Kayne Anderson BDC, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Except as otherwise specified, references to “we,” “us,” “our,” or the “Company” refer to Kayne Anderson BDC, Inc.

Overview and Investment Framework

Kayne Anderson BDC, Inc. was formed as a Delaware corporation to make investments in middle-market companies and commenced operations on February 5, 2021. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act, as amended. In addition, for U.S. federal income tax purposes, we intend to qualify, annually, as a RIC under Subchapter M of the Code.

We are managed by KA Credit Advisors, LLC (the “Advisor”), an affiliate of Kayne Anderson Capital Advisors, L.P. (“Kayne Anderson”), a prominent alternative investment management firm. The Advisor and Kayne Anderson are registered with the United States Securities and Exchange Commission (the “SEC”) under the Investment Advisory Act of 1940, as amended. Subject to the overall supervision of the Company’s board of directors (the “Board”), our Advisor is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring investments, determining the value of our investments and monitoring our investments and portfolio companies on an ongoing basis. The Board consists of seven directors, four of whom are independent.

Our investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through debt investments in middle-market companies. We define “middle-market companies” as private U.S. middle-market companies that, in general, generate between $10 million and $150 million of annual earnings before interest, taxes, depreciation and amortization, or EBITDA. Further, we refer to companies that generate between $10 million and $50 million of annual EBITDA as “core middle-market companies” and companies that generate between $50 million and $150 million of annual EBITDA as “upper middle-market companies.”

We intend to achieve our investment objective by investing primarily in first lien senior secured loans, with a secondary focus on unitranche and split-lien loans to privately held middle market companies. We expect at least 90% of our portfolio (including investments purchased with proceeds from borrowings) to be invested in first lien senior secured, unitranche and split-lien loans. The remaining 10% of our portfolio may be invested in equity securities (including those purchased in conjunction with other credit investments) and other opportunistic credit investments, including junior debt and other higher yielding investments. Most of these investments (i) will be made in core middle market companies, with the remainder in upper middle market companies and (ii) will generally have stated maturities of no more than six years.

We execute on our investment objective by (1) accessing the established loan sourcing channels developed by Kayne Anderson’s middle market private credit platform and investment and management team (“KAPC” or “Kayne Anderson Private Credit”), which includes an extensive network of private equity firms, other middle market lenders, financial advisors and intermediaries, and management teams, (2) selecting investments within our middle market company focus, (3) implementing KAPC’s time-tested underwriting process, and (4) drawing upon the experience and resources of our Advisor’s investment team and the broader Kayne Anderson network.

We believe our Advisor’s disciplined approach to origination, credit analysis, portfolio construction and risk management should allow us to achieve attractive risk-adjusted returns while preserving investor capital. At a high-level, our Advisor adheres to a strategy it refers to as a “value lending philosophy”, which is comprised of several distinct areas of focus. This philosophy includes an explicit focus on underwriting investments in “evolutionary” not “revolutionary” markets. We tend to avoid high-growth markets as that growth profile attracts substantial capital formation and, in turn, new competition, leading to the potential for longer-term uncertainty and industry upheaval. As such, we tend to invest in markets where the winners and losers have been more-or-less decided and where we can underwrite sustainable, predictable and leverageable cashflows for the long term.

Our portfolio is currently comprised of a broad mix of loans, with diversity among investment size, industry focus and geography. Our Advisor’s team of professionals conducts due diligence on prospective investments during the underwriting process and is involved in structuring the credit terms of substantially all of our investments. Once an investment has been made, our Advisor closely monitors portfolio investments and takes a proactive approach identifying and addressing sector or company specific risks. Our Advisor maintains a regular dialogue with portfolio company management teams (as well as their financial sponsors, where applicable), reviews detailed operating and financial results on a regular basis (typically monthly or quarterly) and monitors current and projected liquidity needs, in addition to other portfolio management activities.

Recent Developments

On October 13, 2023, we paid a distribution of $0.53 per share to each common stockholder of record as of September 29, 2023. The total distribution was $22.0 million and $1.6 million was reinvested into the Company through the purchase of 96,731 shares of common stock.

On October 16, 2023, we completed a capital close totaling $101.2 million. Following this capital close, we have subscription agreements with investors for an aggregate capital commitment of $988.2 million to purchase shares of common stock ($329.9 million is undrawn).

On November 9, 2023, the Board elected Frank P. Karl as Senior Vice President.

Portfolio and Investment Activity

September 30, 2023

As of September 30, 2023, we had investments in 72 portfolio companies with an aggregate fair value of approximately $1,278 million, and unfunded commitments to these portfolio companies of $109 million, and our portfolio consisted of 97.7% first lien senior secured loans, 1.7% junior debt and 0.6% equity investments.

As of September 30, 2023, our weighted average yield of debt and income producing securities at fair value and amortized cost was 12.4% and 12.5%, respectively, and 100% of our debt investments at fair value were at floating rates. We do not include investments on non-accrual status and non-incoming producing as of September 30, 2023 in this calculation.

As of September 30, 2023, our portfolio was invested across 28 different industries (Global Industry Classification “GICS”, Level 3 – Industry). The largest industries in our portfolio as of September 30, 2023 were Trading Companies & Distributors; Food Products and Commercial Services & Supplies, which represented, as a percentage of our portfolio of long-term investments, 13.8%, 10.9% and 10.5%, respectively, based on fair value.

As of September 30, 2023, our average position sized based on commitment (at the portfolio company level) was $19.5 million, and the weighted average and median last twelve months (“LTM”) EBITDA of our portfolio companies was $55.8 million and $43.4 million, respectively, based on fair value.

As of September 30, 2023, the weighted average loan-to-value (“LTV”) of our debt investments at the time of our initial investment was 44.5%, based on fair value. LTV represents the total par value of our debt investment relative to our estimate of the enterprise value of the underlying borrower. Given the senior secured status of nearly all of our investments, the difference between 100% and the LTV of our investment represents the percentage that our estimate of the enterprise value of the underlying borrower would need to degrade prior to a loss on our position.

As of September 30, 2023, we had one investment on non-accrual status, which comprised 1.9% and 1.1%, respectively, of total debt investments at cost and fair value.

As of September 30, 2023, 100% of our debt investments included financial maintenance covenants.

September 30, 2022

As of September 30, 2022, we had investments in 59 portfolio companies with an aggregate fair value of approximately $964 million, and unfunded commitments to these portfolio companies of $125 million, and our portfolio consisted of 96.9% first lien senior secured loans, 2.6% junior debt and 0.5% equity investments.

As of September 30, 2022, our weighted average yield of debt and income producing securities at fair value and amortized cost was 9.8% and 9.9%, respectively, and 100% of our debt investments at fair value were at floating rates.

As of September 30, 2022, our portfolio was invested across 25 different industries (GICS, Level 3 – Industry). The largest industries in our portfolio as of September 30, 2022 were Commercial Services & Supplies; Trading Companies & Distributors; Health Care Providers & Services and Food Products, which represented, as a percentage of our portfolio of long-term investments, 13.7%, 12.8%, 10.9% and 10.3%, respectively, based on fair value.

As of September 30, 2022, our average position sized based on commitment (at the portfolio company level) was $18.5 million, and the weighted average and median last twelve months (“LTM”) EBITDA of our portfolio companies was $48.5 million and $37.1 million, respectively, based on fair value.

As of September 30, 2022, the weighted average loan-to-value (“LTV”) of our debt investments at the time of our initial investment was 46.1%, based on fair value. LTV represents the total par value of our debt investment relative to our estimate of the enterprise value of the underlying borrower. Given the senior secured status of nearly all of our investments, the difference between 100% and the LTV of our investment represents the percentage that our estimate of the enterprise value of the underlying borrower would need to degrade prior to a loss on our position.

As of September 30, 2022, none of our debt investments in portfolio companies were on non-accrual.

As of September 30, 2022, 100% of our debt investments included financial maintenance covenants.

Our investment activity for the three months ended September 30, 2023 and 2022 is presented below (information presented herein is at par value unless otherwise indicated).

(1) Does not include repayments on revolving loans, which may be redrawn.

(2) As of September 30, 2023, preferred equity investments and common equity investments were reported as equity investments.

(3) For undrawn delayed draw term loans, the maturity date used is that of the associated term loan.

(4) Based on the rate in effect at September 30, 2023 per our Consolidated Schedule of Investments for new commitments entered into during the quarter.

(5) Based on the underlying rate if still held at September 30, 2023. For those investments sold or paid down in full during the year, based on the rate in effect at the time of sale or paid down.

We use Global Industry Classification Standards (GICS), Level 3 – Industry, for classifying the industry groupings of our portfolio companies.

The table below describes long-term investments by industry composition based on fair value as of September 30, 2023 and December 31, 2022.

42

Results of Operations

For the three and nine months ended September 30, 2023 and 2022, our total investment income was derived from our portfolio of investments. As of September 30, 2023, we had one investment on non-accrual status and non-income producing. As of September 30, 2022, there were no loans on non-accrual status.

The following table represents the operating results for the three and nine months ended September 30, 2023 and 2022.

($ in millions)

($ in millions)

($ in millions)

($ in millions)

Investment Income

Investment income for the three and nine months ended September 30, 2023 totaled $41.2 million and $118.3 million, respectively, and consisted primarily of interest income on our debt investments. Investment income for the three and nine months ended September 30, 2022 totaled $20.5 million and $45.4 million, respectively, and consisted primarily of interest income on our debt investments. For the three and nine months ended September 30, 2023, we had $0.3 million and $1.3 million of PIK interest included in interest income. There was no PIK interest for the three and nine months ended September 30, 2022.

Expenses

Operating expenses for the three and nine months ended September 30, 2023 and 2022 were as follows:

($ in millions)

($ in millions)

($ in millions)

($ in millions)

43

Net Unrealized Gains (Losses) on Investments

We fair value our portfolio investments quarterly and any changes in fair value are recorded as unrealized gains or losses. During the three and nine months ended September 30, 2023 and 2022, net unrealized gains (losses) on our investment portfolio were comprised of the following.

($ in millions)

($ in millions)

($ in millions)

($ in millions)

For these three-month periods ended September 30, 2023 and 2022, the top five largest contributors to the change in unrealized gains and change in unrealized losses on investments are presented in the following tables.

($ in millions)

($ in millions)

44

For these nine-month periods ended September 30, 2023 and 2022, the top five largest contributors to the change in unrealized gains and change in unrealized losses on investments are presented in the following tables.

($ in millions)

($ in millions)

45

Financial Condition, Liquidity and Capital Resources

Our liquidity and capital resources are generated primarily from the net proceeds of any offering of our shares of common stock, proceeds from borrowing on our credit facilities, proceeds from the issuance of notes and from cash flows from interest and fees earned from our investments and principal repayments and proceeds from sales of our investments. Our primary use of cash will be investments in portfolio companies, payments of our expenses, repayments of borrowed amounts and payment of cash distributions to our stockholders.

We finance our investments with borrowed money. In accordance with the 1940 Act, we are required to meet a coverage ratio of total assets (less total liabilities other than indebtedness) to total borrowings and other senior securities (and any preferred stock that we may issue in the future) of at least 150%. If this ratio declines below 150%, we cannot incur additional leverage and could be required to sell a portion of our investments to repay some leverage when it is disadvantageous to do so. As of September 30, 2023 and December 31, 2022, our asset coverage ratios were 214% and 203%. We currently intend to target asset coverage of 200% to 180% (which equates to a debt-to-equity ratio of 1.0x to 1.25x) but may alter this target based on market conditions.

Over the next twelve months, we expect that cash and cash equivalents, taken together with our undrawn capital commitments and available capacity under our credit facilities, will be sufficient to conduct anticipated investment activities. Beyond twelve months, we expect that our cash and liquidity needs will continue to be met by cash generated from our ongoing operations as well as financing activities.

As of September 30, 2023, we had $75 million Notes outstanding, $523 million borrowed under our credit facilities and cash and cash equivalents of $29.0 million (including short-term investments). As of November 9, 2023, we had $75 million Notes outstanding, $531 million borrowed under our credit facilities and cash and cash equivalents of $17.1 million (including short-term investments).

Capital Contributions

During the nine months ended September 30, 2023 and 2022, we issued 5,422,524 and 11,858,122 shares of our common stock related to capital called at an aggregate purchase price of $90.6 million and $193.6 million, respectively. As of November 9, 2023, we had aggregate capital commitments of $988.2 million, and we had undrawn capital commitments of $329.9 million from investors ($658.3 million or 66.6% funded).

Senior Unsecured Notes

As of September 30, 2023, we have $75 million of senior unsecured notes outstanding, with $25 million of 8.65% Series A Notes due June 2027 and $50 million of 8.74% Series B Notes due June 2028.

Credit Facilities

Corporate Credit Facility: As of September 30, 2023, we are party to a senior secured revolving credit facility (the “Corporate Credit Facility”), that has a total commitment of $400 million. The facility’s commitment termination date and the final maturity date are February 18, 2026 and February 18, 2027, respectively. The Corporate Credit Facility also provides for a feature that allows us, under certain circumstances, to increase the overall size of the Corporate Credit Facility to a maximum of $550 million. The interest rate on the Corporate Credit Facility is equal to Term SOFR (a forward-looking rate based on SOFR futures) plus an applicable spread of 2.35% per annum or an “alternate base rate” (as defined in the agreements governing the Corporate Credit Facility) plus an applicable spread of 1.25%. We are also required to pay a commitment fee of 0.375% per annum on any unused portion of the Corporate Credit Facility.

Revolving Funding Facility: As of September 30, 2023, we and our wholly owned, special purpose financing subsidiary, Kayne Anderson BDC Financing, LLC (“KABDCF”), are party to a senior secured revolving funding facility (the “Revolving Funding Facility”), that has a total commitment of $455 million. The Revolving Funding Facility is secured by all of the assets held by, and the membership interest in, KABDCF. The end of the reinvestment period and the stated maturity date for the Revolving Funding Facility are February 18, 2025 and February 18, 2027, respectively. The interest rate on the Revolving Funding Facility is equal to daily SOFR plus 2.75% per annum. KABDCF is also required to pay a commitment fee of between 0.50% and 1.50% per annum depending on the size of the unused portion of the Revolving Funding Facility.

Subscription Credit Agreement: As of September 30, 2023, we are party to a senior secured revolving credit agreement that includes a capital call facility (the “Subscription Credit Agreement”). The Subscription Credit Agreement permits us to elect the commitment amount each quarter to borrow up to $125 million, subject to availability under the borrowing base which is calculated based on the unused capital commitments of the investors meeting various eligibility requirements. The Subscription Credit Agreement has a maximum commitment of $125 million and the interest rate under the facility is equal to Term SOFR plus 1.975% (subject to a 0.275% floor). We are also required to pay a commitment fee of 0.25% per annum on the unused portion of the Subscription Credit Agreement. We also pay an extension fee of 0.05% per quarter on the elected commitment amount on the first day of each calendar quarter. The Subscription Credit Agreement will expire on December 31, 2023.

Contractual Obligations

A summary of our significant contractual principal payment obligations related to the repayment of our outstanding indebtedness at September 30, 2023 is as follows:

Off-Balance Sheet Arrangements

As of September 30, 2023 and December 31, 2022, we had an aggregate $109.1 million and $149.3 million, respectively, of unfunded commitments to provide debt financing to our portfolio companies. Such commitments are generally subject to the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in our financial statements. Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any other off-balance sheet financings or liabilities.

Critical Accounting Estimates

The preparation of our consolidated financial statements requires us 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. Our critical accounting policies, including those relating to the valuation of our investment portfolio, are described below. The critical accounting policies should be read in conjunction with our risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in this Quarterly Report. See Note 2 to our consolidated financial statements for the nine months ended September 30, 2023, for more information on our critical accounting policies.

Investment Valuation

Traded Investments (Level 1 or Level 2)

Investments for which market quotations are readily available will typically be valued at those market quotations. Traded investments such as corporate bonds, preferred stock, bank notes, loans or loan participations are valued by using the bid price provided by an independent pricing service, by an independent broker, the agent bank, syndicate bank or principal market maker. When price quotes for investments are not available, or such prices are stale or do not represent fair value in the judgment of our Advisor, fair market value will be determined using our Advisor’s valuation process for investments that are privately issued or otherwise restricted as to resale.

We may also invest, to a lesser extent, in equity securities purchased in conjunction with debt investments. While we anticipate these equity securities to be issued by privately held companies, we may hold equity securities that are publicly traded. Equity securities listed on any exchange other than the NASDAQ Stock Market, Inc. (“NASDAQ”) are valued, except as indicated below, at the last sale price on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and ask prices on such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing price. Equity securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. Equity securities traded in the over-the-counter market, but excluding securities admitted to trading on the NASDAQ, are valued at the closing bid prices.

Non-Traded Investments (Level 3)

Investments that are privately issued or otherwise restricted as to resale, as well as any security for which (a) reliable market quotations are not available in the judgment of our Advisor, or (b) the independent pricing service or independent broker does not provide prices or provides a price that in the judgment of our Advisor is stale or does not represent fair value, shall each be valued in a manner that most fairly reflects fair value of the security on the valuation date. We expect that a significant majority of our investments will be Level 3 investments. Unless otherwise determined by the Advisor, the following valuation process is used for our Level 3 investments:

• Valuation Designee. The applicable investments will be valued no less frequently than quarterly by the Advisor, with new investments valued at the time such investment was made. The value of each Level 3 investment will be initially reviewed by the persons responsible for such portfolio company or investment. The Advisor will use a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs to determine a preliminary value. The Advisor will specify the titles of the persons responsible for determining the fair value of Company investments, including by specifying the particular functions for which they are responsible, and will reasonably segregate fair value determinations from the portfolio management of the Company such that the portfolio manager(s) may not determine, or effectively determine by exerting substantial influence on, the fair values ascribed to portfolio investments.
• Valuation Firm. Quarterly, a third-party valuation firm engaged by the Advisor reviews the valuation methodologies and calculations employed for each of the Company’s investments that the Advisor has placed on the “watch list” and approximately 25% of the Company’s remaining investments. The third-party valuation firm will review and independently value all of the Level 3 investments at least once per year, on a rolling twelve-month basis. The quarterly report issued by the third-party valuation firm will provide positive assurance on the fair values of the investments reviewed.
• Oversight. The Board has appointed the Advisor as the valuation designee for the Company for purposes of making determinations of fair value as permitted by Rule 2a-5 under the 1940 Act. The Audit Committee shall aid the Board in overseeing the Advisor’s fair valuation of securities that are not publicly traded or for which current market values are not readily available. The Audit Committee shall meet quarterly to review the fair value determinations, processes and written reports of the Advisor as part of the Board’s oversight responsibilities.

Refer to Note 5 – Fair Value – for more information on the Company’s valuation process.

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities for accounting purposes if we have reason to doubt our ability to collect such interest. OIDs, market discounts or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income.

Related Party Transactions

Investment Advisory Agreement. On February 5, 2021, we entered into the Investment Advisory Agreement with our Advisor. On March 7, 2023, the Board approved a one-year renewal of the Investment Advisory Agreement through March 15, 2024. Our Advisor will agree to serve as our investment advisor in accordance with the terms of our Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period will consist of the base management fee equal to a percentage of the fair market value of investments, including, in each case, assets purchased with borrowed funds or other forms of leverage, but excluding cash, U.S. government securities and commercial paper instruments maturing within one year of purchase as well as an incentive fee based on our performance.

For services rendered under the Investment Advisory Agreement, we will pay a base management fee quarterly in arrears to our Advisor based on the of the fair market value of our investments including, in each case, assets purchased with borrowed funds or other forms of leverage, but excluding cash, U.S. government securities and commercial paper instruments maturing within one year of purchase. We will also pay an incentive fee on income and an incentive fee on capital gains to our Advisor.

Prior to an Exchange Listing, any incentive fees earned by the Advisor shall accrue as earned but only become payable in cash to the Advisor upon consummation of an Exchange Listing. To the extent the Company does not complete an Exchange Listing, the incentive fees will be payable to the Advisor (a) upon consummation of a sale of the Company or (b) once substantially all proceeds from a Company Liquidation payable to the Company’s common stockholders have been distributed to such stockholders.

Administration Agreement. On February 5, 2021, we entered into an Administration Agreement with our Advisor, which serves as our Administrator pursuant to which the Administrator will furnish us with administrative services necessary to conduct our day-to-day operations. On March 7, 2023, the Board approved a one-year renewal of the Administration Agreement through March 15, 2024. The Administrator will be reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such reimbursement may be made for our allocable portion (subject to the review and approval of our independent directors) of office facilities, overhead, and compensation paid to or compensatory distributions received by our officers (including our Chief Compliance Officer and Chief Financial Officer) and their respective staff who provide services to us. As we reimburse the Administrator for its expenses, we will indirectly bear such cost. The Administrator engaged U.S. Bank Global Fund Services under a sub-administration agreement to assist the Administrator in performing certain of its administrative duties. On March 28, 2023, the Administrator engaged Ultimus Fund Solutions, LLC under a sub-administration agreement to assist the Administrator in performing certain of its administrative duties effective in the second quarter of 2023. The Administrator may enter into additional sub-administration agreements with third-parties to perform other administrative and professional services on behalf of the Administrator.

We are subject to financial market risks, including changes in interest rates. Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income will be affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

Assuming that the consolidated statement of assets and liabilities as of September 30, 2023 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact ($ in millions) of hypothetical base rate changes in interest rate (considering interest rate floors for floating rate instruments). We do not include our investments on non-accrual status and non-incoming producing as of September 30, 2023 in this calculation.

The data in the table is based on the Company’s current statement of assets and liabilities.

We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2023 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic United States Securities and Exchange Commission (the “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 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.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the risk factors described below and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

Our business is dependent on bank relationships and recent strain on the banking system may adversely impact us.

The financial markets recently have encountered volatility associated with concerns about the balance sheets of banks, especially small and regional banks, which may have significant losses associated with investments that make it difficult to fund demands to withdraw deposits and other liquidity needs. Although the federal government has announced measures to assist these banks and protect depositors, some banks have already been impacted and others may be materially and adversely impacted. Our business is dependent on bank relationships and we are proactively monitoring the financial health of such bank relationships. Continued strain on the banking system may adversely impact our business, financial condition and results of operations.