pay a non-usage fee which accrued at 0.50% per annum through September 22, 2016, and at 1.00% per annum thereafter (or 0.60% per annum with respect to any date in which the aggregated amount of outstanding borrowings is greater than 77.5% of the total commitments), on the average daily unused amount of the financing commitments to the extent the aggregate principal amount available under the Credit Facility has not been borrowed. The commitment fee was waived through September 22, 2016 while borrowings under the Credit
Facility exceeded $100,000. Prior to December 29, 2020, the Company, at its discretion and option, may increase the total borrowing limit under the Credit Facility from $200,000 to $235,000 (with the required minimum outstanding borrowings also increasing from $155,000 to $175,000) by submitting written notification of such intent and subject to consent from the lender and other terms provided for under the Credit Facility. In 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. Through May 19, 2019, the required minimum outstanding borrowings are $115,000 and then will be increased to $135,000 until August 20, 2019. Thereafter, the required minimum outstanding borrowings will return to $155,000. In connection with the Credit Facility, WhiteHorse Credit pledged securities with a fair value of approximately $432,238 as of December 31, 2018 as
collateral. The Credit Facility has a final maturity date of December 29, 2021.
 108    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 5  BORROWINGS   (continued) 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 December 31, 2018, the Company had $115,000 in outstanding borrowings and $85,000 undrawn under the Credit Facility. Weighted average outstanding borrowings were $159,392 at a weighted average interest rate of 4.89% for year ended December 31, 2018. At December 31, 2018, the interest rate in effect was 5.50%. 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 December 31, 2018, approximately $85,000 was available to be drawn by the Company based on these requirements. 2020 Notes:  On July 23, 2013, the Company completed a public offering of $30,000 of aggregate principal amount of the 2020 Notes, the net proceeds of which were used to reduce outstanding obligations under the Companys unsecured term loan, which was repaid in full on June 30, 2016. Interest on the 2020 Notes had paid quarterly on March 31, June 30, September 30 and December 31, at an annual rate of 6.50%. On July 10, 2018, the Company notified the trustee for its 2020 Notes of its election to redeem the $30,000 aggregate principal amount of the 2020 Notes outstanding in full in accordance with the terms
of the indenture agreement under which the 2020 Notes were issued. The redemption was completed on August 9, 2018. Following the redemption, none of the 2020 Notes remained outstanding, and they were delisted from the NASDAQ Global Select Market. Prior to August 9, 2018, the 2020 Notes were listed under the symbol WHFBL. Private Notes:  On July 13, 2018, the Company entered into an agreement (the Note Purchase Agreement) to sell in a private offering $30,000 aggregate principal amount of senior unsecured Private Notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. Interest on the 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 Private Notes cease to have an investment grade rating. The Private
Notes 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 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. The Company used the net proceeds from this offering, together with cash on hand, to redeem all of its 2020 Notes. 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 Private Notes. The 2025 Notes are listed on the NASDAQ Global Select Market under the trading symbol WHFBZ. NOTE 6  RELATED PARTY TRANSACTIONS Investment Advisory Agreement:  WhiteHorse Advisers serves as the Companys investment adviser in accordance with the terms of an investment advisory agreement (the Investment Advisory Agreement). The Companys board of directors most recently re-approved the Investment Advisory Agreement on August 1, 2018. On November 1, 2018, at an in-person meeting, the Companys board of directors approved an amended
 109    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 6  RELATED PARTY TRANSACTIONS   (continued) and restated investment advisory agreement (the 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. 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 is 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 of 2.0% of the average carrying value of consolidated gross assets (including cash and cash equivalents and assets purchased with borrowed funds); provided, however, the base management fee shall be calculated at an annual rate of 1.25% of the average
carrying value of consolidated gross assets (including cash and cash equivalents and assets purchased with borrowed funds), that exceeds 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 years ended December 31, 2018, 2017 and 2016, the Company incurred base management fees of $10,241, $9,508 and $8,990, 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 and March 31, 2019; and for the fiscal quarter ended June 30, 2019 only to the extent that the determination of base management fees would otherwise
include March 31, 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.
 110    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 6  RELATED PARTY TRANSACTIONS   (continued) 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
 111    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 6  RELATED PARTY TRANSACTIONS   (continued) 

          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
 112    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 6  RELATED PARTY TRANSACTIONS   (continued) the years ended December 31, 2018, 2017 and 2016, the Company recorded a net Capital Gains Incentive Fee of $4,707, $0 and $0, respectively, which are included in performance-based incentive fees in the consolidated statements of operations. As of December 31, 2018 and December 31, 2017, included in management fees payable on the consolidated statements of assets and liabilities were $4,707 and $0, 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 incentive fee even after incurring a loss in that quarter due to realized and unrealized capital losses. During the years ended December 31, 2018, 2017 and 2016, the Company incurred performance-based incentive fees of $12,134, $6,553 and $6,755, 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 Securities and Exchange Commission (the
SEC). 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 years ended December 31, 2018, 2017 and 2016, the Company incurred allocated administrative service fees of $684, $696 and $684, respectively. Co-investments with Related Parties:  At December 31, 2018 and 2017, certain officers or employees affiliated with or employed by WhiteHorse Advisers and its related entities maintained co-investments in the Companys investments of $0 and $61, respectively. At December 31, 2018 and 2017, certain funds affiliated with WhiteHorse Advisers and its related entities maintained co-investments in the Companys investments of $1,015,838 and $480,752.
 113    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 7  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 $1.6 million and $6.4 million as of December 31, 2018 and 2017, 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 December 31, 2018 and 2017:  Unfunded Commitment as ofDecember 31, 2018

          

          December 31, 2017Revolving Loan Commitments:Lift Brands, Inc.

          

          $

          624

          

          

          $

          Quest Events, LLC

          

          

          935

          

          

          

          1,559

          

          

          

          Delayed Draw Loan Commitments:Planet Fit Indy 10 LLC

          

          

          

          

          

          

          3,525Rural Media Group, Inc.

          

          

          

          

          

          

          2,867

          

          

          

          6,392Total Unfunded Commitments

          

          $

          1,559

          

          

          $

          6,392
 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, the investment adviser and the administrator 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.
 114    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 8  FINANCIAL HIGHLIGHTS The following is a schedule of financial highlights:  Years Ended December 31,2018

          

          2017

          

          2016

          

          2015

          

          2014Per share data:(1)Net asset value, beginning of period

          

          $

          13.98

          

          

          $

          13.63

          

          

          $

          13.33

          

          

          $

          15.04

          

          

          $

          15.16Issuance of common stock

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (0.11

          )

          

          

          Offering costs

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (0.07

          )

          

          

          Investment operations:Net investment income

          

          

          1.22

          

          

          

          1.35

          

          

          

          1.48

          

          

          

          1.36

          

          

          

          1.13Net realized and unrealized (losses) gains on investments

          

          

          1.57

          

          

          

          0.42

          

          

          

          0.24

          

          

          

          (1.47

          )

          

          

          0.17Net increase in net assets resulting from operations

          

          

          2.79

          

          

          

          1.77

          

          

          

          1.72

          

          

          

          (0.11

          )

          

          

          1.30Distributions declared

          

          

          (1.42

          )

          

          

          (1.42

          )

          

          

          (1.42

          )

          

          

          (1.42

          )

          

          

          (1.42

          )Net asset value, end of period

          

          $

          15.35

          

          

          $

          13.98

          

          

          $

          13.63

          

          

          $

          13.33

          

          

          $

          15.04Total return based on market value(2)

          

          

          (5.22

          )%

          

          

          10.27

          %

          

          

          6.01

          %

          

          

          (0.61

          )%

          

          

          (23.56

          )%Total return based on net asset value

          

          

          18.66

          %

          

          

          12.69

          %

          

          

          12.64

          %

          

          

          (1.24

          )%

          

          

          8.52

          %Net assets, end of period

          

          $

          315,296

          

          

          $

          286,952

          

          

          $

          249,389

          

          

          $

          244,052

          

          

          $

          225,358Per share market value at end of period

          

          $

          12.72

          

          

          $

          13.42

          

          

          $

          12.17

          

          

          $

          11.48

          

          

          $

          11.55Shares outstanding end of period

          

          

          20,546,032

          

          

          

          20,531,948

          

          

          

          18,303,890

          

          

          

          18,303,890

          

          

          

          14,982,857Ratios/Supplemental Data:Ratio of expenses before incentive fees to average net assets(3)(4)

          

          

          8.50

          %

          

          

          8.12

          %

          

          

          8.03

          %

          

          

          9.66

          %

          

          

          7.48

          %Ratio of incentive fees to average net assets(3)

          

          

          3.95

          %

          

          

          2.42

          %

          

          

          2.80

          %

          

          

          1.90

          %

          

          

          1.48

          %Ratio of total expenses to average net assets(3)(4)

          

          

          12.45

          %

          

          

          10.54

          %

          

          

          10.83

          %

          

          

          11.56

          %

          

          

          8.96

          %Ratio of net investment income to average net assets(3)(4)

          

          

          8.14

          %

          

          

          9.66

          %

          

          

          10.90

          %

          

          

          9.11

          %

          

          

          7.41

          %Portfolio turnover ratio

          

          

          57.74

          %

          

          

          27.96

          %

          

          

          29.38

          %

          

          

          32.97

          %

          

          

          40.01

          %
  (1)

          Calculated using the weighted average shares outstanding for the period. (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)

          During the year ended December 31, 2018, WhiteHorse Advisers irrevocably waived $270 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 8.59%, 3.93%, 12.52% and 8.06%, respectively, for the year ended December 31, 2018. WhiteHorse Advisers did not waive any base management fees during the years ended December 31, 2017, 2016 and 2015. During the year ended December 31, 2014, WhiteHorse Advisers irrevocably waived $447 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 7.68%, 1.36%, 9.04% and 7.22%, respectively, for the year ended December
31, 2014. (4)

          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.
 115    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 9  INCOME TAXES The Company has elected to be treated as a RIC under Subchapter M of the Code, and as a result must distribute substantially all of its taxable income. Accordingly, no provision for federal income tax has been made in the consolidated financial statements. The Company distributed 100% of its taxable income in each of its fiscal and taxable years. Distributions from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal tax regulations, which may differ from amounts determined in accordance with GAAP and those differences could be material. These book-to-tax differences are either temporary or permanent in nature. Reclassifications due to permanent book-tax differences have no impact on net assets. Such reclassifications have been reflected in the consolidated statements of changes in net assets. The reconciliation of net increase in net assets resulting from operations to taxable income is as follows:  Years ended December 31,2018

          

          2017

          

          2016Net increase (decrease) in net assets resulting from operations

          

          $

          57,301

          

          

          $

          34,448

          

          

          $

          31,329Change in net unrealized (appreciation) depreciation on investments

          

          

          433

          

          

          

          (8,128

          )

          

          

          (4,796

          )Other book-to-tax differences

          

          

          4,573

          

          

          

          (63

          )

          

          

          462Taxable income before deductions for distributions

          

          $

          62,307

          

          

          $

          26,257

          

          

          $

          26,995
 The tax character of distributions was as follows:  Years ended December 31,2018

          

          2017

          

          2016Ordinary income

          

          $

          17,540

          

          

          

          60.1

          %

          

          $

          26,716

          

          

          

          96.9

          %

          

          $

          25,992

          

          

          

          100.0

          %Return of capital

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Long-term capital gains

          

          

          11,625

          

          

          

          39.9

          %

          

          

          857

          

          

          

          3.1

          %

          

          

          

          

          

          

          Total distributions

          

          $

          29,165

          

          

          

          100.0

          %

          

          $

          27,573

          

          

          

          100.0

          %

          

          $

          25,992

          

          

          

          100.0

          %
 The Company may make certain adjustments to the classification of stockholders equity as a result of permanent book-to-tax differences. During the current fiscal year, permanent differences primarily due to nondeductible federal taxes resulted in a net increase in accumulated undistributed net investment income and a net decrease in paid-in capital. During the year ended December 31, 2017, permanent differences primarily due to the capital gain reclassification of fee income resulted in a net decrease in paid-in capital and a net decrease in accumulated net realized losses on investments. During the year ended December
31, 2016, permanent differences primarily due to the capital gain reclassification of fee income resulted in a net decrease in paid-in capital and a net decrease in accumulated net realized losses on investments. These reclassifications had no net effect on net assets.
 116    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 9  INCOME TAXES   (continued) As of December 31, 2018, 2017 and 2016, the tax basis components of distributable earnings were as follows:  December 31,2018

          

          2017

          

          2016Accumulated capital and other losses

          

          $

          26,073

          

          

          $

          

          

          

          $

          (655

          )Net unrealized (depreciation) appreciation on investments

          

          

          (12,355

          )

          

          

          (8,256

          )

          

          

          (16,720

          )Distributions deferred

          

          

          

          

          

          

          (7,104

          )

          

          

          (5,495

          )Total (accumulated deficit) distributable earnings  tax basis

          

          $

          13,718

          

          

          $

          (15,360

          )

          

          $

          (22,870

          )
 There were no late year ordinary losses for the fiscal years ended December 31, 2018, December 31, 2017 and December 31, 2016. For tax purposes, net capital losses may be carried over to offset future capital gains, if any. The Company is permitted to carry forward capital losses incurred in taxable years beginning December 22, 2010 for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. As of December 31, 2018, the Company did not have any short-term or long-term capital loss carryforwards. As of December 31, 2017, the Company did not have any short-term or long-term capital loss carryforwards. As of December 31, 2018, the cost of investments for U.S. federal income tax purposes was $481,919, resulting in net unrealized depreciation of $12,355. This is comprised of gross unrealized appreciation of $3,598 and gross unrealized depreciation of $15,953 on a tax basis. As of December 31, 2017, the cost of investments for U.S. federal income tax purposes was $448,937, resulting in net unrealized depreciation of $8,256. This is comprised of gross unrealized appreciation of $3,953 and gross unrealized depreciation of $12,209 on a tax basis. The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25,Income Taxes, nor did the Company have any unrecognized tax benefits as of the period presented herein. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. Tax returns for each of the federal tax years since 2014 remain subject to examination by the Internal Revenue Service.
 117    TABLE OF CONTENTS WhiteHorse Finance, Inc.  Notes to Consolidated Financial Statements December 31, 2018(in thousands, except share and per share data) NOTE 10  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth, for the periods indicated, certain consolidated quarterly financial information. This information is derived from the Companys unaudited financial statements which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. The results for any quarter are not necessarily indicative of results for future periods.  2018Q4

          

          Q3

          

          Q2

          

          Q1Total investment income

          

          $

          16,671

          

          

          $

          15,318

          

          

          $

          14,654

          

          

          $

          16,605Net investment income after excise tax

          

          

          8,040

          

          

          

          3,777

          (1)

          

          

          4,607

          

          

          

          8,578Net realized and unrealized (losses) gains on investments

          

          

          (3,106

          )

          

          

          15,685

          

          

          

          14,447

          

          

          

          5,275Net increase in net assets resulting from operations

          

          

          4,934

          

          

          

          19,462

          

          

          

          19,054

          

          

          

          13,853Earnings per share

          

          

          0.24

          

          

          

          0.95

          

          

          

          0.93

          

          

          

          0.67Net asset value per share

          

          $

          15.35

          

          

          $

          15.46

          

          

          $

          14.87

          

          

          $

          14.30
  2017Q4

          

          Q3

          

          Q2

          

          Q1Total investment income

          

          $

          13,920

          

          

          $

          13,024

          

          

          $

          14,285

          

          

          $

          13,575Net investment income after excise tax

          

          

          6,804

          

          

          

          5,950

          

          

          

          6,936

          

          

          

          6,522Net realized and unrealized gains on investments

          

          

          1,684

          

          

          

          3,106

          

          

          

          339

          

          

          

          3,107Net increase in net assets resulting from operations

          

          

          8,488

          

          

          

          9,056

          

          

          

          7,275

          

          

          

          9,629Earnings per share

          

          

          0.41

          

          

          

          0.45

          

          

          

          0.39

          

          

          

          0.53Net asset value per share

          

          $

          13.98

          

          

          $

          13.92

          

          

          $

          13.83

          

          

          $

          13.80
  2016Q4

          

          Q3

          

          Q2

          

          Q1Total investment income

          

          $

          13,359

          

          

          $

          14,030

          

          

          $

          13,050

          

          

          $

          13,410Net investment income after excise tax

          

          

          6,555

          

          

          

          7,268

          

          

          

          6,426

          

          

          

          6,762Net realized and unrealized gains (losses) on investments

          

          

          2,519

          

          

          

          1,326

          

          

          

          1,703

          

          

          

          (1,230

          )Net increase in net assets resulting from operations

          

          

          9,074

          

          

          

          8,594

          

          

          

          8,129

          

          

          

          5,532Earnings per share

          

          

          0.50

          

          

          

          0.47

          

          

          

          0.44

          

          

          

          0.30Net asset value per share

          

          $

          13.63

          

          

          $

          13.48

          

          

          $

          13.37

          

          

          $

          13.28
  (1)

          Includes $0.3 million of accelerated amortization of debt acquisition costs related to the redemption of the Companys 2020 Notes on August 9, 2018. 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 January 14, 2019, the Company entered into a limited liability company operating agreement with State Teachers Retirement System of Ohio (STRS Ohio), a public pension fund established under Ohio law, to co-manage a newly formed joint venture investment company, WHF STRS Ohio Senior Loan Fund LLC (the Joint Venture). STRS Ohio and the Company have committed to provide up to $125.0 million of subordinated notes and equity to the Joint Venture, with STRS Ohio providing up to $50.0 million and the Company providing up to $75.0 million, respectively. The Joint Venture will invest primarily in lower middle
market, senior secured debt facilities.
 118    TABLE OF CONTENTS Item 9.

          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A.

          Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures As of December 31, 2018 (the end of the period covered by this report), we, including our chief executive officer and interim 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 that evaluation, our management, including the chief executive officer and chief financial officer, concluded that, at the end of such period, our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and interim chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated 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 such possible controls and procedures. (b) Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is a process designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. WhiteHorse Finances internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions recorded necessary to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Our policies and procedures also provide reasonable assurance that receipts and expenditures are being made only in accordance with authorizations of management and the directors of WhiteHorse Finance, and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of WhiteHorse Finances internal control over financial reporting as of December 31, 2018. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control  Integrated Framework issued in 2013. Based on the assessment, management believes that, as of December 31, 2018, our internal control over financial reporting is effective based on those criteria. (c) Report of the Independent Registered Public Accounting Firm Our independent registered public accounting firm, Crowe LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting which is set forth under the heading Report of Independent Registered Public Accounting Firm on page 82 under Item 8. Consolidated Financial Statements and Supplementary Data.
 119    TABLE OF CONTENTS (d) Changes in Internal Control Over Financial Reporting Management has not identified any change in our internal control over financial reporting that occurred during the fourth fiscal quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B.

          Other Information None.
 120    TABLE OF CONTENTS PART III Item 10.

          Directors, Executive Officers and Corporate Governance Directors Set forth below is certain information regarding the members of our board of directors, including the name, age, principal occupation, business experience and length of service as a director.  Name

          

          Age

          

          Position

          

          Director Since

          

          Expiration of TermInterested DirectorsJohn Bolduc

          

          54

          

          Chairman of the Board of Directors

          

          2012

          

          2021Stuart Aronson

          

          56

          

          Chief Executive Officer and Director

          

          2017

          

          2020Jay Carvell

          

          53

          

          Director

          

          2012

          

          2020Independent DirectorsRick P. Frier

          

          57

          

          Director, Chairman of the Compensation Committee

          

          2016

          

          2020Rick D. Puckett

          

          65

          

          Director, Chairman of the Audit Committee

          

          2012

          

          2021G. Stacy Smith

          

          50

          

          Director, Co-Chairman of the Nominating and Corporate Governance Committee

          

          2015

          

          2019Kevin F. Burke

          

          65

          

          Director, Co-Chairman of the Nominating and Corporate Governance Committee

          

          2017

          

          2019
 The address for each director is c/o WhiteHorse Finance, Inc., 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131. Our directors have been divided into two groups  interested directors and independent directors. Interested directors are interested persons as defined in the 1940 Act. Interested Directors John Bolduc:  Mr. Bolduc has been Chairman of our board of directors since 2012. Mr. Bolduc is an Executive Managing Director of H.I.G. Capital, having joined the firm in 1993. Mr. Bolduc is responsible for leading H.I.G. Capitals credit platform, which manages approximately $10 billion of capital across multiple investment funds. He has more than 25 years of experience focused on credit investments, including primary loans and distressed debt, as well as private equity investments. Mr. Bolduc currently serves on the boards of directors of several privately held companies. Prior to joining H.I.G. Capital
in 1993, Mr. Bolduc was at the management-consulting firm of Bain & Company, a leading worldwide management-consulting firm, where he directed domestic and international assignments for Fortune 500 clients. Prior to joining Bain & Company, Mr. Bolduc worked for three years as the Assistant to the President of Chemed Corporation (NYSE: CHE), a specialty chemical company. Mr. Bolduc is a graduate of Lehigh University with a B.S. degree in Computer Science and earned his M.B.A. from the University of Virginias Darden School of Business. Mr. Bolduc was selected to serve as Chairman of our board of directors due, in part, to his familiarity with our portfolio companies, his broad experience with the day-to-day management and operation of other investment funds and his significant background investing in debt and working in the financial services industry. Stuart Aronson:  Mr. Aronson has served as our Chief Executive Officer since May 2016 and has served as a director since May 2017. Mr. Aronson also currently serves as Group Head of the U.S. direct lending platform of H.I.G. Capital, a position he has held since February 2016. In this position, Mr. Aronson is responsible for building the debt solutions offered by H.I.G. Capital to non-sponsor and sponsor borrowers in the U.S. middle market. Prior to joining H.I.G. Capital, from July 1990 through December 2015 Mr. Aronson served as an officer of the General Electric Company and as the President and Chief
Executive Officer of GSF. Mr. Aronson also served during this period on the board of directors of Peacock Equity Partners, a mid-to-late stage venture capital fund organized as a joint venture between GE Capital and NBC Universal. Prior to joining GSF, Mr. Aronson led the commercial and industrial platform of GE Structured Finance
 121    TABLE OF CONTENTS (Americas), Inc., which provided structured debt and equity solutions to borrowers in the United States, Europe and Asia. Before that, he held several positions with GE Capital Markets Group, Inc., including serving as leader of domestic product execution, including syndications, private placements, securitization and trade finance. Mr. Aronson began his career in the syndications group of Chemical Banking Corporation. He also currently serves on the Board of Kids in Crisis in Greenwich, Connecticut. Mr. Aronson graduated cum laude from Tufts University and received an M.B.A. with honors from Columbia Business School. Mr. Aronsons expertise in sponsored lending and his experience as our Chief Executive Officer and Group Head of the U.S. direct lending platform of H.I.G. Capital are among the attributes that led to the conclusion that Mr. Aronson should serve on our board of directors. Jay Carvell:  Mr. Carvell has served as a director since 2012. Mr. Carvell also serves as a Managing Director at an H.I.G. Capital-affiliated investment adviser. He is responsible for all aspects of our investment process, including sourcing, structuring and post-closing strategies, as well as portfolio management. Until May 2016, Mr. Carvell served as Chief Executive Officer of the Company. Prior to joining H.I.G. Capital, Mr. Carvell was a founding partner of WhiteHorse Capital Partners, L.P., a leading credit investor and manager of collateralized loan obligations. At WhiteHorse Capital Partners, Mr.
Carvell co-managed portfolios of par and distressed loans across numerous industries and sectors through several market cycles. Mr. Carvell has over 16 years of experience in credit investment and management, including structuring and placement, trading and restructuring and reorganization. This experience branches across lower mid-cap, mid-cap and broadly syndicated investments. Before founding WhiteHorse Capital Partners in 2003, Mr. Carvell held various positions with Highland Capital Management, L.P. and PricewaterhouseCoopers LLP. Mr. Carvell earned both a B.A. and an M.B.A. from the University of Texas at Austin and holds the Chartered Financial Analyst designation. Mr. Carvell was selected to serve as a board member due to his experience investing in credit instruments and managing WhiteHorse Capital Partners. Mr. Carvells experience building WhiteHorse Capital Partners brings expertise in developing a successful credit investment firm to our board of directors. Independent Directors Kevin F. Burke:  Mr. Burke has served as a director since May 2017. He currently serves as a Senior Advisor to THL Credit Advisors LLC, an alternative credit investment manager for both direct lending and broadly syndicated investments through public and private vehicles, and to Churchill Asset Management LLC, a leading provider of senior and unitranche debt financing to middle market companies. From January 2016 until December 2016, Mr. Burke served as Senior Managing Director of the loan syndication sales and trading department of Antares Capital, a company specializing in acquisition finance for private
equity firms. Prior to this position, from April 2003 until December 2015, Mr. Burke was a Senior Managing Director of GE Capital, a leading provider of debt financing to the U.S. sponsor middle market. Mr. Burke received a Bachelor of Arts in History from Harvard University in 1976. Mr. Burkes experience as a senior managing director and his debt financing expertise is among the attributes that led to the conclusion that Mr. Burke should serve on our board of directors. Rick P. Frier:  Mr. Frier has served as a director since August 2016. He currently serves on the board of directors of Affinion Group, Inc., where he is the Chairman of the Audit Committee, to which he was elected in November 2015. He is currently the Chairman of the Board and the Chairman of the Audit Committee for Exal Corporation, to which he was elected in December 2016. Mr. Frier also served as a director of Shearers Foods Inc. from August 2017 until February 2018. Prior to these positions, from April 2013 until January 2015 Mr. Frier was the Executive Vice President and Chief Financial Officer of
Chiquita Brands International, Inc. Before his position with Chiquita Brands, from March 2005 until October 2012 Mr. Frier served as the Executive Vice President, Chief Financial Officer and director of Catalina Marketing Corporation. Mr. Frier received a Bachelor of Science in Business Administration from the University of Southern California, and an M.B.A. from the Claremont Graduate University. Mr. Friers experience as a board member and chief financial officer of several companies are among the attributes that led to the conclusion that Mr. Frier should serve on our board of directors.
 122    TABLE OF CONTENTS Rick D. Puckett:  Mr. Puckett has served as a director since 2012. Until his retirement in 2016, Rick D. Puckett was Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Snyders-Lance Inc., Charlotte, NC. In these positions, he led all Finance, Information Technology, Investor Relations, Risk Management, Corporate Relations and Treasury functions and supported the companys achievement of strategic initiatives in supply chain management and sales efficiency improvements. Prior to Snyders-Lance, Mr. Puckett was Executive Vice President, Chief Financial Officer
and Treasurer for United Natural Foods, Inc. Mr. Puckett is a Certified Public Accountant and received his degree in Accounting and his M.B.A. from the University of Kentucky. He is a director of SPX Corporation (NYSE:SPXC), a public company where he is the Chairman of the Audit Committee and serves on the Compensation and Governance Committees. He is also a director of Driven Brands, Inc., a privately held company. He is a member of the Board of Advisors for Wake Forest University Charlotte and previously served on the Board of the NACD of Charlotte, National Association of Corporate Directors. Mr. Pucketts experience as Executive Vice President and Chief Financial Officer at a public company and his training as a Certified Public Accountant are among the attributes that led to the conclusion that Mr. Puckett should serve on our board of directors. G. Stacy Smith:  Mr. Smith has served as a director since 2015. Mr. Smith currently serves on the board of directors of Independent Bank Group, a bank holding company, to which he was elected in February 2013. He also currently serves on the board of directors of USD Partners LP, an energy-related logistics company, to which he was elected in October 2015. Mr. Smith co-founded in February 2013 and remains a partner of Trinity Investment Group, a firm which invests in private equity transactions, public equity securities and other assets. Since 2013, he has also served as a partner of SCW Capital, LP, a hedge
fund. In 1997, Mr. Smith co-founded Walker Smith Capital, a Dallas-based small- and mid-cap equity hedge fund, where he was a partner and served as a portfolio manager until December 2012. Mr. Smith received a Bachelor of Business Administration in Finance and Accounting from the University of Texas at Austin in 1990. Mr. Smiths experience as a board member, partner for several investment companies and manager for a hedge fund are among the attributes that led to the conclusion that Mr. Smith should serve on our board of directors. Officers Who are Not Directors  Name

          

          Age

          

          PositionEdward J. Giordano

          

          48

          

          Interim Chief Financial OfficerMarco Collazos

          

          43

          

          Chief Compliance Officer
 The address for each officer is c/o WhiteHorse Finance, Inc., 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131. Each officer holds office until his successor is chosen and qualifies or until his earlier resignation or removal. Edward J. Giordano:  Mr. Giordano has served as our interim Chief Financial Officer since August 2016. He also serves as Chief Financial Officer of H.I.G. Capitals $10 billion Credit Platform, where he is responsible for the financial reporting and operations oversight for all of H.I.G.s credit funds. Mr. Giordano has more than 12 years of experience focused on overseeing the finance functions of credit funds. Prior to joining H.I.G. Capital in 2013, Mr. Giordano was a Managing Director and Chief Accounting Officer of Black Diamond Capital Management, or BDCM, where he was responsible for the
firms finance and operation groups overseeing all finance, accounting, tax and operational activities for BDCM and its affiliates. Previously, he was a Senior Manager in Ernst & Youngs and Arthur Andersens Transaction Advisory Services practices where he led teams providing financial, tax and human capital due diligence services to large private equity and strategic buyers. Prior to this, Mr. Giordano was a Senior Manager in Arthur Andersens audit practice where he was responsible for the audit process for RICs and companies in various other industries. Mr. Giordano earned his B.S. in Accounting from Villanova University. Marco Collazos:  Mr. Collazos has served as our Chief Compliance Officer since November 2014. Mr. Collazos also currently serves as Director of Compliance for H.I.G. Capital, a position he has held since May 2013. Prior to joining H.I.G. Capital, Mr. Collazos served as Chief Compliance Officer in the Americas for EFG International from March 2011 until April 2013. Mr. Collazos previously worked as a Principal
 123    TABLE OF CONTENTS Consultant with ACA Compliance Group (a regulatory and compliance consulting firm), as well as a Compliance Examiner for several years with the SEC and with the Federal Reserve Bank of Atlanta. Mr. Collazos received a B.S. from the University of Central Florida and an M.B.A. from the University of Notre Dame. Section 16(a) Beneficial Ownership Reporting Compliance Pursuant to Section 16(a) of the Exchange Act, our directors and other executive officers, and any person holding more than 10% of our common stock, are required to report their beneficial ownership and any changes therein to us and the SEC. Specific due dates for those reports have been established, and we are required to report in this annual report on Form 10-K any failure to file such reports by those due dates. Based on our review of Forms 3, 4 and 5 filed by such persons and information provided to us, we believe that, during the fiscal year ended December 31, 2018, with the exception of one Form 4 filed one day late by
Mr. Aronson due to an administrative oversight, all Section 16(a) filing requirements applicable to such persons were met in a timely manner. Code of Ethics We and WhiteHorse Advisers have each adopted and maintain a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures that apply to our directors, executive officers, officers, their respective staffs and the employees of WhiteHorse Advisers with respect to their personal investments and investment transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the codes requirements. Our code of ethics is included as Exhibit 14.1 to
this annual report on Form 10-K, and you may access our code of ethics via the Internet at the website of the SEC athttp://www.sec.gov or our website at www.whitehorsefinance.com. We intend to disclose any material amendments to or waivers of required provisions of the code of ethics on a current report on Form 8-K. Corporate Governance Our board of directors has established an audit committee, a nominating and corporate governance committee and a compensation committee. For the fiscal year ended December 31, 2018, our board of directors held five board of directors meetings, four audit committee meetings and three joint meetings of the compensation committee and the nominating and corporate governance committee. All directors attended at least 75% of the aggregate number of meetings of the board of directors and of the respective committees on which they served that were held while they were members of the board of directors. We require each director to make
a diligent effort to attend all board of directors and committee meetings and encourage directors to attend the annual meeting of stockholders. Committees of the Board of Directors Audit Committee The members of the audit committee are Messrs. Burke, Frier, Puckett and Smith, each of whom is independent for purposes of the 1940 Act and the NASDAQ corporate governance regulations. Mr. Puckett serves as the chairman of the audit committee. The audit committee is responsible for pre-approving the engagement of the independent accountants to render audit and/or permissible non-audit services, approving the terms of compensation of such independent accountants, reviewing with our independent accountants the plans and results of the audit engagement, reviewing the independence of our independent accountants and reviewing the
adequacy of our internal accounting controls. The audit committee is also responsible for aiding our board of directors in fair value pricing debt and equity securities that are not publicly-traded or for which current market values are not readily available. The board of directors and audit committee use the services of one or more independent valuation firms to help them determine the fair value of these securities. Our board of directors has determined that Mr. Puckett is an audit committee financial expert, as defined under Item 407(d)(5) of Regulation S-K under the Securities Act. In addition, each member of our audit committee meets the current independence and experience requirements of Rule 10A-3 under the Exchange Act. The audit committee has adopted a written charter that is available on our website atwww.whitehorsefinance.com.
 124    TABLE OF CONTENTS Nominating and Corporate Governance Committee The members of the nominating and corporate governance committee are Messrs. Burke, Frier, Puckett and Smith, each of whom is independent for purposes of the 1940 Act and the NASDAQ corporate governance regulations. Messrs. Burke and Smith serve as the co-chairmen of the nominating and corporate governance committee. The nominating and corporate governance committee is responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on the board of directors or a committee thereof, developing and recommending to the board of directors a set of corporate
governance principles and overseeing the evaluation of the board of directors and our management. The nominating and corporate governance committee has adopted a written charter that is available on our website atwww.whitehorsefinance.com. The nominating and corporate governance committee considers stockholders recommendations for possible nominees for election as directors when such recommendations are submitted in accordance with our bylaws, the nominating and corporate governance committee charter and any applicable law, rule or regulation regarding director nomination. Our bylaws provide that a stockholder who wishes to nominate a person for election as a director at a meeting of stockholders must deliver written notice to our Secretary, Richard Siegel, c/o WhiteHorse Finance, Inc., 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131.
This notice must contain, as to each nominee, all of the information relating to such person as would be required to be disclosed in a proxy statement meeting the requirements of Regulation 14A under the Exchange Act and certain other information set forth in our bylaws, including the following information for each director nominee: full name, age and address; principal occupation during the past five years; directorships on publicly held companies and investment companies during the past five years; number of shares of our common stock owned, if any; and a written consent of the individual to stand for election if nominated by the board of directors and to serve if elected by the stockholders. In order to be eligible to be a nominee for election as a director by a stockholder, such potential nominee must deliver to our Secretary a written questionnaire providing the requested information about the background and qualifications of such person and a written representation and agreement
that such person is not and will not become a party to any voting agreements, any agreement or understanding with any person with respect to any compensation or indemnification in connection with service on the board of directors, and would be in compliance with all of our publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines. Criteria considered by the nominating and corporate governance committee in evaluating the qualifications of individuals for election as members of the board of directors include compliance with the independence and other applicable requirements of the NASDAQ corporate governance regulations, the 1940 Act and the SEC, and all other applicable laws, rules, regulations and listing standards, the criteria, policies and principles set forth in the nominating and corporate governance committee charter and the ability to contribute to the effective management of WhiteHorse Finance, taking into account its needs and such factors as
the individuals experience, perspective, skills and knowledge of the industry in which we operate. The nominating and corporate governance committee has not adopted a formal policy with regard to the consideration of diversity in identifying individuals for election as members of the board of directors, but the nominating and corporate governance committee will consider such factors as it may deem are in the best interests of WhiteHorse Finance and its stockholders. Such factors may include the individuals professional experience, education, skills and other individual qualities or attributes, including gender, race or national origin. Compensation Committee We established a compensation committee in May 2014. The members of the compensation committee are Messrs. Burke, Frier, Puckett and Smith, each of whom meets the independence standards established by the SEC and the NASDAQ corporate governance regulations. Mr. Frier serves as the chairman of the compensation committee. The compensation committee is responsible for determining, or recommending to the board of directors for determination, the compensation, if any, of our Independent Directors, our chief executive officer and all of our other executive officers. Currently none of our executive officers are compensated by us and,
as a result, the compensation committee does not produce and/or review a report on executive compensation practices. The compensation committee also has the authority to
 125    TABLE OF CONTENTS engage compensation consultants following consideration of certain factors related to such consultants independence. The compensation committee has adopted a written charter that is available on our website atwww.whitehorsefinance.com. Item 11.  Executive Compensation Compensation of Chief Executive Officer and Other Executive Officers None of our officers receives direct compensation from us. An allocable portion of the compensation of our chief financial officer and our chief compliance officer is paid by WhiteHorse Administration, subject to reimbursement by us of an allocable portion of such compensation for services rendered by them to us. To the extent that our administrator outsources any of its functions, we pay the fees associated with such functions on a direct basis without profit to the administrator. Compensation of Directors The Independent Directors will each receive an annual fee of $57,000 for the fiscal year ending December 31, 2018, which increased from the annual fee of $52,500 received for the fiscal year ended December 31, 2017. They also receive $3,500 for each full board of directors meeting attended, $1,500 for each meeting of the audit committee or the nominating and corporate governance committee attended, $750 for each meeting attended that is determined by the board of directors to constitute a special purpose board of directors meeting and not a full board of directors meeting, and reasonable out-of-pocket expenses
relating to attendance at in-person meetings. In addition, the chairman of the audit committee receives an annual fee of $10,000 and the chairman of each other committee of the board of directors receives an annual fee of $5,000 for their additional services in these capacities. In addition, we have purchased directors and officers liability insurance on behalf of our directors and officers. The following table shows information regarding the compensation earned by our directors (excluding any reimbursed out-of-pocket expenses relating to attendance at in-person meetings) for the fiscal year ended December 31, 2018. No compensation is paid by us to any interested director or executive officer of WhiteHorse Finance.  Name

          

          AggregateCompensationfrom WhiteHorseFinance

          

          Pension orRetirementBenefits Accruedas Part of OurExpenses(1)

          

          TotalCompensationfrom WhiteHorseFinanceIndependent DirectorsKevin F. Burke

          

          $

          82,750

          

          

          

          

          

          

          $

          82,750Rick P. Frier

          

          

          85,750

          

          

          

          

          

          

          

          85,750Rick D. Puckett

          

          

          91,500

          

          

          

          

          

          

          

          91,500G. Stacy Smith

          

          

          86,500

          

          

          

          

          

          

          

          86,500Interested DirectorsStuart Aronson

          

          

          

          

          

          

          

          

          

          

          John Bolduc

          

          

          

          

          

          

          

          

          

          

          Jay Carvell

          

          

          

          

          

          

          

          

          

          

          
  (1)

          We do not have a profit-sharing or retirement plan, and directors do not receive any pension or retirement benefits.
 126    TABLE OF CONTENTS Item 12.

          Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plans No stock has been authorized for issuance under any equity compensation plan. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 11, 2019, certain ownership information with respect to our common stock for those persons who directly or indirectly own, control or hold with the power to vote, five percent or more of our outstanding shares of common stock and all officers and directors, as a group.  Name and Address

          

          Type of Ownership

          

          Shares Owned

          

          PercentageH.I.G. Bayside Debt & LBO Fund II, L.P.(1)

          

          

          Beneficial

          

          

          

          5,802,061

          

          

          

          28.2

          %H.I.G. Bayside Loan Opportunity Fund II, L.P.(1)

          

          

          Beneficial

          

          

          

          4,727,939

          

          

          

          23.0

          %Hamilton Lane Advisors, L.L.C.(2)

          

          

          Beneficial

          

          

          

          1,075,244

          

          

          

          5.2

          %Stuart Aronson(3)

          

          

          Beneficial

          

          

          

          18,000

          

          

          

          

          *John Bolduc(3)(4)

          

          

          Beneficial

          

          

          

          191,975

          

          

          

          

          *Jay Carvell(3)

          

          

          Beneficial

          

          

          

          15,629

          

          

          

          

          *Sami Mnaymneh(5)(6)

          

          

          Beneficial

          

          

          

          10,809,635

          

          

          

          52.6

          %Anthony Tamer(5)(7)

          

          

          Beneficial

          

          

          

          10,799,317

          

          

          

          52.6

          %Kevin F. Burke(3)

          

          

          Beneficial

          

          

          

          4,530

          

          

          

          

          *Rick P. Frier(3)

          

          

          Beneficial

          

          

          

          

          

          

          

          

          *Rick D. Puckett(3)(8)

          

          

          Beneficial

          

          

          

          18,912

          

          

          

          

          *G. Stacy Smith(3)

          

          

          Beneficial

          

          

          

          

          

          

          

          

          *Marco Collazos(3)

          

          

          Beneficial

          

          

          

          

          

          

          

          

          *Edward J. Giordano(3)

          

          

          Beneficial

          

          

          

          

          

          

          

          

          *All officers and directors as a group (9 persons)

          

          

          Beneficial

          

          

          

          249,046

          

          

          

          1.2

          %
  *

          Represents less than 1.0%. (1)

          The address of H.I.G. Bayside Debt & LBO Fund II, L.P. and H.I.G. Bayside Loan Opportunity Fund II, L.P., each a Delaware limited partnership, is 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131. The number of shares of common stock shown in the above table as being owned by the named entities reflect the fact that they collectively may be viewed as having investment power over 10,530,000 shares of our common stock indirectly owned of record by such entities, although voting rights to such securities have been passed through to the respective limited partners. Each of H.I.G. Bayside Debt & LBO Fund II, L.P. and H.I.G. Bayside Loan Opportunity Fund II, L.P. disclaim beneficial ownership of such shares of common stock, except to the extent of their respective pecuniary interests therein. (2)

          The address for Hamilton Lane Advisors, L.L.C. is One Presidential Blvd., 4th Floor, Bala Cynwyd, Pennsylvania 19004. The number of shares beneficially owned is based on a Schedule 13G filed by Hamilton Lane Advisors, L.L.C. on February 12, 2019, which Schedule 13G reflects sole voting power over 669,787 shares by Hamilton Lane Advisors, L.L.C. and shared voting power over 405,457 shares by Hamilton Lane Advisors, L.L.C. (3)

          The address for each of our officers and directors is c/o WhiteHorse Finance, Inc., 1450 Brickell Avenue, 31st Floor, Miami, Florida 33131. (4)

          Mr. Bolduc is the sole shareholder of the general partner of Bolduc Family L.P. The number of shares of common stock shown in the above table as being owned by Mr. Bolduc reflects the fact that, due to his control of Bolduc Family, L.P., Mr. Bolduc may be viewed as having investment power over 34,829 shares of common stock owned by such entity. Mr. Bolduc disclaims beneficial ownership of shares of common stock held by Bolduc Family, L.P., except to the extent of his direct pecuniary interest therein. (5)

          Messrs. Mnaymneh and Tamer are control persons of H.I.G.-GP II, Inc., which is the manager of the general partner of each of H.I.G. Bayside Debt & LBO Fund II, L.P. and H.I.G. Bayside Loan Opportunity Fund II, L.P. The number of shares of common stock shown in the above table as being owned by each named individual reflects the fact that, due to their control of such entities, each may be
 127    TABLE OF CONTENTS viewed as having investment power over 10,530,000 shares of common stock indirectly owned by such entities, although voting rights to such securities have been passed through to the respective members and limited partners. Messrs. Mnaymneh and Tamer disclaim beneficial ownership of such shares of common stock except to the extent of their respective pecuniary interests therein. The address for each of Messrs. Mnaymneh and Tamer is c/o H.I.G. Capital, L.L.C., 1450 Brickell Avenue, 31st floor, Miami, Florida 33131. (6)

          Mr. Mnaymneh is the General Partner and Manager of Mnaymneh H.I.G. Management, L.P. The number of shares of common stock shown in the above table as being owned by Mr. Mnaymneh reflects the fact that, due to his control of Mnaymneh H.I.G. Management, L.P., Mr. Mnaymneh may be viewed as having investment power over 279,635 shares of common stock owned by such entity. Mr. Mnaymneh disclaims beneficial ownership of shares of common stock held by Mnaymneh H.I.G. Management, L.P., except to the extent of his direct pecuniary interest therein. (7)

          Mr. Tamer is the President of Tamer H.I.G. Management, L.P. The number of shares of common stock shown in the above table as being owned by Mr. Tamer reflects the fact that, due to his control of Tamer H.I.G. Management, L.P., Mr. Tamer may be viewed as having investment power over 263,439 shares of common stock owned by such entity. Mr. Tamer disclaims beneficial ownership of shares of common stock held by Tamer H.I.G. Management, L.P., except to the extent of his direct pecuniary interest therein. (8)

          Mr. Puckett is a member of the Jen and Rick Puckett Foundation. The number of shares of common stock shown in the above table as being owned by Mr. Puckett reflects the fact that, due to his control of the Jen and Rick Puckett Foundation, Mr. Puckett has shared voting and dispositive power over 18,912 shares of common stock owned by such entity. Item 13.

          Certain Relationships and Related Transactions, and Director Independence Director Independence NASDAQ corporate governance regulations require listed companies to have a board of directors with at least a majority of independent directors. Under NASDAQ corporate governance regulations, in order for a director to be deemed independent, our board of directors must determine that the individual does not have a relationship that would interfere with the directors exercise of independent judgment in carrying out his responsibilities. On an annual basis, each of our directors is required to complete an independence questionnaire designed to provide information to assist the board of directors in determining whether the
director is independent under NASDAQ corporate governance rules, the 1940 Act and our corporate governance guidelines. Our board of directors has determined that each of our directors, other than Messrs. Aronson, Carvell and Bolduc, is independent under the listing standards of the NASDAQ Global Select Market and the 1940 Act. Our corporate governance guidelines require any director who has previously been determined to be independent to inform the chairman of the board of directors, the chairman of the nominating and corporate governance committee and our corporate secretary of any change in circumstance that may cause his status as an independent director to change. The board of directors limits membership on the audit committee and the nominating and corporate governance committee to independent directors. Transactions With Related Persons See Business  Management Agreements, Managements Discussion and Analysis of Financial Condition and Results of Operations  Related Party Transactions and Risk Factors  Risks Relating to Our Business and Structure  The Investment Advisory Agreement with WhiteHorse Advisers and the Administration Agreement with WhiteHorse Administration were not negotiated on an arms length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party for a description of our transactions with
related persons. Item 14.

          Principal Accountant Fees and Services Crowe LLP, an independent registered public accounting firm, audited our consolidated financial statements for the fiscal year ended December 31, 2018 and has been selected as the independent registered public accounting firm to audit our consolidated financial statements for the fiscal year ending December 31, 2019. The audit committee selected Crowe LLP, and that selection was ratified by a majority of our board of directors, including all of the independent directors. We do not know of any direct or indirect financial interest of Crowe LLP in WhiteHorse Finance.
 128    TABLE OF CONTENTS The following table sets forth Crowe LLPs fees (dollars in thousands):  Years ended December 31,2018

          

          2017Audit Fees

          

          $

          380

          

          

          $

          358Audit-Related Fees

          

          

          50

          

          

          

          30Tax Fees

          

          

          

          

          

          

          All Other Fees

          

          

          

          

          

          

          Total Fees

          

          $

          430

          

          

          $

          388
 Audit Fees are those fees billed for professional services rendered for the audit of our year-end financial statements and services that are normally provided in connection with statutory and regulatory filings. Audit-Related Fees are those fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Audit Fees. These services include attestation services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards. Tax Fees are those fees billed for professional services for tax compliance. Crowe LLP provided no professional services for tax compliance during the fiscal years ended December 31, 2018 and 2017. All Other Fees are those fees billed for services, other than the services reported above, related to our registration statements and related prospectuses. The audit committee has established a pre-approval policy that describes the permitted audit, audit-related, tax and other services to be provided by Crowe LLP. The policy requires that the audit committee pre-approve the audit and permissible non-audit services performed by the independent auditor in order to assure that the provision of such services does not impair the auditors independence. Any requests for audit, audit-related, tax and other services that have not received general pre-approval must be submitted to the audit committee for specific pre-approval, and cannot commence until such approval has been
granted. Normally, pre-approval is provided at regularly scheduled meetings of the audit committee. However, the audit committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to the audit committee at its next scheduled meeting. The audit committee does not delegate its responsibilities to pre-approve services performed by the independent auditor to management. All services described in the table above were pre-approved by the Audit Committee.
 129    TABLE OF CONTENTS PART IV Item 15.

          Exhibits and Financial Statement Schedules The following documents are filed as part of this annual report on Form 10-K: (1) Financial Statements  Refer to Item 8 starting on page 81. (2) Financial Statements Schedules  None. (3) Exhibits  3.1



Form of Certificate of Incorporation (Incorporated by reference to Exhibit (a)(2) to the Registrants Pre-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on September 25, 2012)3.2



Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Registrants current report on Form 8-K, filed on March 2, 2016)4.1



Form of Stock Certificate (Incorporated by reference to Exhibit (d) to the Registrants Pre-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on September 25, 2012)4.2



Indenture, dated as of November 13, 2018, by and between WhiteHorse Finance, Inc. and American Stock Transfer & Trust Company, LLC, as trustee (incorporated herein by reference to Exhibit (d)(5) of Post-Effective Amendment No. 5 to Registration Statement on Form N-2 (File No. 333-217093), filed on November 13, 2018)4.3



First Supplemental Indenture, dated as of November 13, 2018, by and between WhiteHorse Finance, Inc. and American Stock Transfer & Trust Company, LLC, as trustee (incorporated herein by reference to Exhibit (d)(6) of Post-Effective Amendment No. 5 to Registration Statement on Form N-2 (File No. 333-217093), filed on November 13, 2018)4.4



Form of 6.50% Notes due 2025 (incorporated herein by reference to Exhibit 4.2)10.1



Investment Advisory Agreement between Registrant and WhiteHorse Advisers (Incorporated by reference to Exhibit 10.1 to the Registrants Annual Report on Form 10-K, filed on March 5, 2013)10.2



Form of Custody Agreement (Incorporated by reference to Exhibit (j) to the Registrants Pre-effective Amendment No. 2 to the Registration Statement on Form N-2, filed on November 8, 2012)10.3



Administration Agreement between Registrant and H.I.G. WhiteHorse Administration, LLC (Incorporated by reference to Exhibit 10.3 to the Registrants Annual Report on Form 10-K, filed on March 5, 2013)10.4



Form of Trademark License Agreement between the Registrant and Bayside Capital, Inc. (Incorporated by reference to Exhibit (k)(3) to the Registrants Pre-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on September 25, 2012)10.5



Dividend Reinvestment Plan (Incorporated by reference to Exhibit (e) to the Registrants Pre-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on September 25, 2012)10.6



Underwriting Agreement, dated June 27, 2017, by and among the Registrant, H.I.G. WhiteHorse Advisers, LLC, H.I.G. WhiteHorse Administration, LLC, H.I.G. Bayside Debt & LBO Fund II, L.P., H.I.G. Bayside Loan Opportunity Fund II, L.P. and Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC (Incorporated by reference to Exhibit (h)(3) to the Registrants Post-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on June 30, 2017)
 130    TABLE OF CONTENTS 10.7



Second Amended and Restated Loan Agreement, dated as of June 29, 2017, by and among WhiteHorse Finance Credit I, LLC, as borrower, WhiteHorse Finance, Inc., as the portfolio manager, JPMorgan Chase Bank, National Association, as administrative agent, together with any lenders from time to time party thereto, and the collateral administrator, collateral agent and securities intermediary party thereto (Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q, filed on August 9, 2017)10.9



Underwriting Agreement, dated November 8, 2018, by and among WhiteHorse Finance, Inc., H.I.G. WhiteHorse Advisers, LLC, H.I.G. WhiteHorse Administration, LLC, and Ladenburg Thalmann & Co. Inc., as representative of the several underwriters set forth on Schedule I thereto (incorporated herein by reference to Exhibit (h)(3) of Post-Effective Amendment No. 5 to Registration Statement on Form N-2 (File No. 333-217093), filed on November 13, 2018)10.8



Third Amended and Restated Loan Agreement, dated as of May 15, 2018, by and among WhiteHorse Finance Credit I, LLC, as borrower, WhiteHorse Finance, Inc., as the portfolio manager, JPMorgan Chase Bank, National Association, as administrative agent, together with any lenders from time to time party thereto, and the collateral administrator, collateral agent and securities intermediary party thereto (incorporated by reference to Exhibit 10.1 to the Registrants current report on Form 8-K, filed on May 17, 2018)10.9



Note Purchase Agreement, dated July 13, 2018, by and among WhiteHorse Finance, Inc. and the Purchasers signatory thereto (incorporated by reference to Exhibit 10.1 to the Registrants current report on Form 8-K, filed on July 17, 2018)10.10



Form of 6.00% Senior Notes due 2023 (included in Exhibit 10.9)10.11



Amended and Restated Investment Advisory Agreement, dated November 1, 2018, between Registrant and WhiteHorse Advisers (Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed on November 6, 2018)10.12*



Limited Liability Company Agreement of WHF STRS Senior Loan Fund LLC, dated January 14, 2019, by and between WhiteHorse Finance, Inc. and State Teachers Retirement System of Ohio11.1



Computation of per share earnings (included in the notes to the audited financial statements included in this report)14.1



Code of Ethics of the Registrant (Incorporated by reference to Exhibit (r)(1) to the Registrants Pre-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on September 25, 2012)14.2



Code of Ethics of WhiteHorse Advisers (Incorporated by reference to Exhibit (r)(2) to the Registrants Pre-effective Amendment No. 1 to the Registration Statement on Form N-2, filed on September 25, 2012)21.1*



List of Subsidiaries24



Power of attorney (included on the signature page hereto)31.1*



Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended31.2*



Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended32.1*



Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*



Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *

          Filed herewith Item 16.

          Form 10-K Summary None.
 131    TABLE OF CONTENTS SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. WhiteHorse Finance, Inc. By:

          /s/ Stuart AronsonName: Stuart Aronson Title:  Chief Executive Officer Date: March 14, 2019 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stuart Aronson and Edward J. Giordano as his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.  Signature

          

          Title

          

          Date/s/ Stuart AronsonStuart Aronson

          

          Chief Executive Officer and Director(Principal Executive Officer)

          

          March 14, 2019/s/ Edward J. GiordanoEdward J. Giordano

          

          Interim Chief Financial Officer(Principal Financial and Accounting Officer)

          

          March 14, 2019/s/ John BolducJohn Bolduc

          

          Chairman of the Board of Directors

          

          March 14, 2019/s/ Jay CarvellJay Carvell

          

          Director

          

          March 14, 2019/s/ Kevin F. BurkeKevin F. Burke

          

          Director

          

          March 14, 2019/s/ Rick P. FrierRick P. Frier

          

          Director

          

          March 14, 2019/s/ Rick D. PuckettRick D. Puckett

          

          Director

          

          March 14, 2019/s/ G. Stacy SmithG. Stacy Smith

          

          Director

          

          March 14, 2019
 132