Advanced Flower Capital Inc. 10-Q

Item 1. Financial Statements AFC GAMMA, INC. BALANCE SHEETS As Of March 31, 2021 December 31, 2020 (unaudited) Assets Loans held for investment at fair value (cost of $48,833,111 and $46,994,711 at March 31, 2021 and December 31, 2020, respectively, net) $ 50,252,049 $ 48,558,051 Loans held for investment at carrying value 39,152,936 31,837,031 Loan receivable at carrying value 3,240,855 3,348,263 Current expected credit loss reserve (248,317 ) (404,860 ) Loans held for investment at carrying value and loan receivable at carrying value, net of current expected credit loss reserve 42,145,474 34,780,434 Cash and cash equivalents 126,793,972 9,623,820 Interest receivable 1,205,304 927,292 Prepaid expenses and other assets 1,109,038 72,095 Total assets $ 221,505,837 $ 93,961,692 Liabilities Interest reserve $ 3,243,484 $ 1,325,750 Current expected credit loss reserve 283,180 60,537 Accrued management fees 876,662 222,127 Accrued direct administrative expenses 365,567 550,671 Accounts payable and other liabilities 404,939 154,895 Total liabilities 5,173,832 2,313,980 Commitments and contingencies (Note 10) Stockholders' Equity Preferred stock, par value $0.01 per share, 10,000 shares authorized at March 31, 2021 and December 31, 2020 and 125 shares issued and outstanding at March 31, 2021 and December 31, 2020 1 1 Common stock, par value $0.01 per share, 25,000,000 and 15,000,000 shares authorized at March 31, 2021 and December 31, 2020, respectively, and 13,366,877 and 6,179,392 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 133,669 61,794 Additional paid-in-capital 216,504,726 91,068,197 Accumulated earnings (deficit) (306,391 ) 517,720 Total stockholders' equity 216,332,005 91,647,712 Total liabilities and stockholders' equity $ 221,505,837 $ 93,961,692 (See accompanying notes to the Financial Statements) 1 Table of Contents AFC GAMMA, INC. STATEMENT OF OPERATIONS For the three months ended March 31, 2021 (unaudited) Revenue Interest Income $ 4,685,005 Total revenue 4,685,005 Expenses Management and incentive fees, net (less rebate of $237,743) 876,662 General and administrative expense 462,518 Stock-based compensation 1,599,115 Professional fees 135,453 Total expenses 3,073,748 Provision for current expected credit losses (66,100 ) Change in unrealized gains / (losses) on loans at fair value, net (144,402 ) Net income before income taxes 1,400,755 Income tax expense - Net income $ 1,400,755 Earnings per common share: Basic earnings per common share (in dollars per share) $ 0.20 Diluted earnings per common share (in dollars per share) $ 0.19 Weighted average number of common shares outstanding: Basic weighted average shares of common stock outstanding (in shares) 7,144,670 Diluted weighted average shares of common stock outstanding (in shares) 7,485,048 (See accompanying notes to the Financial Statements) 2 Table of Contents AFC GAMMA, INC. STATEMENT OF STOCKHOLDERS’ EQUITY For the three months ended March 31, 2021 (unaudited) Preferred Stock Common Stock Additional Paid- In-Capital Accumulated Earnings (Deficit) Total Stockholders' Equity Shares Amount Balance at December 31, 2020 $ 1 6,179,392 $ 61,794 $ 91,068,197 $ 517,720 $ 91,647,712 Issuance of common stock, net of offering cost - 7,187,485 71,875 123,837,414 - 123,909,289 Stock-based compensation - - - 1,599,115 - 1,599,115 Dividends declared and paid on common shares ($0.36 per share) - - - - (2,224,866 ) (2,224,866 ) Net income - - - - 1,400,755 1,400,755 Balance at March 31, 2021 (unaudited) $ 1 13,366,877 $ 133,669 $ 216,504,726 $ (306,391 ) $ 216,332,005 (See accompanying notes to the Financial Statements) 3 Table of Contents AFC GAMMA, INC. STATEMENT OF CASH FLOWS For the three months ended March 31, 2021 Operating activities: (unaudited) Net income $ 1,400,755 Adjustments to reconcile net income / (loss) to net cash provided by / (used in) operating activities: Provision for current expected credit losses 66,100 Change in unrealized gains / (losses) on loans at fair value, net 144,402 Accretion of deferred loan original issue discount and other discounts (707,751 ) Stock-based compensation 1,599,115 PIK interest (559,004 ) Changes in operating assets and liabilities: Interest reserve (82,266 ) Interest receivable (278,012 ) Prepaid expenses and other assets 67,971 Accrued management fees, net 654,535 Accrued direct administrative expenses (185,104 ) Accounts payable and other liabilities 250,044 Net cash provided by / (used in) operating activities 2,370,785 Cash flows from investing activities: Issuance of and fundings on loans (7,096,075 ) Proceeds from sales of Assigned Rights 103,302 Principal repayment of loans 107,717 Net cash provided by / (used in) investing activities (6,885,056 ) Cash flows from financing activities: Proceeds from sale of common stock 127,003,125 Payment of offering costs (3,093,836 ) Dividends paid (2,224,866 ) Net cash provided by / (used in) financing activities 121,684,423 Change in cash, cash equivalents and restricted cash 117,170,152 Cash, cash equivalents and restricted cash, beginning of period 9,623,820 Cash, cash equivalents and restricted cash, end of period $ 126,793,972 Supplemental disclosure of non-cash financing and investing activity: Interest reserve withheld from funding of loan $ 2,000,000 Sale of Assigned Rights $ 1,104,914 Supplemental information: Interest paid during the period $ - Income taxes paid during the period $ - (See accompanying notes to the Financial Statements) 4 Table of Contents AFC GAMMA, INC. NOTES TO FINANCIAL STATEMENTS As of March 31, 2021 (unaudited) 1. ORGANIZATION AFC Gamma, Inc. (the “Company” or “AFCG”) is a commercial real estate (“CRE”) finance company primarily engaged in originating, structuring, and underwriting senior secured loans and other types of loans. The Company was formed and commenced operations on July 31, 2020. The Company is a Maryland corporation and completed its initial public offering (the “IPO”) in March 2021. The Company is externally managed by AFC Management, LLC (“AFC Management” or the Company’s “Manager”), a Delaware limited liability company, pursuant to the terms of a management agreement (as amended, the “Management Agreement”). The Company operates as one operating segment and is primarily focused on financing senior secured loans and other types of loans for established cannabis industry operators in states where medical and /or adult use cannabis is legal. These loans are generally held for investment and are secured, directly or indirectly, by real estate, equipment, licenses and/or other assets of borrowers depending on the applicable laws and regulations governing such borrowers. The Company intends to elect to be taxed as a real estate investment trust (“REIT”) for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2020. The Company generally will not be subject to United States federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income prior to the deduction for dividends paid to stockholders and complies with various other requirements as a REIT. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited interim financial statements should be read in conjunction with the audited financial statements and the related management's discussion and analysis of financial condition and results of operations included in the Company's final prospectus relating to our IPO filed with the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”) on March 19, 2021 (the “Final Prospectus”). Refer to Note 2 to the Company’s financial statements in the Final Prospectus for a description of the Company’s significant accounting policies. The Company has included disclosure below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly, (ii) have material changes or (ii) the Company views as critical as of the date of this report. Basis of Presentation The accompanying unaudited interim financial statements and related notes have been prepared on the accrual basis of accounting in conformity with United States generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the SEC applicable to interim financial information. These unaudited interim financial statements reflect all adjustments and reclassifications that, in the opinion of management, are considered necessary for a fair statement of the balance sheets, statement of operations, statement of stockholders’ equity, and statement of cash flows for the periods presented. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the year ending December 31, 2021. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant estimates include the valuation of investments. The spread of a novel strain of coronavirus (“COVID-19”) has caused significant business disruptions in the United States beginning in the first quarter of 2020 and has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as quarantines, shelter-in-place or total lock-down orders and business imitations and shutdowns (subject to exceptions for certain “essential” operations and businesses). Over the course of the COVID-19 pandemic, medical cannabis companies have been deemed “essential” by 29 states administering shelter-in-place orders and adult use cannabis has been deemed “essential” in eight of those states. Consequently, the impact of the COVID-19 pandemic and the related regulatory and private sector response on our financial and operating results for the period ended March 31, 2021 was somewhat mitigated as all of our borrowers were permitted to continue to operate during this pandemic. Regardless, the full extent of the economic impact of the business disruptions caused by COVID-19 is uncertain. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving, and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including the regulated cannabis industry. Although some of these measures have been lifted or scaled back, a recent resurgence of COVID-19 in certain parts of the world, including the United States, may lead to more restrictions to reduce the spread of COVID-19. The extent of any effect that these disruptions may have on the operations and financial performance of the Company will depend on future developments, including possible impacts on the performance of the Company’s loans, general business activity, and ability to generate revenue, which cannot be determined. 5 Table of Contents Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this ASU on its financial statements. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01is effective immediately for all entities. An entity may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. If an entity elects to apply any of the amendments for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election. The amendments do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Company is currently evaluating the impact, if any, of this ASU on its financial statements. In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, which is an update to clarify that an entity should reevaluate whether a callable debt security is within the scope of 310-20-35-33 for each reporting period. ASU No. 2020-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, the amendments in ASU No. 2020-08 are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted for all other entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. All entities should apply the amendments in this update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company has adopted this new standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements. 6 Table of Contents 3. LOANS HELD FOR INVESTMENT AT FAIR VALUE As of March 31, 2021 and December 31, 2020, the Company’s portfolio included four loans held at fair value. The aggregate originated commitment under these loans was approximately $62.4 million and $59.9 million, respectively, and outstanding principal was approximately $52.2 million and $50.8 million, respectively, as of March 31, 2021 and December 31, 2020. For the three months ended March 31, 2021, the Company funded approximately $1.0 million of outstanding principal. As of March 31, 2021 and December 31, 2020, approximately 0% and 6.0%, respectively, of the Company’s loans held at fair value have floating interest rates. As of December 31, 2020, these floating rates were subject to LIBOR floors, with a weighted average floor of 2.5%, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated). The following tables summarize the Company’s loans held at fair value as of March 31, 2021 and December 31, 2020: As of March 31, 2021 Fair Value (2) Carrying Value (1) Outstanding Principal (1) Weighted Average Remaining Life (Years) (3) Senior Term Loans $ 50,252,049 $ 48,833,111 $ 52,212,608 3.1 Total loans held at fair value $ 50,252,049 $ 48,833,111 $ 52,212,608 3.1 As of December 31, 2020 Fair Value (2) Carrying Value (1) Outstanding Principal (1) Weighted Average Remaining Life (Years) (3) Senior Term Loans $ 48,558,051 $ 46,994,711 $ 50,831,235 3.3 Total loans held at fair value $ 48,558,051 $ 46,994,711 $ 50,831,235 3.3 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted purchase discount, deferred loan fees and loan origination costs. (2) Refer to Footnote 14. (3) Weighted average remaining life is calculated based on the fair value of the loans as of March 31, 2021 and December 31, 2020. The following table presents changes in loans held at fair value as of and for the three months ended March 31, 2021: Principal Original Issue Discount Unrealized Gains / (Losses) Fair Value Total loans held at fair value at December 31, 2020 $ 50,831,235 $ (3,836,524 ) $ 1,563,340 $ 48,558,051 Change in unrealized gains / (losses) on loans at fair value, net - - (144,402 ) (144,402 ) New fundings 992,000 (142,982 ) - 849,018 Accretion of original issue discount - 600,009 - 600,009 PIK Interest 389,373 - - 389,373 Total loans held at fair value at March 31, 2021 $ 52,212,608 $ (3,379,497 ) $ 1,418,938 $ 50,252,049 A more detailed listing of the Company’s loans held at fair value portfolio based on information available as of March 31, 2021 is as follows: Collateral Location Collateral Type (9) Fair Value (2) Carrying Value (1) Outstanding Principal (1) Interest Rate Maturity Date (3) Payment Terms (4) Private Co. A AZ, MI, MD, MA C , D $ 32,834,697 $ 32,384,888 $ 34,672,331 17.0 % (5) 5/8/2024 P/I Private Co. B MI C 2,495,922 2,290,381 2,548,159 17.0 % (6) 9/1/2023 P/I Public Co. A NV C 2,874,629 2,840,108 2,945,317 14.0 % (7) 12/21/2021 I/O Sub. Of Public Co. C FL C 12,046,801 11,317,734 12,046,801 18.0 % (8) 2/18/2025 P/I Total loans held at fair value $ 50,252,049 $ 48,833,111 $ 52,212,608 7 Table of Contents (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount (“OID”) and loan origination costs. (2) Refer to Footnote 14. (3) Certain loans are subject to contractual extension options and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications. (4) I/O = interest only, P/I = principal and interest. P/I loans may include interest only periods for a portion of the loan term. (5) Base interest rate of 13% and payment-in-kind (“PIK”) interest rate of 4%. (6) Base interest rate of 13% and PIK interest rate of 4%. (7) Base interest rate of 12% and PIK interest rate of 2%. (8) Loan to Subsidiary of Public Company C is a $15,000,000 aggregate loan commitment with an initial funding of $3,000,000 at a base interest rate of 13.5% and PIK interest rate of 3% and subsequent advances of $9,000,000 at a base interest rate of 19%. The weighted average interest rate is 18.0% at March 31, 2021. (9) C = Cultivation Facilities, D = Dispensaries 4. LOANS HELD FOR INVESTMENT AT CARRYING VALUE As of March 31, 2021 and December 31, 2020, the Company’s portfolio included four and three loans, respectively, held at carrying value. The aggregate originated commitment under these loans was approximately $65 million and $44 million, respectively, and outstanding principal was approximately $42.9 million and $33.9 million, respectively, as of March 31, 2021 and December 31, 2020. During the three months ended March 31, 2021, the Company funded approximately $8.9 million of outstanding principal. As of March 31, 2021 and December 31, 2020, approximately 49% and 35%, respectively, of the Company’s loans held at carrying value have floating interest rates. These floating rates are subject to LIBOR floors, with a weighted average floor of 1% and 1%, respectively, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated). The following tables summarize the Company’s loans held at carrying value as of March 31, 2021 and December 31, 2020: As of March 31, 2021 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior Term Loans $ 42,940,850 $ (3,787,914 ) $ 39,152,936 4.5 Total loans held at carrying value $ 42,940,850 $ (3,787,914 ) $ 39,152,936 4.5 As of December 31, 2020 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior Term Loans $ 33,907,763 $ (2,070,732 ) $ 31,837,031 4.7 Total loans held at carrying value $ 33,907,763 $ (2,070,732 ) $ 31,837,031 4.7 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount and loan origination costs. (2) Weighted average remaining life is calculated based on the carrying value of the loans as of March 31, 2021 and December 31, 2020. 8 Table of Contents The following table presents changes in loans held at carrying value as of and for the three months ended March 31, 2021: Principal Original Issue Discount Carrying Value Total loans held at carrying value at December 31, 2020 $ 33,907,763 $ (2,070,732 ) $ 31,837,031 New Fundings 8,863,455 (1,824,614 ) 7,038,841 Accretion of original issue discount - 107,432 107,432 PIK Interest 169,632 169,632 Total loans held at carrying value at March 31, 2021 $ 42,940,850 $ (3,787,914 ) $ 39,152,936 A more detailed listing of the Company’s loans held at carrying value portfolio based on information available as of March 31, 2021 is as follows: Collateral Location Collateral Type (8) Outstanding Principal (1) Original Issue Discount Carrying Value (1) Interest Rate Maturity Date (2) Payment Terms (3) Private Co. C PA C , D $ 13,895,465 $ (807,869 ) $ 13,087,596 17.0 % (4) 12/1/2025 P/I Private Co. D OH, AR D 12,045,385 (983,237 ) 11,062,148 15.0 % (5) 1/1/2026 P/I Sub. of Public Co. D PA C 10,000,000 (172,194 ) 9,827,806 12.9 % (6) 12/18/2024 I/O Private Co. E OH C , D 7,000,000 (1,824,614 ) 5,175,386 17.0 % (7) 4/1/2026 P/I Total loans held at carry value $ 42,940,850 $ (3,787,914 ) $ 39,152,936 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted purchase discount, deferred loan fees and loan origination costs. (2) Certain loans are subject to contractual extension options and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications. (3) I/O = interest only, P/I = principal and interest. P/I loans may include interest only periods for a portion of the loan term. (4) Base interest rate of 12% plus LIBOR (LIBOR floor of 1%) and PIK interest rate of 4%. (5) Base interest rate of 13% and PIK interest rate of 2%. (6) Base interest rate of 12.9%. (7) Base interest rate of 12% plus LIBOR (LIBOR floor of 1%) and PIK interest rate of 4%. (8) C = Cultivation Facilities, D = Dispensaries 5. LOAN RECEIVABLE AT CARRYING VALUE As of March 31, 2021 and December 31, 2020, the Company’s portfolio included one loan receivable at carrying value. The originated commitment under this loan was approximately $4 million and outstanding principal was approximately $3.2 million and $3.4 million as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, the Company received repayments of $0.1 million of outstanding principal. The following table presents changes in loans receivable as of and for the three months ended March 31, 2021: Principal Original Issue Discount Carrying Value Total loans receivable at carrying value at December 31, 2020 $ 3,352,176 $ (3,913 ) $ 3,348,263 Principal repayment of loans (107,717 ) - (107,717 ) Accretion of original issue discount - 309 309 Total loans receivable at carrying value at March 31, 2021 $ 3,244,459 $ (3,604 ) $ 3,240,855 9 Table of Contents 6. CURRENT EXPECTED CREDIT LOSSES The Company estimates its current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”) using a model that considers multiple datapoints and methodologies that may include the likelihood of default and expected loss given default for each individual loan, discounted cash flows (“DCF”), and other inputs which may include the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment if applicable. Calculation of the CECL Reserve requires loan specific data, which includes fixed charge coverage ratio, loan-to-value, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s loan portfolio and (iv) the Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve, which may include (i) whether cash from the borrower’s operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we may elect to apply a practical expedient in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a Specific CECL Allowance. In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company may consider historical market loan loss data provided by a third-party data service. The third party’s loan database includes historical loss data for commercial mortgage-backed securities, or CMBS which the Company believes is a reasonably comparable and available data set to its type of loans. The Company utilized macroeconomic data that reflects a current recession; however, the short and long-term economic implications of the COVID-19 pandemic and its financial impact on the Company are highly uncertain. The CECL Reserve takes into consideration the macroeconomic impact of the COVID-19 pandemic on CRE properties and is not specific to any loan losses or impairments on the Company’s loans held for investment. As of March 31, 2021 and December 31, 2020, the Company’s CECL Reserve for its loans held at carrying value and loans receivable at carrying value is $531,497 and $465,397, respectively, or 125 and 132 basis points, respectively, of the Company’s total loans held at carrying value and loans receivable at carrying value of $42,393,791 and $35,185,294, respectively, and is bifurcated between the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loans receivable at carrying value of $248,317 and $404,860, respectively, and a liability for unfunded commitments of $283,180 and $60,537, respectively. The liability was based on the unfunded portion of the loan commitment over the full contractual period over which the Company is exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. Activity related to the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value and loans receivable at carrying value as of and for the three months ended March 31, 2021 was as follows: Outstanding (1) Unfunded (2) Total Balance at December 31, 2020 $ 404,860 $ 60,537 $ 465,397 Provision for current expected credit losses (156,543 ) 222,643 66,100 Write-offs - - - Recoveries - - - Balance at March 31, 2021 $ 248,317 $ 283,180 $ 531,497 (1) As of March 31, 2021 and December 31, 2020, the CECL Reserve related to outstanding balances on loans at carrying value and loans receivable at carrying value is recorded within current expected credit loss reserve in the Company's balance sheets. (2) As of March 31, 2021 and December 31, 2020, the CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within other liabilities in the Company's balance sheets. The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, projected cash flow, loan structure and exit plan, loan-to-value ratio, fixed charge coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows: Rating Definition 1 Very Low Risk 2 Low Risk 3 Medium Risk 4 High Risk/ Potential for Loss 5 Impaired/Loss Likely 10 Table of Contents The risk ratings are primarily based on historical data as well as taking into account future economic conditions. As of March 31, 2021, the carrying value, excluding the CECL Reserve, of the Company’s loans held at carrying value and loans receivable at carrying value within each risk rating by year of origination is as follows: Risk Rating: 2021 2020 Total 1 $ - $ - $ - 2 - - - 3 5,175,386 33,977,550 39,152,936 4 - 3,240,855 3,240,855 5 - - - Total $ 5,175,386 $ 37,218,405 $ 42,393,791 7. INTEREST RECEIVABLE The following tables summarize the interest receivable by the Company as of March 31, 2021 and December 31, 2020: As of March 31, 2021 As of December 31, 2020 Interest receivable $ 954,349 $ 675,795 PIK receivable 210,588 177,183 Unused fees 40,367 74,314 Total interest receivable $ 1,205,304 $ 927,292 8. INTEREST RESERVE At March 31, 2021 and December 31, 2020, the Company had two and one loans, respectively, that included a loan funded interest reserve. For the three months ended March 31, 2021, approximately $82 thousand of interest income was earned and disbursed from the interest reserve. The following table presents changes in interest reserve as of and for the three months ended March 31, 2021: Three months ended March 31, 2021 Initial reserves $ 1,325,750 New reserves 2,000,000 Reserves disbursed (82,266 ) Total Interest reserve $ 3,243,484 9. DEBT The Company obtained a secured revolving credit loan (the “Revolving Loan”) from AFC Finance, LLC, an affiliate of the Company’s management. The Revolving Loan has a loan commitment of $40,000,000 and bears interest of 8% per annum, payable in cash in arrears. The Company did not incur any fees or cost related to the origination of the Revolving Loan and the Revolving Loan does not have any unused fees. The maturity date of the Revolving Loan is the earlier of (i) July 31, 2021 and (ii) the date of the closing of any Refinancing Credit Facility (as defined below) in accordance with terms in the Revolving Loan agreement. The Revolving Loan is secured by the assets of the Company. For the three months ended March 31, 2021, the Company did not utilize its Revolving Loan and therefore no interest expense was incurred. The Revolving Loan was amended in May 2021, see Note 17. Subsequent Events. 11 Table of Contents 10. COMMITMENTS AND CONTINGENCIES As of March 31, 2021 and December 31, 2020, the Company had the following commitments to fund various senior term loans, equipment loans and bridge loans. As of March 31, 2021 As of December 31, 2020 Total original loan commitments $ 130,684,459 $ 107,292,176 Less: drawn commitments (97,214,795 ) (87,467,057 ) Total undrawn commitments $ 33,469,664 $ 19,825,119 The Company from time to time may be a party to litigation in the normal course of business. As of March 31, 2021, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations. We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement of federal laws regarding the federal illegality of cannabis, and lack liquidity, and we could lose all or part of any of our investments. Our ability to grow or maintain our business depends on state laws pertaining to the cannabis industry. New laws that are adverse to our portfolio companies may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow and could materially adversely affect our business. Management’s plan to mitigate risks include monitoring the legal landscape as deemed appropriate. Also, should a loan default or otherwise be seized, the Company may be prohibited from owning cannabis assets and thus could not take possession of collateral, in which case the Company would look to sell the loan, which could result in the Company realizing a loss on the transaction. 11. STOCKHOLDERS’ EQUITY Series A Preferred Stock As of March 31, 2021 and December 31, 2020, the Company has authorized 10,000 preferred shares and issued 125 of the preferred shares designated as 12.0% Series A Cumulative Non-Voting Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”). The Series A Preferred Stock entitles the holders thereof to receive cumulative cash dividends at a rate per annum of 12.0% of the liquidation preference of $1,000 per share plus all accumulated and unpaid dividends thereon. The Company generally may not declare or pay, or set apart for payment, any dividend or other distribution on any shares of the Company’s stock ranking junior to the Series A Preferred Stock as to dividends, including the Company’s common stock, or redeem, repurchase or otherwise make payments on any such shares, unless full, cumulative dividends on all outstanding shares of Series A Preferred Stock have been declared and paid or set apart for payment for all past dividend periods. The holders of the Series A Preferred Stock generally have no voting rights except in limited circumstances, including certain amendments to the Company’s charter and the authorization or issuance of equity securities senior to or on parity with the Series A Preferred Stock. The Series A Preferred Stock is not convertible into shares of any other class or series of our stock. The Series A Preferred Stock is senior to all other classes and series of shares of the Company’s stock as to dividend and redemption rights and rights upon the Company’s liquidation, dissolution and winding up. Upon written notice to each record holder of the Series A Preferred Stock as to the effective date of redemption, the Company may redeem the shares of the outstanding Series A Preferred Stock at the Company’s option, in whole or in part, at any time for cash at a redemption price equal to $1,000 per share, for a total of $125,000 for the 125 shares outstanding, plus all accrued and unpaid dividends thereon to and including the date fixed for redemption, plus a redemption premium of $50 per share if the shares are redeemed on or before December 31, 2021. Shares of the Series A Preferred Stock that are redeemed shall no longer be deemed outstanding shares of the Company and all rights of the holders of such shares will terminate. Common Stock The Board of Directors of the Company (the “Board”) approved a seven-for-one stock split of the Company's common stock effective on January 25, 2021. All common shares, stock options, and per share information presented in the financial statements have been adjusted to reflect the stock split on a retroactive basis for all periods presented, including reclassifying an amount equal to the increase in par value of common stock from additional paid-in capital. There was no change in the par value of the Company's common stock. Upon consummation of the Company’s IPO, any stockholder that held fractional shares received cash in lieu of such fractional shares based on the public offering price of the shares of the Company’s common stock at IPO. This resulted in the reduction of 15 shares issued and outstanding. On March 23, 2021, the Company completed its IPO of 6,250,000 shares of its common stock at a price of $19.00 per share, raising $118,750,000 in gross proceeds. The underwriters also exercised their over-allotment option to purchase up to an additional 937,500 shares of the Company’s common stock at a price of $19.00 per share, which was completed on March 26, 2021, raising $17,812,500 in additional gross proceeds. The underwriting commissions of $8,312,500 and $1,246,875, respectively, are reflected as a reduction of additional paid-in capital on the statement of stockholders’ equity. The Company incurred approximately $3,093,836 of expenses in connection with the IPO, which is reflected as a reduction in additional paid-in capital. The net proceeds to the Company totaled approximately $123,909,289. The Company intends to use the net proceeds of the IPO (i) to fund loans related to unfunded commitments to existing borrowers, (ii) to originate and participate in commercial loans to companies operating in the cannabis industry that are consistent with the Company’s investment strategy and (iii) for working capital and other general corporate purposes. Until appropriate investments can be identified, the Company may invest this balance in interest-bearing short-term investments, including money market accounts or funds, commercial mortgage-backed securities and corporate bonds, which are consistent with the Company’s intention to qualify as a REIT and to maintain our exclusion from registration under the Investment Company Act of 1940, as amended. 12 Table of Contents Equity Incentive Plan The Company has established an equity incentive compensation plan (the “Plan”). The Company’s Board authorized the adoption of the Plan (the “2020 Plan”) and approved stock option grants of 1,616,098 shares of common stock as of March 31, 2021. The Board or one or more committees appointed by the Board will administer the 2020 Plan. The Plan authorizes stock options, stock appreciation rights, restricted stock, stock bonuses, stock units and other forms of awards granted or denominated in the Company’s common stock or units of common stock. The 2020 Plan retains flexibility to offer competitive incentives and to tailor benefits to specific needs and circumstances. Any award may be structured to be paid or settled in cash. The Company currently intends to grant stock options to participants in the 2020 Plan, but it may also grant any other type of award available under the 2020 Plan in the future. Persons eligible to receive awards under the 2020 Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company, employees of the Manager and certain directors and consultants and other service providers to the Company or any of its subsidiaries. The current maximum number of shares of the Company common stock that may be delivered pursuant to awards under the 2020 Plan (the “Share Limit”) equals 2,100,000 shares. Shares that are subject to or underlie awards that expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under the 2020 Plan will not be counted against the Share Limit and will again be available for subsequent awards under the 2020 Plan. Shares that are exchanged by a participant or withheld by the Company as full or partial payment in connection with any award granted under the 2020 Plan, as well as any shares exchanged by a participant or withheld by us to satisfy tax withholding obligations related to any award granted under the 2020 Plan, will not be counted against the Share Limit and will again be available for subsequent awards under the 2020 Plan. To the extent that an award is settled in cash or a form other than shares, the shares that would have been delivered had there been no such cash or other settlement will not be counted against the Share Limit and will again be available for subsequent awards under the 2020 Plan. The exercise price of any options granted under the 2020 Plan will be at net asset value or greater; provided, however, the exercise price will be at least equal to the market price of the underlying shares on the grant date. The options granted under the 2020 Plan have an ordinary term of up to ten years. An option may either be an incentive stock option or a nonqualified stock option. Options generally may not be transferred to third parties for value and do not include dividend equivalent rights. The following table summarizes the (i) non-vested options granted, (ii) vested options granted and (iii) forfeited options granted for the Company’s directors and officers and employees of the Manager as of March 31, 2021 and December 31, 2020: As of March 31, 2021 As of December 31, 2020 Non-vested 183,114 142,814 Vested 1,449,518 800,618 Forfeited (16,534 ) (16,534 ) Balance 1,616,098 926,898 The Company uses the Black-Scholes option pricing model to value stock options in determining the share-based compensation expense. Forfeitures are recognized as they occur. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The expected dividend yield was based on the Company’s expected dividend yield at grant date. Expected volatility is based on the estimated average volatility of similar companies due to the lack of historical volatilities of the Company’s common stock. The share-based compensation expense for the Company was approximately $1,599,115 for the three months ended March 31, 2021. The following table presents the assumptions used in the option pricing model of options granted under the 2020 Plan: Assumptions Range Expected volatility 40% - 50 % Expected dividend yield 10% - 20 % Risk-free interest rate 0.5% - 1.5 % Expected forfeiture rate 0 % 13 Table of Contents The following table summarizes stock option activity during the three months ended March 31, 2021: Three months ended March 31, 2021 Weighted-Average Grant Date Fair Value Per Option Balance as of December 31, 2020 926,898 $ 0.91 Granted 689,200 1.31 Exercised - - Forfeited - - Balance as of March 31, 2021 1,616,098 $ 1.08 12. EARNINGS PER SHARE The following information sets forth the computations of basic weighted average earnings per common share for the three months ended March 31, 2021: Three months ended March 31, 2021 Net income / (loss) attributable to common stockholders $ 1,400,755 Divided by: Basic weighted average shares of common stock outstanding 7,144,670 Diluted weighted average shares of common stock outstanding 7,485,048 Basic weighted average earnings per common share $ 0.20 Diluted weighted average earnings per common share $ 0.19 13. INCOME TAX The income tax provisions for the Company was $0 for the three months ended March 31, 2021. For the three months ended March 31, 2021, the Company incurred no expense for United Stated federal excise tax. Excise tax represents a 4% tax on the sum of a portion of the Company’s ordinary income and net capital gains not distributed during the period. If it is determined that an excise tax liability exists for the current period, the Company will accrue excise tax on estimated excess taxable income as such taxable income is earned. The expense is calculated in accordance with applicable tax regulations. The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months. 14. FAIR VALUE The Company’s loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to portfolio companies where the Company does not own a controlling equity position. To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk. In the yield analysis, the Company considers the current contractual interest rate, the maturity and other terms of the loan relative to risk of the company and the specific loan. A key determinant of risk, among other things, is the leverage through the loan relative to the enterprise value of the portfolio company. As loans held by the Company are substantially illiquid with no active loan market, the Company depends on primary market data, including newly funded loans, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable. The following tables summarize the significant unobservable inputs the Company used to value the loans categorized within Level 3 as of March 31, 2021 and December 31, 2020. The tables are not intended to be all-inclusive, but instead capture the significant unobservable inputs relevant to the Company’s determination of fair values. As of March 31, 2021 Unobservable Input Fair Value Primary Valuation Techniques Input Estimated Range Weighted Average Senior Term Loans $ 50,252,049 Yield analysis Market Yield 17.07% - 20.61 % 20.33 % Total Investments $ 50,252,049 14 Table of Contents As of December 31, 2020 Unobservable Input Fair Value Primary Valuation Techniques Input Estimated Range Weighted Average Senior Term Loans $ 48,558,051 Yield analysis Market Yield 15.79% - 20.75 % 20.20 % Total Investments $ 48,558,051 Changes in market yields may change the fair value of certain of the Company’s loans. Generally, an increase in market yields may result in a decrease in the fair value of certain of the Company’s loans. Due to the inherent uncertainty of determining the fair value of loans that do not have a readily available market value, the fair value of the Company’s loans may fluctuate from period to period. Additionally, the fair value of the Company’s loans may differ significantly from the values that would have been used had a ready market existed for such loans and may differ materially from the values that the Company may ultimately realize. Further, such loans are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a loan in a forced or liquidation sale, it could realize significantly less than the value at which the Company has recorded it. In addition, changes in the market environment and other events that may occur over the life of the loans may cause the gains or losses ultimately realized on these loans to be different than the unrealized gains or losses reflected in the valuations currently assigned. The following table presents fair value measurements of loans held at fair value as of March 31, 2021 and December 31, 2020: Fair Value Measurement Using as of March 31, 2021 Total Level 1 Level 2 Level 3 Loans held at fair value $ 50,252,049 - - $ 50,252,049 Total $ 50,252,049 - - $ 50,252,049 Fair Value Measurement Using as of December 31, 2020 Total Level 1 Level 2 Level 3 Loans held at fair value $ 48,558,051 - - $ 48,558,051 Total $ 48,558,051 - - $ 48,558,051 The following table presents changes in loans that use Level 3 inputs as of and for the three months ended March 31, 2021: Three months ended March 31, 2021 Total loans using Level 3 inputs at December 31, 2020 $ 48,558,051 Change in unrealized gains / (losses) on loans at fair value, net (144,402 ) Additional funding 992,000 Original issue discount and other discounts, net of costs (142,982 ) Accretion of original issue discount 600,009 PIK Interest 389,373 Total loans using Level 3 inputs at March 31, 2021 $ 50,252,049 Fair Value of Financial Instruments GAAP requires disclosure of fair value information about financial instruments, whether or not recognized at fair value in the balance sheet, for which it is practicable to estimate that value. 15 Table of Contents The following table details the book value and fair value of the Company’s financial instruments not recognized at fair value in the balance sheet: As of March 31, 2021 Carrying Value Fair Value Financial assets Cash and cash equivalents $ 126,793,972 $ 126,793,972 Loans held for investment at carrying value $ 39,152,936 $ 41,661,386 Loan receivable at carrying value $ 3,240,855 $ 3,066,014 Estimates of fair value for cash and cash equivalents are measured using observable, quoted market prices, or Level 1 inputs. All other fair value significant estimates are measured using unobservable inputs, or Level 3 inputs. 15. RELATED PARTY TRANSACTIONS Management Agreement Pursuant to the Management Agreement, the Manager manages the loans and day-to-day operations of the Company, subject at all times to the further terms and conditions set forth in the Management Agreement and such further limitations or parameters as may be imposed from time to time by the Company’s Board. The Manager will receive base management fees (the “Base Management Fee”) that are calculated and payable quarterly in arrears, in an amount equal to 0.375% of the Company’s Equity (as defined below), subject to certain adjustments, less 50% of the aggregate amount of any other fees (“Outside Fees”), including any agency fees relating to our loans, but excluding the Incentive Compensation (as defined below) and any diligence fees paid to and earned by the Manager and paid by third parties in connection with the Manager's due diligence of potential loans . Prior to the IPO, the quarterly base management fee was equal to 0.4375% of the Company’s Equity, subject to certain adjustments, less 100% of the aggregate amount of any Outside Fees, including any agency fees relating to our loans, but excluding the Incentive Compensation and any diligence fees paid to and earned by the Manager and paid by third parties in connection with the Manager's due diligence of potential loans . In addition to the Base Management Fee, the Manager is entitled to receive incentive compensation (the “Incentive Compensation” or “Incentive Fees”) under the Management Agreement. Under the Management Agreement, the Company will pay Incentive Fees to the Manager based upon the Company’s achievement of targeted levels of Core Earnings. “Core Earnings” is defined in the Management Agreement as, for a given period means the net income (loss) for such period, computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) the Incentive Compensation, (iii) depreciation and amortization, (iv) any unrealized gains or losses or other non-cash items that are included in net income for the applicable reporting period, regardless of whether such items are included in other comprehensive income or loss, or in net income and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between the Manager and the Company’s independent directors and approved by a majority of the independent directors. The Incentive Compensation for the three months ended March 31, 2021 was approximately $662,730. The Company shall pay all of its costs and expenses and shall reimburse the Manager or its affiliates for expenses of the Manager and its affiliates paid or incurred on behalf of the Company, excepting only those expenses that are specifically the responsibility of the Manager pursuant to the Management Agreement. The following table summarizes the related party costs incurred by the Company for the three months ended March 31, 2021. Three months ended March 31, 2021 Affiliate Payments Management fees $ 451,675 Less other fees earned (237,743 ) Incentive fees earned 662,730 General and administrative expenses reimbursable to Manager 365,567 Total $ 1,242,229 Amounts payable to the Company’s Manager as of March 31, 2021 and December 31, 2020 were $1,242,229 and $728,298, respectively. 16 Table of Contents Investments in Loans From time to time, the Company may co-invest with other investment vehicles managed by the Company’s Manager or its affiliates, including the Manager, and their portfolio companies, including by means of splitting loans, participating in loans or other means of syndicating loans. The Company is not obligated to provide, nor has it provided, any financial support to the other managed investment vehicles. As such, the Company’s risk is limited to the carrying value of its investment in any such loan. As of and for the three months ended March 31, 2021, there were no co-investments held by the Company. In connection with investments in loans, the Company may receive the option to assign the right (the “Assigned Right”) to acquire warrants and/or equity of the borrower. The Company may sell the Assigned Right, and the sale may be to an affiliate of the Company. For the three months ended March 31, 2021, the Company sold approximately $1,208,216 of Assigned Rights to an affiliate which are accounted for as additional original issue discount and accreted over the life of the loans. As of March 31, 2021, the Company had a receivable from an affiliate related to the Assigned Rights sold during the three months ended March 31, 2021 in the amount of approximately $1,104,914 which is included on the balance sheet in the prepaid expense and other assets line. Secured Revolving Credit From Affiliate The Company has a secured revolving credit loan (the “Revolving Loan”) from AFC Finance, LLC, an affiliate of the Company’s management. Refer to footnote 9 for more information. 16. DIVIDENDS AND DISTRIBUTIONS The following table summarizes the Company’s dividends declared and paid during the three months ended March 31, 2021: Record Date Payment Date Common Share distribution amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/15/2021 3/31/2021 $ 0.36 $ 0.36 $ - $ 0.36 Total cash dividend $ 0.36 $ 0.36 $ - $ 0.36 17. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date the financial statements were available to be issued. There were no material subsequent events, other than that described below, that required disclosure in these financial statements. In April 2021, Sub. Of Public Co. C repaid their loan in full. The loan had an original maturity date of February 2025 and the outstanding principal on the date of repayment was approximately $12.1 million. The Company received an exit fee of $750,000 and a prepayment premium of $750,000 upon repayment of the loan. In April 2021, the Company entered into a commitment for a $13 million senior term loan and funded $5.25 million at closing. The loan has an interest rate of 13% and PIK interest of 4% with a step down to 2% once certain criteria are met as defined in the loan agreement. The loan has a maturity date of May 2026, an unused fee of 3%, an exit fee of 15% and OID of 15.5%. In April 2021, the Company entered into a commitment for a $15 million senior term loan and funded $15 million at closing. The loan has an interest rate of 13%. The loan has a maturity date of April 2025 and OID of 7%. In April 2021, the Company entered into a commitment for a $22 million senior term loan and funded $22 million at closing, including a $2 million interest reserve. The loan has an interest rate of 12% plus LIBOR, with a 1% LIBOR floor, and PIK interest of 4% with step downs to 2% and 1.5% once certain criteria are met as defined in the loan agreement. The loan has a maturity date of May 2026, an exit fee of 10%, provided that if certain criteria are met as defined in the loan agreement the exit fee is 2%, and OID of 4%. On May 7, 2021, the Company amended its secured revolving credit loan (the “Revolving Loan”) from AFC Finance, LLC, an affiliate of the Company’s management. The amendment to the Revolving Loan increased the loan commitment from $40,000,000 to $50,000,000, decreased the interest rate from 8% per annum to 6% per annum, removed Gamma Lending Holdco LLC as a lender and extended the maturity date from July 31, 2021 to the earlier of (i) December 31, 2021 or (ii) the date of the closing of any credit facility where the proceeds are incurred to refund, refinance or replace the Revolving Credit Agreement with an aggregate principal amount equal to or greater than $50 million. The Company did not incur any fees or cost related to the amendment of the Revolving Loan and the Revolving Loan does not have any unused fees. As of the date of these financial statements, the Company has not drawn on the Revolving Loan or incurred any fees or interest expense related to the Revolving Loan. 17 Table of Contents