Kayne Anderson BDC, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 80 Statement of Assets and Liabilities as of December 31, 2020 81 Statement of Operations for the year ended December 31, 2020 82 Statement of Changes in Member’s Capital for the year ended December 31, 2020 83 Statement of Cash Flows for the year ended December 31, 2020 84 Notes to Financial Statements 85 79 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Kayne Anderson BDC, Inc. Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of Kayne Anderson BDC, LLC (the “Company”) as of December 31, 2020, and the related statements of operations, changes in member’s capital and cash flows for the year ended December 31, 2020, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations, changes in member’s capital and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. 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 audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California February 26, 2021 We have served as the Company’s auditor since 2020. 80 Table of Contents KAYNE ANDERSON BDC, LLC Statement of Assets and Liabilities As of December 31, 2020 ASSETS Cash $ 10,000 Prepaid insurance 177,075 Deferred offering costs 230,534 Total Assets 417,609 LIABILITIES AND MEMBER’S CAPITAL LIABILITIES Accrued organizational and offering costs $ 141,360 Payable to affiliates (Note 3) 1,074,399 Total Liabilities 1,215,759 Commitments and contingencies Total Member’s Capital (Deficit) (798,150 ) Total Liabilities and Member’s Capital $ 417,609 See accompanying notes to financial statements. 81 Table of Contents KAYNE ANDERSON BDC, LLC Statement of Operations For the Year Ended December 31, 2020 Revenue $ — Expenses Administrative and marketing costs 25,724 Organizational costs 782,426 Total Expenses $ 808,150 Net Loss $ (808,150 ) See accompanying notes to financial statements. 82 Table of Contents KAYNE ANDERSON BDC, LLC Statement of Changes in Member’s Capital For the Year Ended December 31, 2020 Member’s Capital—beginning of year $ 10,000 Net Loss (808,150 ) Total Decrease in Member’s Capital $ (808,150 ) Member’s Capital—end of year $ (798,150 ) See accompanying notes to financial statements. 83 Table of Contents KAYNE ANDERSON BDC, LLC Statement of Cash Flows For the Year Ended December 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net decrease in member’s capital resulting from operations $ (808,150 ) Adjustments to reconcile net decrease in member’s capital resulting from operations to net cash provided by operating activities: Increase in prepaid insurance Increase in deferred offering costs Increase in organizational and offering costs (177,075 (230,534 141,360 ) ) Increase in payable to affiliates 1,074,399 Net cash used in operating activities $ — Net change in cash $ — Cash—beginning of year $ 10,000 Cash—end of year $ 10,000 See accompanying notes to financial statements. 84 Table of Contents KAYNE ANDERSON BDC, LLC Notes to Financial Statements Note 1. Organization Kayne Anderson BDC, LLC (the “Company”) is an externally managed, closed-end, non-diversified management investment company that intends to elect to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, the Company intends to elect to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company was formed as a Delaware limited liability company in May 2018. The Company was formed to make investments in middle-market companies and commenced operations on February 5, 2021. On this same date, prior to the Company’s election to be regulated as a BDC under the 1940 Act, the Company completed a conversion from a Delaware limited liability company into a Delaware corporation and Kayne Anderson BDC, Inc. succeeded to the business of Kayne Anderson BDC, LLC. Since formation in May 2018, the Company’s advisor, KA Credit Advisors, LLC (the “Advisor”), has conducted organization and marketing efforts for the Company. The Advisor is an indirect subsidiary of Kayne Anderson Capital Advisors, L.P. (“KACALP” or “Kayne Anderson”). The Advisor is registered with the Securities and Exchange Commission (“SEC”) as an investment advisor under the Investment Advisory Act of 1940. Subject to the overall supervision of the Company’s board of directors (the “Board”), the Advisor is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring investments and monitoring its investments and portfolio companies on an ongoing basis. The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through debt investments in middle-market companies. The Company expects to conduct private offerings of its Common Stock to investors in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). At the closing of any private offering, each investor will make a capital commitment (a “Capital Commitment”) to purchase shares of its Common Stock (“Shares”) pursuant to a subscription agreement entered into with the Company. Investors will be required to fund drawdowns to purchase Shares up to the amount of their respective Capital Commitments each time the Company delivers a notice to the investors. The Company anticipates commencing its loan origination and investment activities contemporaneously with the initial drawdown from investors in the private offering. Following the initial closing of the private offering (the “Initial Closing”) and prior to any Liquidity Event (as defined below), the Advisor may, in its sole discretion, permit one or more additional closings of the private offering. A “Liquidity Event” is defined as (a) an initial public offering of Shares (the “Initial Public Offering”) or the listing of Shares on an exchange (together with the Initial Public Offering, an “Exchange Listing”), (b) the sale of the Company or (c) a disposition of the Company’s investments and distribution of the net proceeds (after repayment of borrowed funds or other forms of leverage) to the Company’s investors. As of December 31, 2020, the Company was still devoting substantially all of its efforts to establishing the business and its planned operations and investing activities had not commenced. See Note 4—Subsequent Events. Note 2. Significant Accounting Policies A. Basis of Presentation —the accompanying financial statement has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company is an investment company and follows accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946 — “Financial Services — Investment Companies.” 85 Table of Contents KAYNE ANDERSON BDC, LLC Notes to Financial Statements B. Use of Estimates —the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the period. Actual results could differ materially from those estimates. C. Cash and Cash Equivalents —cash and cash equivalents include short-term, liquid investments with an original maturity of three months or less and include money market fund accounts. As of December 31, 2020, cash on hand is held with one financial institution, City National Bank (“CNB”), in a non-interest bearing account. This cash balance is the seed capital contribution from KACALP to the Company on December 18, 2018. D. Organizational Costs —organizational expenses include costs and expenses relating to the formation and organization of the Company. The Company has agreed to reimburse the Advisor for these costs. E. Offering Costs —offering costs include costs and expenses incurred in connection with the offering of the Company’s common stock. These costs are capitalized as deferred offering expenses and included in prepaid expenses and other assets on the Statement of Assets and Liabilities. These costs are amortized over a twelve-month period beginning with the commencement of operations. These expenses consist primarily of legal fees and other costs incurred in connection with the Company’s share offerings, the preparation of the Company’s registration statement and registration fees. The Company has agreed to reimburse the Advisor for these costs. F. Income Taxes —the Company intends to elect to be treated as a RIC under Subchapter M of the Code. As a RIC, the Company generally will not have to pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that the Company timely distributes to its stockholders as dividends. To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to its stockholders, for each taxable year, dividends of an amount at least equal to 90% of its “investment company taxable income,” which is generally its net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses and determined without regard to any deduction for dividends paid (the “Annual Distribution Requirement”). Although not required for the Company to maintain its RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, the Company must distribute to its stockholders in respect of each calendar year dividends of an amount at least equal to the sum of (1) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of the excess (if any) of its realized capital gains over its realized capital losses, or capital gain net income (adjusted for certain ordinary losses), generally for the one-year period ending on October 31 of the calendar year and (3) the sum of any net ordinary income plus capital gains net income for preceding years that were not distributed during such years and on which the Company paid no federal income tax (the “Excise Tax Avoidance Requirement”). The Company does not currently qualify as a “publicly offered regulated investment company,” as defined in the Code. A “publicly offered regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market, or (iii) held by at least 500 persons at all times during the taxable year. The Company cannot determine when it will qualify as a publicly offered RIC. If the Company does not qualify as a publicly offered RIC during the tax year, a non-corporate shareholder’s allocable portion of the Company’s affected expenses, including its management fees, will be treated as an additional distribution to shareholders. A non-corporate shareholder’s allocable portion of these expenses are treated as miscellaneous itemized deductions that are not currently deductible by such shareholders. 86 Table of Contents KAYNE ANDERSON BDC, LLC Notes to Financial Statements The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. G. New Accounting Standards —the Company does not believe any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements. H. Commitments and Contingencies —in the normal course of business, the Company may enter into contracts that provide a variety of general indemnifications. Any exposure to the Company under these arrangements could involve future claims that may be made against the Company. Currently, no such claims exist or are expected to arise and, accordingly, the Company has not accrued any liability in connection with such indemnifications. Note 3. Agreements and Related Party Transactions A. Administration Agreement —the Company will enter into an Administration Agreement with its Advisor, which will serve as its Administrator and will provide or oversee the performance of its required administrative services and professional services rendered by others, which will include (but not limited to), accounting, payment of our expenses, legal, compliance, operations, technology and investor relations, preparation and filing of its tax returns, and preparation of financial reports provided to its stockholders and filed with the SEC. The Company will reimburse the Administrator for its costs and expenses incurred in performing its obligations under the Administration Agreement, including its allocable portion of office facilities, overhead, and compensation paid to or compensatory distributions received by its officers (including our Chief Compliance Officer and Chief Financial Officer) and its respective staff who provide services to the Company. As the Company reimburses the Administrator for its expenses, the Company will indirectly bear such cost. The Administration Agreement may be terminated by either party with 60 days’ written notice. B. Investment Advisory Agreement —the Company will enter into the Investment Advisory Agreement with its Advisor. Pursuant to the Investment Advisory Agreement with its Advisor, the Company will pay its Advisor a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The Advisor may, from time-to-time, grant waivers on the Company’s obligations, including waivers of the base management fee and/or incentive fee, under the Investment Advisory Agreement. The Investment Advisory Agreement may be terminated by either party with 60 days’ written notice. There were no management fees or incentive fees incurred as the Company has not yet commenced operations. The Company has agreed to reimburse the Advisor and its affiliates for the third-party costs incurred on its behalf in connection with the formation and the offering of shares of the Company’s common stock. Amounts shown as payables to affiliates on the Statement of Assets and Liabilities represent organizational expenses and offering costs of the Company that were paid by the Advisor and its affiliates on behalf of the Company. C. Other— KACALP, an affiliate of the Advisor, made an equity contribution of $10,000 to the Company on December 18, 2018. On February 5, 2021, the Company purchased its initial portfolio of investments for $103,030,517 from an affiliate of the Company’s Advisor (the “Warehousing Entity”). See Note 4—Subsequent Events. 87 Table of Contents KAYNE ANDERSON BDC, LLC Notes to Financial Statements Note 4. Subsequent Events On January 25, 2021, the Company entered into subscription agreements with investors for an aggregate capital commitment of $154,305,000 to purchase shares of the Company’s common stock. On February 5, 2021, the Company sold 5,666,667 shares of our common stock, par value $.001 per share to these investors for an aggregate offering price of $85,000,000. On this same date, the Company used a portion of the proceeds from the sale of common stock together with borrowings under the Company’s credit facility to purchase its initial portfolio of investments for $103,030,517 from the Warehousing Entity. The initial portfolio purchased from the Warehouse Entity consisted of 18 loans, with an average outstanding balance of $5,876,266, an average purchase price of 97.4% of principal value and an average yield on that date of 8.8%. None of these loans in the initial portfolio were in default or non-accrual status. Information about the initial portfolio is not intended to indicate the Company’s expected investment return on the initial portfolio or the investment performance of the Company’s shares of common stock. All of the loans are senior secured and the borrowers are middle and upper middle market companies. The purchase of the initial portfolio was completed before the Company elected to be treated as a business development company under the 1940 Act. This initial acquisition and all related transactions are referred to as the “Formation Transactions.” On February 5, 2021, Kayne Anderson BDC Financing, LLC, (“KABDCF”), the Company’s newly-formed, wholly owned, special purposes financing subsidiary, entered into a Loan and Security Agreement (the “LSA”) with certain lenders party thereto, administrative agent, and our Advisor as collateral manager. The maximum commitment of the LSA is up to $150,000,000, and, subject to certain conditions, may be increased by $50 million up to two times not to exceed $250 million. Advances under the facility bear an interest rate of LIBOR plus 4.25% (subject to a 1.00% LIBOR floor). The facility has a term of three years. On February 5, 2021, the Company entered into a credit agreement (the “Credit Agreement”) with certain lenders party thereto. The Credit Agreement is comprised of two sub-facilities: (i) a $25,000,000 capital call facility (the “Subscription Facility”) and (ii) a $50,000,000 treasury facility (the “Treasury Facility”). The interest rate under the Subscription Facility will be equal to LIBOR plus 1.90% (subject to a 0.35% LIBOR floor) and the interest rate under the Treasury Facility will be equal to LIBOR plus 0.20% (with no LIBOR floor). The Subscription Facility will expire on December 31, 2022, and the Treasury Facility will expire on September 30, 2021. On February 5, 2021, the Company filed with the Secretary of State of the State of Delaware certificates of conversion and incorporation to convert from a limited liability company to a corporation. Also on this date, the Company made its election to be regulated as a BDC under the 1940 Act. On February 5, 2021, the Company entered into the Investment Advisory Agreement and the Administration Agreement with its Advisor. The Company has performed an evaluation of subsequent events through the date the financial statements were issued and has determined that no additional items require recognition or disclosure. 88 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are not and have not been any disagreements between us and our accountant on any matter of accounting principles, practices, or financial statement disclosure.