10-K/A: WhiteHorse Finance Amends 2024 Annual Report, Discloses Control Deficiency Amidst Declining Net Assets and Investment Income

Sentiment:

Annual Report Amendment 9 June 2025 7:09 PM

📋All filings for Whitehorse Finance, INC

WhiteHorse Finance, Inc. has filed an amendment to its 2024 Annual Report on Form 10-K to correct its accelerated filer status and include an auditor's report on internal controls, while reporting a significant decline in net assets and investment income for the year.

Delay expectedThe Company did not correctly determine its accelerated filer status for the fiscal year ended December 31, 2024, and consequently did not obtain or file an attestation report by its independent registered public accounting firm with respect to its internal control over financial reporting in the original Form 10-K.This amendment (Form 10-K/A) is being filed solely to correct this oversight and include the required audit report.

Capital raiseThe Company completed a public offering of $30,000 thousand aggregate principal amount of 7.875% Notes due 2028 on August 24, 2023, with an additional $4,500 thousand exercised via overallotment on August 31, 2023, totaling $34,500 thousand.The Company launched an at-the-market (ATM) offering program on March 31, 2023, allowing it to offer and sell up to $35,000 thousand of common stock from time to time, though no shares were issued under this program in 2023 or 2024.

Worse than expectedNet assets, net asset value per share, total investment income, net investment income, and basic/diluted earnings per share all significantly decreased from 2023 to 2024.The Company reported substantial net realized losses of $17,981 thousand in 2024, a sharp contrast to net realized gains in the prior year.The total cost basis of non-accrual loans increased significantly from $38,322 thousand in 2023 to $69,576 thousand in 2024, indicating a deterioration in the credit quality of a portion of the investment portfolio.

Summary

WhiteHorse Finance, Inc. (the "Company") filed an Amendment No. 1 on Form 10-K/A to its original Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
The amendment was filed to correct the Company's filing status to 'accelerated filer' for 2024, which was not correctly determined in the original filing.
Crowe LLP, the independent registered public accounting firm, issued an opinion on the Company's financial statements as of December 31, 2024, and for the three-year period ended December 31, 2024, and an opinion on the Company's internal control over financial reporting as of December 31, 2024, stating they were effective.
Management's evaluation of disclosure controls and procedures as of December 31, 2024, concluded they were not effective due to the incorrect filing status determination, though this was not deemed a generalized deficiency.
Total investments at fair value decreased to $642,213 thousand in 2024 from $696,168 thousand in 2023.
Total net assets decreased to $286,134 thousand in 2024 from $316,772 thousand in 2023.
Net asset value per share declined to $12.31 in 2024 from $13.63 in 2023.
Net investment income after excise tax decreased to $37,238 thousand in 2024 from $42,713 thousand in 2023.
The Company reported net realized losses of $17,981 thousand in 2024, a significant deterioration from net realized gains of $947 thousand in 2023.
Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions was a depreciation of $8,406 thousand in 2024, an improvement from $23,248 thousand depreciation in 2023.
Net increase in net assets resulting from operations decreased to $10,851 thousand in 2024 from $20,412 thousand in 2023.
Basic and diluted earnings per common share fell to $0.47 in 2024 from $0.88 in 2023.
Dividends and distributions declared per common share increased to $1.79 in 2024 from $1.55 in 2023.
The total cost basis of non-accrual loans significantly increased to $69,576 thousand in 2024 from $38,322 thousand in 2023, with fair value increasing to $37,019 thousand from $14,087 thousand.
The Company's asset coverage for borrowed amounts was 180.4% as of December 31, 2024, remaining above the 150% requirement.
Unfunded commitments to extend credit increased to $26,385 thousand in 2024 from $21,440 thousand in 2023.
The STRS JV Credit Facility was amended in November 2024, reducing the spread from 2.50% to 2.25% and extending maturity and reinvestment periods.
The JPM Credit Facility was further amended in January 2025 (subsequent event) to reduce the applicable margins for interest rates to 2.25% and extend key dates.
The base management fee was reduced from 2.00% to 1.75% of consolidated gross assets, effective January 1, 2024, with the existing threshold for a 1.25% rate on assets exceeding 200% of net assets remaining.
Restructuring agreements in 2024 for Arcstor Midco, LLC (d/b/a Arcserve (USA)) and Honors Holdings, LLC (d/b/a Orange Theory) resulted in conversions of debt to new debt/equity and realized losses.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative. While the auditor's opinion on internal controls is effective and credit facility terms improved, the core financial performance metrics (net assets, investment income, EPS, realized losses) show significant deterioration. The disclosure control deficiency, though remediated, is also a negative factor.

Positives

Crowe LLP, the independent registered public accounting firm, issued an effective opinion on the Company's internal control over financial reporting as of December 31, 2024.
The Company's asset coverage for borrowed amounts remained strong at 180.4% as of December 31, 2024, well above the 150% regulatory requirement.
The STRS JV Credit Facility and JPM Credit Facility were amended to reduce interest rate spreads and extend maturity and reinvestment periods, indicating favorable financing terms.
The base management fee was reduced from 2.00% to 1.75% effective January 1, 2024, potentially improving profitability.
Dividends and distributions declared per common share increased to $1.79 in 2024 from $1.55 in 2023.

Negatives

The Company incorrectly determined its accelerated filer status for 2024, leading to a deficiency in disclosure controls and procedures.
Total investments at fair value decreased by $53,955 thousand, or approximately 7.7%, from $696,168 thousand in 2023 to $642,213 thousand in 2024.
Total net assets decreased by $30,638 thousand, or approximately 9.7%, from $316,772 thousand in 2023 to $286,134 thousand in 2024.
Net asset value per share declined by $1.32, or approximately 9.7%, from $13.63 in 2023 to $12.31 in 2024.
Net investment income after excise tax decreased by $5,475 thousand, or approximately 12.8%, from $42,713 thousand in 2023 to $37,238 thousand in 2024.
The Company incurred significant net realized losses of $17,981 thousand in 2024, a substantial reversal from net realized gains of $947 thousand in 2023.
Net increase in net assets resulting from operations decreased by $9,561 thousand, or approximately 46.8%, from $20,412 thousand in 2023 to $10,851 thousand in 2024.
Basic and diluted earnings per common share decreased by $0.41, or approximately 46.6%, from $0.88 in 2023 to $0.47 in 2024.
The total cost basis of non-accrual loans increased significantly to $69,576 thousand in 2024 from $38,322 thousand in 2023, indicating a deterioration in credit quality for a portion of the portfolio.
Unfunded commitments increased, which could represent future cash requirements.

Risks

Credit risk: The risk of default on the Company's investments due to an issuer's, borrower's, or derivative counterparty's inability or unwillingness to make contractually required payments.
Market risk: Changes in the value of investments due to fluctuations in interest rates, spreads, or other market factors, including the value of underlying collateral.
Foreign currency fluctuations and revaluations: Investments in foreign currencies expose the Company to risks from changes in exchange rates.
Future adverse political, social, and economic developments in foreign markets: These could lead to less liquid investments and more volatile prices compared to U.S. companies or government securities.
Uncertainty in valuation of privately held investments: Valuations are inherently uncertain, may fluctuate, and are based on estimates, potentially differing materially from market values if a ready market existed.
Inherent limitations of internal control over financial reporting: Even well-designed systems may not prevent or detect misstatements, and effectiveness can deteriorate due to changing conditions or compliance levels.

Future Outlook

The document primarily focuses on historical financial performance and a correction to a prior filing. It does not provide explicit forward-looking statements or guidance regarding future financial performance, but it does mention the Investment Adviser's intention to continue affirming its exclusion from the definition of a commodity pool operator annually.

Management Comments

Management concluded that, as of December 31, 2024, the Company's disclosure controls and procedures were not effective with respect to its filing status determination.
Management determined that such oversight did not evidence any generalized deficiency in disclosure controls and procedures or a deficiency in internal control over financial reporting.
Management has taken steps to remediate disclosure controls and procedures as they pertain to this incident and does not expect any recurrence of the issue.
Management believes that, as of December 31, 2024, the Company's internal control over financial reporting is effective based on COSO criteria.

Industry Context

The filing reflects the performance of a Business Development Company (BDC) operating in the lower middle market, primarily investing in senior secured loans. The increase in non-accrual loans and realized losses could indicate a challenging credit environment or specific portfolio company underperformance within this segment. The amendments to credit facilities with reduced spreads suggest a potentially more favorable lending environment for the Company's own financing, which could be a positive trend for BDCs with strong relationships with lenders.

Comparison to Industry Standards

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Filing Status Correction	The Company incorrectly determined its filing status for 2024, failing to identify itself as an accelerated filer, which led to not obtaining or filing a required attestation report on internal control over financial reporting in the original 10-K.	2024-12-31	This indicates a deficiency in disclosure controls and procedures related to compliance with SEC filing requirements, though management stated it was not a generalized deficiency and has been remediated.
Internal Control Over Financial Reporting Assessment	Management concluded that its internal control over financial reporting was effective as of December 31, 2024, despite the disclosure control deficiency related to filing status.	2024-12-31	The auditor, Crowe LLP, also issued an effective opinion on internal control over financial reporting, providing assurance on the reliability of financial reporting despite the procedural error.
Investment Advisory Agreement Amendment	The Investment Advisory Agreement was amended and re-approved, reducing the base management fee from 2.00% to 1.75% of consolidated gross assets (with certain thresholds remaining).	2024-01-01	This change could positively impact the Company's profitability by reducing management expenses.

Legal Proceedings

In the normal course of business, the Company, WhiteHorse Advisers, and WhiteHorse Administrator may be subject to legal and regulatory proceedings that are generally incidental to its ongoing operations. The Company does not believe any such disposition will have a material adverse effect on its consolidated financial statements.

Related Party Transactions

WhiteHorse Advisers serves as the Company's investment adviser, receiving a base management fee and a performance-based incentive fee.
WhiteHorse Administration provides administrative services, receiving allocated administrative service fees.
Certain funds affiliated with WhiteHorse Advisers and its related entities maintained co-investments in the Company's investments, totaling $5,890,052 thousand as of December 31, 2024.
The Company sold investments totaling $59,190 thousand to STRS JV for the year ended December 31, 2024, recognizing a net realized loss of $15 thousand.
The Company provides capital to STRS JV in the form of LLC equity interests and interest-bearing subordinated notes, with commitments of $23,000 thousand and $92,000 thousand respectively, of which $1,896 thousand and $7,584 thousand were unfunded as of December 31, 2024.

Stakeholder Impact

Shareholders: Experienced a decrease in net asset value per share and earnings per share, but an increase in dividends declared per share. The control deficiency could raise concerns about compliance, but the auditor's effective opinion on internal controls provides reassurance.
Investment Professionals/Management: The Investment Adviser's base management fee was reduced, but the incentive fee structure remains. Management acknowledged and remediated a control deficiency.
Creditors/Lenders: The Company maintained strong asset coverage for borrowed amounts, and recent amendments to credit facilities indicate continued access to favorable financing terms.
Portfolio Companies: Restructuring agreements with certain portfolio companies (Arcserve, Honors Holdings) indicate ongoing active management and adjustments to investment structures, potentially impacting their capital structure.

Next Steps

The Investment Adviser intends to continue to affirm its exclusion from the definition of a commodity pool operator on an annual basis.
Management has taken steps to remediate the disclosure controls and procedures related to the filing status determination and does not expect any recurrence of the issue.

Key Dates

Date	Description
2018-07-13	Company entered into an agreement to sell $30,000 aggregate principal amount of 6.000% 2023 Notes in a private offering.
2018-08-01	Company's stockholders approved the reduced asset coverage ratio from 200% to 150%.
2018-08-02	Reduced asset coverage requirements became effective.
2019-01-14	Company entered into an LLC operating agreement with STRS Ohio to co-manage WHF STRS Ohio Senior Loan Fund, LLC (STRS JV).
2019-07-19	STRS JV formally launched operations and entered into a $125,000 credit and security agreement (the STRS JV Credit Facility) with JPMorgan Chase Bank, National Association.
2020-10-20	Company entered into a Note Purchase Agreement governing the issuance of $40,000 in aggregate principal amount of 5.375% Notes due 2025.
2020-12-04	Company entered into Note Purchase Agreements governing the issuance of $10,000 in aggregate principal amount of 5.375% Notes due 2026 and $10,000 in aggregate principal amount of 5.625% Notes due 2027.
2021-01-27	Terms of the STRS JV Credit Facility were amended to increase its size from $125,000 to $175,000.
2021-04-28	Terms of the STRS JV Credit Facility were amended and restated to enable borrowings in British pounds or euros.
2021-07-15	Terms of the STRS JV Credit Facility were amended to reduce applicable margins, extend non-call period, reinvestment period, and scheduled termination date.
2021-11-24	Company completed a public offering of $75,000 of aggregate principal amount of 4.000% Notes due 2026.
2021-12-06	Company entered into a Note Purchase Agreement governing the issuance of $25,000 in aggregate principal amount of 4.25% Notes due 2028.
2022-01-04	Terms of the Credit Facility were amended to establish a temporary upsize to the borrowing capacity.
2022-02-04	Terms of the Credit Facility were further amended to increase availability and extend a temporary increase.
2022-02-28	Company increased its capital commitment to the STRS JV by an additional $25,000.
2022-03-11	Terms of the STRS JV Credit Facility were further amended to permanently increase availability to $225,000 and adjust interest rates.
2022-03-30	Terms of the Credit Facility were further amended to increase availability to $335,000 and retain an accordion feature.
2023-01-13	Terms of the STRS JV Credit Facility were further amended to permanently increase availability to $262,500 and adjust interest rates.
2023-02-28	Company increased its commitment to the STRS JV by an additional $15,000, bringing total commitment to $115,000.
2023-03-16	Restructuring agreement between the Company and Sklar Holdings, Inc (d/b/a Starco) resulted in conversion of first lien secured term loan into a new second lien secured term loan and preferred/common units.
2023-03-31	Company launched an at-the-market offering program for up to $35,000 in common stock.
2023-04-12	Terms of the Credit Facility were further amended to adjust annual interest rates and convert to SOFR for USD denominated borrowings.
2023-05-18	Terms of the STRS JV Credit Facility were further amended to adjust interest rates, extend scheduled termination date, non-call period, and reinvestment period.
2023-08-07	The 6.000% 2023 Notes matured and were fully repaid by the Company.
2023-08-24	Company completed a public offering of $30,000 aggregate principal amount of 7.875% 2028 Notes.
2023-08-31	Underwriters fully exercised their overallotment option for an additional $4,500 of 7.875% 2028 Notes, bringing total to $34,500.
2024-01-01	Base management fee changed from 2.00% to 1.75%.
2024-01-03	Restructuring agreement between the Company and Arcstor Midco, LLC (d/b/a Arcserve (USA)) resulted in conversion of debt investments into new debt and common equity.
2024-09-25	Restructuring and partial foreclosure agreement between the Company and Honors Holdings, LLC (d/b/a Orange Theory) resulted in conversion of debt investments into new debt and common equity interests.
2024-11-21	Terms of the Credit Facility were amended to extend the reinvestment period by one month to December 22, 2024.
2024-11-26	Terms of the STRS JV Credit Facility were further amended to reduce spread, extend non-call period, reinvestment period, and termination date.
2024-12-19	Terms of the Credit Facility were amended to extend the reinvestment period by one month to January 22, 2025.
2024-12-31	Fiscal year end for the Annual Report on Form 10-K/A.
2025-01-17	Terms of the Credit Facility were amended to reduce applicable margins for interest rates, extend non-call period, reinvestment period, and scheduled termination date.
2025-02-28	Number of common shares outstanding.
2025-03-07	Original Annual Report on Form 10-K for the fiscal year ended December 31, 2024, was filed with the SEC.
2025-05-12	Company's Form 10-Q for the fiscal quarter ended March 31, 2025, was filed, disclosing the incorrect filing status.
2025-06-09	Date of filing of this Amendment No. 1 on Form 10-K/A.

Recommendation

hold

Keywords

Business Development Company, BDC, SEC Filing, 10-K/A, Financial Report, Investment Company, Senior Secured Loans, Private Credit, Middle Market Lending, Corporate Governance, Internal Controls, Financial Performance, Investment Portfolio, Credit Quality, Net Asset Value, Earnings Per Share, Dividends, Debt Facilities, Joint Venture, STRS JV, Restructuring

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