Advanced Flower Capital Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Statement Regarding Forward-Looking Information Some of the statements contained in this quarterly report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend such statements to be covered by the safe harbor provisions contained therein. The information contained in this section should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in “Risk Factors” in our final prospectus relating to our initial public offering 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”). In addition, some of the statements in this quarterly report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial condition of AFC Gamma, Inc. (“AFCG” and the “Company,” “we,” “us” and “our”). The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning: • use of proceeds of the IPO; • our business and investment strategy; • our projected operating results, including our projections for distributable earnings for the second quarter of 2021; • the impact of the COVID-19 pandemic, on our business and the United States and global economies; • the ability of our Manager to locate suitable loan opportunities for us, monitor, service and administer our loans and execute our investment strategy; • allocation of loan opportunities to us by our Manager; • our projected operating results; • actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law; the state of the United States, European Union and Asian economies generally or in specific geographic regions; • the estimated growth in and evolving market dynamics of the cannabis market; • the demand for cannabis cultivation and processing facilities; • shifts in public opinion regarding cannabis; • the state of the U.S. economy generally or in specific geographic regions; • economic trends and economic recoveries; and • the collectability and timing of cash flows, if any, from our loans; • our ability to obtain and maintain financing arrangements; • our expected leverage; • Changes in the value of our loans; • our expected portfolio of loans; • our expected investment and underwriting process; • rates of default or decreased recovery rates on our loans; • the degree to which our hedging strategies may or may not protect us from interest rate volatility; • changes in interest rates of our loans and impacts of such changes on our results of operations, cash flows and the market value of our loans; • interest rate mismatches between our loans and our borrowings used to fund such loans; • the departure of any of the executive officers or key personnel supporting and assisting us from our Manager or its affiliates; • impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; • our ability to maintain our exemption from registration under the Investment Company Act of 1940 (the “1940 Act”); • our ability to qualify and maintain our qualification as a real estate investment trust (“REIT”) for United States federal income tax purposes; • estimates relating to our ability to make distributions to our stockholders in the future; • our understanding of our competition; • market trends in our industry, interest rates, real estate values, the securities markets or the general economy. 18 Table of Contents We use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and financial condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and the other information included in our Final Prospectus and elsewhere in this quarterly report on Form 10-Q. We have based the forward-looking statements included in this quarterly report on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form S-11, quarterly reports on Form 10-Q and current reports on Form 8-K. Available Information We routinely post important information for investors on our website, www.afcgamma.com. We intend to use this webpage as a means of disclosing material information, for complying with our disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. AFCG encourages investors, analysts, the media and others interested in AFCG to monitor the Investors section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations, webcasts and other information we post from time to time on our website. To sign-up for email-notifications, please visit the “Email Alerts” section of our website under the “IR Resources” section and enter the required information to enable notifications. Overview AFC Gamma, Inc. (the ‘Company” or “AFCG” or “we”) is a commercial real estate finance company founded in July 2020 by a veteran team of investment professionals. We originate, structure and underwrite senior secured loans and other types of loans for established cannabis industry operators in states that have legalized medicinal and/or adult use cannabis. As states continue to legalize cannabis for medical and adult use, an increasing number of companies operating in the cannabis industry need financing. Due to the capital constrained cannabis market which does not typically have access to traditional bank financing, we believe we are well positioned to become a prudent financing source to established cannabis industry operators given our stringent underwriting criteria, size and scale of operations and institutional infrastructure. Our objective is to provide attractive risk-adjusted returns over time through cash distributions and capital appreciation by providing loans to state law compliant cannabis companies. The loans we originate are primarily structured as senior loans secured by real estate, equipment, licenses and/or other assets of the loan parties to the extent permitted by applicable laws and the regulations governing such loan parties. Our targeted borrowers will sometimes be publicly traded on the Canadian Stock Exchange and/or over-the-counter in the United States. Our loans typically have up to a five-year maturity and contain amortization and/or cash flow sweeps. As of March 31, 2021, members of our management team, provided by our Manager, and the members of the Investment Committee of our Manager, who advises on our investments and operations, had sourced loans worth approximately $5.5 billion across the cannabis industry in various states while maintaining a robust pipeline of potentially actionable opportunities. We are externally managed by our Manager, AFC Management, LLC, a Delaware limited liability company, pursuant to the terms of our Management Agreement. We commenced operations on July 31, 2020 and completed our IPO in March 2021. We are incorporated in Maryland and intend to elect and qualify to be taxed as a real estate investment trust (“REIT”), commencing with our taxable year ending December 31, 2020. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all or substantially all of our taxable income to stockholders and maintain our intended qualification as a REIT. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”). 19 Table of Contents We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult. We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three year period. Developments during the First Quarter of 2021: On March 23, 2021, we completed our initial public offering (“IPO”) of 6,250,000 shares of our common stock at a price of $19.00 per share, raising $118.8 million in gross proceeds. The underwriters also exercised their over-allotment option to purchase up to an additional 937,500 shares of our common stock at a price of $19.00 per share, which was completed on May 26, 2021, raising $17.8 million in gross proceeds. The underwriting commissions of $8.3 million and $1.2 million, respectively, are reflected as a reduction of additional paid-in capital on the statement of stockholders’ equity. We incurred approximately $3.1 million of expenses in connection with the IPO, which is reflected as a reduction in additional paid-in capital. The net proceeds to us totaled approximately $123.9 million. We intend 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 our investment strategy and (iii) for working capital and other general corporate purposes. Until appropriate investments can be identified, we 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 our intention to qualify as a REIT and to maintain our exclusion from registration under the Investment Company Act. Updates to Our Loan Portfolio during the First Quarter of 2021 In January 2021, Public Company A and its related loan parties entered into Modification Agreements for each of the Public Company A loans pursuant to which we agreed, subject to certain terms and conditions, to forbear from exercising our rights and remedies regarding defaults by the loan parties resulting from, among other things, the loan parties’ failure to timely pay taxes due, incurrence of mechanic’s liens and tax liens on assets, failure to notify the lenders of such failure to pay and incurrence of liens, failure to make payments due in January 2021 under the Public Company A loans in an aggregate amount of $789,177 owed to all lenders, failure to make payment obligations owed to third party creditors and failure to enter into specified debt restructuring transactions. In exchange for such agreement to forbear, we and the other lenders received certain consideration. Such defaults were unrelated to the COVID-19 pandemic. Under the modification agreement relating to the Public Company A real estate loan (the “RE Modification Agreement”), we and the other lenders agreed to forbear until the earlier of December 21, 2021 and the existence of any new event of default, and the terms of the real estate loan were modified to, among other things, (i) extend the maturity date from June 27, 2021 to December 21, 2021, (ii) modify the interest rate to 14.0%, with 12.0% paid monthly and 2.0% paid at maturity and (iii) add an exit fee of $1.0 million payable upon payment in full of the real estate loan on the maturity date. The RE Modification Agreement also provided for the establishment of an interest reserve for the payment of the last three months of interest on the real estate loan. Additional consideration for the RE Modification Agreement included (w) a modification fee in an amount equal to 3.0% per annum on the outstanding principal of the real estate loan from May 19, 2020 to the effective date of the RE Modification Agreement less certain fees previously paid, (x) the right to acquire common shares of Public Company A in an aggregate amount equal to $1.2 million, (y) the right to acquire warrants to purchase common shares of Public Company A and (z) reimbursement of certain expenses. We sold our portion of the rights to acquire the common shares and warrants received as considerations for the RE Modification Agreement to the administrative agent under the Public Company A real estate loan documents. Under the modification agreement relating to Public Company A equipment loan (the “Equipment Modification Agreement” and, together with the RE Modification Agreement, the “Modification Agreements”), we and the other lenders agreed to forbear until the earlier of February 5, 2024 and the existence of any new event of default, and the terms of the equipment loan were modified to, among other things, (i) amend the payment schedule allowing for reduced monthly payments for three months, with the reduced amounts amortized equally over the remaining monthly payments, (ii) add an exit fee of $500,000 due at the end of the term of the agreement governing the equipment loan, (iii) release a certain guarantor, and (iv) add a new parent company guarantee. Additional consideration for the Equipment Modification Agreement included (x) a modification fee in an amount equal to 6.0% per annum on the outstanding principal of the equipment loan from May 19, 2020 through and including the effective date of the Equipment Modification Agreement less certain fees previously paid, (y) an additional fee of $500,000 payable in equal monthly installments commencing April 5, 2021 and (z) reimbursement of certain expenses. In connection with the Modification Agreements, Public Company A consummated the initial closing of $10.1 million of its non-brokered convertible debenture offering for up to $25.0 million of debenture units. The net proceeds received by Public Company A from the convertible debenture offering are intended to be used for working capital, previous debt obligations and general corporate purposes. The loan parties have since paid the January 2021 payments under the Public Company A loans and there are no delinquent payment obligations owed to us under the agreements governing the Public Company A loans. To the best of our knowledge, Public Company A has repaid in full the other monetary obligations it owed under the Modification Agreement. While Public Company A was able to obtain these modifications and consummate the above-referenced convertible debentures offering, Public Company A and its related loan parties may have difficulty meeting their future obligations. None of our other borrowers are now, or have previously been, in default under their respective loan agreements with us. 20 Table of Contents In March 2021, we entered into a commitment to Private Co. E for a $21 million senior term loan and funded $7 million at closing, including a $2 million interest reserve. The loan has an interest rate of 12% plus LIBOR per annum with a LIBOR floor of 1% and PIK interest of 4%. The loan has a maturity date of April 2026, an unused fee of 3% and OID of 8.7%. Private Co. E is a single-state medical cannabis operator in Ohio. Its operations consist of a cultivation facility currently in construction and an operational dispensary. The real estate collateral for this senior term loan includes both the dispensary and cultivation facility in Ohio. Sale of Assigned Rights In January 2021 we sold our Assigned Rights to acquire and/or assign (i) 578,476 common shares of Public Company A and (ii) warrants to purchase approximately 289,238 common shares of Public Company A at an exercise price based on a specified formula tied to the volume weighted average trading price of such common shares, to the third-party administrative agent under the Public Company A loans for an aggregate purchase price of $103,302. In March 2021, we sold to AFC Warehouse Holding, LLC, an affiliate of the Manager and us, an Assigned Right to acquire and/or assign a warrant to purchase 1,382,000 common shares of Private Co. E at an exercise price of $0.01 per share for an aggregate purchase price of $1,104,614, representing the fair value of such Assigned Right as of the date of such sale, as determined by management and the majority of independent directors (based on various subjective and objective factors, including input from an independent third-party valuation firm). Dividends Declared Per Share In December 2020, we declared a seven-for-one stock split in the form of a stock dividend, pursuant to which six additional shares of our common stock shall be issued for each outstanding share of our common stock, payable on January 25, 2021 to each stockholder of record as of the close of business on January 21, 2021 out of our authorized but unissued shares of common stock. In March 2021, we declared a regular cash dividend of $0.36 per share of our common stock, relating to the first quarter of 2021, paid on March 31, 2021 to stockholders of record as of March 15, 2021. The aggregate amount of the regular cash dividend payment was approximately $2.2 million. The payment of these dividends are not indicative of our ability to pay such dividends in the future. Recent Developments In May 2021, we declared a regular cash dividend of $0.38 per share of our common stock, relating to the second quarter of 2021 which will be paid on June 30, 2021 to stockholders of record as of June 15, 2021. The aggregate amount of the regular cash dividend payment will be approximately $5.1 million. The payment of this dividend is not indicative of our ability to pay such dividends in the future. Subsequent to March 31, 2021, we closed 3 loans, committed to $50 million, funded $42.3 million, and were repaid approximately $12.1 million, for net fundings of approximately $30.2 million. 21 Table of Contents 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. We received an exit fee of $750,000 and a prepayment premium of $750,000 upon repayment of the loan. In April 2021, we entered into a commitment to a $13 million senior term loan and funded $5.25 million at closing, including a $925,000 interest reserve. 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%. The borrower is a medical cannabis operator in Missouri. The real estate collateral for this senior term loan includes the borrower’s cultivation and two dispensary facilities in Missouri. In April 2021, we entered into a commitment to 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%. The borrower is a multi-state medical and recreational cannabis provided with operations in Florida, Texas, Michigan and Pennsylvania. The real estate collateral for this senior term loan includes the borrower’s cultivation facility in Michigan. In April 2021, we entered into a commitment to 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%. The borrower’s parent entity has licenses across nine states, and the real estate collateral for this senior term loan includes the borrower’s retail facility in New Jersey and its cultivation facility under construction in New Jersey. This senior term loan relates to the Syndication Letters, as defined and discussed in our Final Prospectus, whereby the loan was initially contemplated as a $46,150,000 commitment and our Manager had syndicated $22 million to us and $24,150,000 to an affiliate, AFC Investments, LLC, subject to satisfactory diligence and definitive loan documentation. The final negotiated loan commitment was for $22 million and AFCG holds the entire amount, with no portion syndicated AFC Investments, LLC. In May 2021, we amended our senior secured revolving credit agreement, dated August 18, 2020, by and among us, as borrower, and AFC Finance, LLC, an affiliate of ours and our management, as a lender and agent and Gamma Lending Holdco LLC, an entity controlled by Jonathan Kalikow, our Head of Real Estate and one of our directors, and his father , as a lender (as may be amended, supplemented, amended and restated or otherwise modified from time to time, the “Revolving Credit Agreement”). The amendment to the Revolving Credit Agreement increased the loan commitment from $40 million to $50 million, decreased the interest rate from 8% per annum to 6% per annum, removed Gamma Lending Holdco LLC as a party thereto 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 (any such financing, a “Refinancing Credit Facility”) in accordance with the terms in the Revolving Credit Agreement. We did not incur any fees or cost related to the amendment of the Revolving Credit Agreement and the Revolving Credit Agreement does not have any unused fees. As of the date of this quarterly report, we have not drawn on the Revolving Credit Agreement or incurred any fees or interest expense related to the Revolving Credit Agreement. Key Financial Measures and Indicators As a commercial real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Adjusted Distributable Earnings, book value per share and dividends declared per share. Non-GAAP Metrics Distributable Earnings and Adjusted Distributable Earnings In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings and Adjusted Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations. Each of Distributable Earnings and Adjusted Distributable Earnings is a measure that is not prepared in accordance with GAAP. We use these non-GAAP financial measures both to explain our results to stockholders and the investment community and in the internal evaluation and management of our businesses. Our management believes that these non-GAAP financial measures and the information they provide are useful to investors since these measures permit investors and stockholders to assess the overall performance of our business using the same tools that our management uses to evaluate our past performance and prospects for future performance. The determination of Distributable Earnings is substantially similar to the determination of Core Earnings under our Management Agreement, provided that Core Earnings is a component of the calculation of any Incentive Fees earned under the Management Agreement for the applicable time period, and thus Core Earnings is calculated prior to Incentive Fee expense, while the calculation of Distributable Earnings accounts for any Incentive Fees earned for such time period. We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors. We define Adjusted Distributable Earnings, for a specified period, as Distributable Earnings excluding certain non-recurring organizational expenses (such as one-time expenses related to our formation and start-up). We believe providing Distributable Earnings and Adjusted Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, we generally intend to attempt to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our Board. Distributable Earnings is one of many factors considered by our Board in declaring dividends and, while not a direct measure of net taxable income, over time, the measure can be considered a useful indicator of our dividends. 22 Table of Contents Distributable Earnings and Adjusted Distributable Earnings are “non-GAAP financial measures” and should not be considered as substitutes for GAAP net income. We caution readers that our methodology for calculating Distributable Earnings and Adjusted Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings and Adjusted Distributable Earnings may not be comparable to similar measures presented by other REITs. The following table provides a reconciliation of GAAP net income to Distributable Earnings and Adjusted Distributable Earnings: For the three months ended March 31, 2021 Net Income $ 1,400,755 Adjustments to net income Non-Cash Equity compensation expense 1,599,115 Depreciation and amortization - Unrealized (gain), losses or other non-cash items 144,402 Provision for current expected credit losses 66,100 One-time events pursuant to changes in GAAP and certain non-cash charges - Distributable Earnings $ 3,210,372 Adjustments to Distributable Earnings Organizational expense - Adjusted Distributable Earnings $ 3,210,372 Basic weighted average shares of common stock outstanding (in shares) 7,144,670 Adjusted Distributable Earnings per weighted Average Share $ 0.45 Book Value Per Share We believe that book value per share is helpful to stockholders in evaluating our growth as we scale our equity capital base and continue to invest in our target investments. The book value per share of our common stock as of March 31, 2021 and December 31, 2020 was approximately $16.18 and $14.83, respectively, on a post-split basis. Dividends Declared Per Share In December 2020, we declared a seven-for-one stock split in the form of a stock dividend, pursuant to which six additional shares of our common stock were issued for each outstanding share of our common stock, payable on January 25, 2021 to each stockholder of record as of the close of business on January 21, 2021 out of our authorized but unissued shares of common stock. In March 2021, we declared a regular cash dividend of $0.36 per share of our common stock, relating to the first quarter of 2021which was paid on March 31, 2021 to stockholders of record as of March 15, 2021. The aggregate amount of the regular cash dividend payment was approximately $2.2 million. The payment of this dividend is not indicative of our ability to pay such dividends in the future. In May 2021, we declared a regular cash dividend of $0.38 per share of our common stock, relating to the second quarter of 2021 which will be paid on June 30, 2021 to stockholders of record as of June 15, 2021. The aggregate amount of the regular cash dividend payment will be approximately $5.1million. The payment of this dividend is not indicative of our ability to pay such dividends in the future. 23 Table of Contents Factors Impacting our Operating Results The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace. Our net interest income, which includes the accretion and amortization of OID, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Results of Operations We commenced operations on July 31, 2020 and therefore, have no period to compare results for the three months ended March 31, 2021. We are currently in the process of investing the proceeds of our IPO. Results for the initial period of our operations are not indicative of the results we expect when our investment strategy has been fully implemented. Our net income allocable to our common stockholders for the three months ended March 31, 2021 was approximately $1.4 million or $0.20 per common share. Net income of approximately $1.4 million was comprised of approximately $4.7 million in total revenues, operating expenses of approximately $0.6 million, stock-based compensation expense of approximately $1.6 million, management and incentive fees of approximately $0.9 million, change in the provision for current expected credit losses of approximately $0.1 million and a net change in unrealized gain on loans of approximately $0.1 million. Investments in loans held at fair value are recorded on the trade date at cost, which reflects the amount of principal funded net of any original issue discounts. An unrealized gain arises when the value the loan portfolio exceeds its cost and an unrealized loss arises when the value of the loan portfolio is less than its cost. The net change in unrealized gain of approximately $0.1 million for the three months ended March 31, 2021 was mainly driven by the net change in the valuation of the loans. For the three months ended March 31, 2021, we incurred fees payable to our manager for a Base Management Fee of $213,932, which was net of a Base Management Fee Rebate of $237,743. The Incentive Compensation fee payable to our manager for the three months ended March 31, 2021 was $662,730. For the three months ended March 31, 2021, our Manager will be reimbursed for approximately $365,567 for out-of-pocket costs incurred on our behalf. Provision for Current Expected Credit Losses For the three months ended March 31, 2021, the increase to our provision for current expected credit loss was $66,100 and the balance as of March 31, 2021 was $531,497 or 125 basis points of our total loans held at carrying value and loans receivable at carrying value commitment balance of $42,393,791 and was bifurcated between (i) 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 (ii) a liability for unfunded commitments of $283,180. The liability is based on the unfunded portion of loan commitments over the full contractual period over which we are 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. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. Loan Portfolio As of March 31, 2021 and December 31, 2020, the Company’s portfolio included four loans, respectively, 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). 24 Table of Contents 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 to our unaudited financial statements included elsewhere in this quarterly report. (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 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 London Interbank Offered Rate (“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). 25 Table of Contents 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 (3) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount and loan origination costs. (4) Weighted average remaining life is calculated based on the carrying value of the loans as of March 31, 2021 and December 31, 2020. 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 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 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 The below summarizes our total loan portfolio as of March 31, 2021, unless otherwise specified. Loan Names Status Original Funding Date (1) Loan Maturity Total Loan Commitment % of Total AFCG Principal Balance as of 3/31/2021 Cash Interest Rate Paid In Kind ("PIK") Fixed/ Floating Amortization During Term YTM (2) Public Co. A - Real Estate Loan (3) Funded: 7/3/2019 1/26/2023 $ 2,940,000 2.3 % $ 2,945,479 12.0 % 2.0 % Fixed No 20 % Public Co. A - Equipment Loan (3) Funded: 8/5/2019 3/5/2024 4,000,000 3.1 % 3,244,459 12.0 % N/A Fixed Yes 17 % Sub. of Public Co. C (4)(5) Funded: 2/12/2020 2/18/2025 15,000,000 11.7 % 12,046,801 16.8 % 3.0 % Fixed Yes 49. % Private Co. A Funded: 5/8/2020 5/8/2024 34,000,000 26.5 % 34,672,331 13.0 % 4.0 % Fixed Yes 24 % Private Co. B Funded: 9/10/2020 9/1/2023 10,500,000 8.2 % 2,548,159 13.0 % 4.0 % Fixed Yes 26 % Private Co. C Funded: 11/5/2020 12/1/2025 22,000,000 17.1 % 13,895,465 13.0 % 4.0 % Floating Yes 22 % Sub. of Public Co. D (6) Funded: 12/18/2020 12/18/2024 10,000,000 7.8 % 10,000,000 12.9 % N/A Fixed No 14 % Private Co. D Funded: 12/23/2020 1/1/2026 12,000,000 9.3 % 12,045,385 13.0 % 2.0 % Fixed Yes 20 % Private Co. E Funded: 3/30/2021 4/1/2026 21,000,000 14.0 % 7,000,000 13.0 % 4.0 % Floating Yes 23 % Subtotal $ 131,440,000 100.0 % $ 98,398,079 13.4 % 3.0 % 23 % Wtd Average 26 Table of Contents Borrower names have been kept confidential due to confidentiality agreement obligations. (1) All loans originated prior to 7/31/2020 were purchased from an affiliated entity at accreted and/or amortized cost plus accrued interest on 7/31/2020. (2) Yield to Maturity (“YTM”) includes a variety of fees and features that enhance the total yield, which may include Original Issue Discount (“OID”), exit fees, prepayment fees, extension fees, and unused fees. Original Issue Discount or "OID" is recognized as a discount to the funded loan principal and are accreted to income over the term of the loan. Loans originated before 7/31/2020 were acquired by AFC, net of unaccreted OID, which AFC accretes to income over the remaining term of the loan. In some cases, additional OID is recognized from additional purchase discounts attributed to the fair value of equity positions that were separated from the loans prior to our acquisition of such loans. The YTM calculations require management to make estimates and assumptions including but not limited to the timing and amounts of loan draws on delayed draw loans, the timing collectability of exit fees, and the probability and timing of prepayments. Actual results could differ from those estimates. To be conservative, no prepayment penalties or early payoffs were assumed. (3) The yield to maturity or “YTM” for Loans Public Co. A - Real Estate Loan, Public Co. A - Equipment Loan, Private Co. A, Private Co. D, Private Co. E is enhanced by purchase discounts attributed to the fair value of equity warrants that were separated from the loans prior to the AFC's acquisition of the Loans. The purchase discounts accrete to income over the remaining term of the loan. Private Co. E equity value is a preliminary value. (4) Loan includes a $3,000,000 initial funding, of a $15,000,000 loan commitment, which has interest that includes 3% PIK; amortization exceeds PIK. The loan also includes two early advances totaling $9,000,000 against the $15,000,000 total loan commitment, with a 19% interest rate. Statistics shown are for the $15,000,000 loan commitment, except the weighted average interest rate, which is based on the weighted average interest rate currently. (5) YTM for Sub. Of Public Co. C assumes a repayment date of 4/13/2021. Refer to recent developments for information on the repayment of this loan. (6) Loan has an optional extension for 364 days, but we do not have to participate in the extension, so it was not included nor assumed. Illustrative Description of Borrowers: Public Company A Single-state cultivator, producer and full-service brand fulfillment partner that produces a wide range of products in the Nevada market. Public Company A operates a +/- 400,000 square foot greenhouse and 55,000 square foot processing and custom packaging facility, which is capable of producing 140,000 pounds of dry flower per year. Public Company A also operates a +/- 25,000 square foot indoor cultivation facility and commercial kitchen. The real estate collateral of Public Company A includes a greenhouse and processing facility in Nevada. Subsidiary of Public Company C Single-state vertically-integrated cultivator and retailer with operations in Florida, one of the fastest growing markets in the United States. Operations consist of two greenhouse cultivation facilities, eight dispensaries and a car delivery system to extend its retail network. The real estate collateral of Subsidiary of Public Company C includes two cultivation facilities in Florida. Private Company A Multi-state operator with operations in seven states. Private Company A is a vertically integrated cultivator and retailer of both medical and adult-use cannabis that primarily operates under its own brand. Private Company A’s business segments include cultivation, extraction and processing, retail products, and dispensaries. The real estate collateral of Private Company A includes three cultivation facilities across Arizona and Michigan and nine dispensaries across Arizona, Maryland, Massachusetts and Michigan. Private Company B Single-state operator currently constructing an indoor cultivation facility to wholesale product to the medical and adult use markets in Michigan. Private Company B produces high-end cannabis strains and intends to focus on the high-end, top-tier cannabis niche. The management team has over 20 years’ experience in the cannabis industry, including ten years in Michigan. The real estate collateral for Private Company B includes a cultivation facility in Michigan. Private Company C Single-state vertically integrated cultivator and retailer of medical cannabis. Private Company C operates under a Chapter 20 Clinical Registrant license and has partnered to collaborate on multifaceted studies to substantiate safety and positive therapeutic outcomes. Private Company C currently operates a cultivation facility and three dispensaries with the ability to add three additional dispensary locations. The real estate collateral of Private Company C includes a cultivation facility and dispensary in Pennsylvania. Subsidiary of Public Company D Public Company D participates in the medical and adult use market across Canada and in several US states where cannabis has been legalized for therapeutic or adult use. Subsidiary of Public Company D is a premier medical marijuana cultivator, processor and distributor in Pennsylvania. Public Company D also has operators in California and New Jersey. The real estate collateral for Subsidiary of Public Company D includes a cultivation facility in Pennsylvania. Private Company D Multi-state operator who operates five dispensaries, the maximum number of dispensaries allowed by law for any operator, in the State of Ohio and one dispensary in Arkansas. Private Company D historical focus has been dispensary operations and has licenses in other states, where it also operates dispensaries. The real estate collateral for Private Company D includes two dispensaries in Ohio and one in Arkansas. 27 Table of Contents Private Company E Single-state operator who operates one dispensary and is currently constructing an indoor cultivation facility to wholesale product for medical use in Ohio. Private Company E approaches the medical cannabis market from the healthcare and scientific perspectives of its founders and key executives, differentiating it in the industry. Collateral Overview Our loans are secured by various types of assets of our borrowers, including real property and certain personal property, including licenses, equipment, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers. The below represents the real estate collateral securing our loans as of March 31, 2021. The values in the table below were measured at the time of underwriting and based on various sources of data available at such time. Borrower Status Date AFCG Commitment, net of Syndication % of Total AFCG Total Funded Debt Issuance AFCG % of the Total Loan Est. Real Estate Value (1) Real Estate Collateral Coverage Implied Real Estate Collateral for AFCG AFCG Real Estate Collateral Coverage Public Co. A - Real Estate Loan (2) Funded 7/3/2019 $ 2,940,000 2.3 % $ 30,000,000 9.8 % $ 72,000,000 2.40 x $ 7,056,000 2.40 x Public Co. A - Equipment Loan Funded 8/5/2019 $ 4,000,000 3.1 % $ 20,000,000 20.0 % $ 0 0.00 x $ 0 0.00 x Subsidiary of Public Co. C (3) Funded 2/12/2020 $ 15,000,000 11.7 % $ 15,000,000 100.0 % $ 30,723,143 2.05 x $ 30,723,143 2.05 x Private Co. A (4) Funded 5/8/2020 $ 34,000,000 26.5 % $ 42,500,000 80.0 % $ 51,339,031 1.21 x $ 41,071,225 1.21 x Private Co. B (5) Funded 9/10/2020 $ 10,500,000 8.2 % $ 10,500,000 100.0 % $ 19,536,098 1.86 x $ 19,536,098 1.86 x Private Co. C (6) Funded 11/5/2020 $ 22,000,000 17.1 % $ 22,000,000 100.0 % $ 23,733,050 1.08 x $ 23,733,050 1.08 x Subsidiary of Public Co. D (7) Funded 12/18/2020 $ 10,000,000 7.8 % $ 120,000,000 8.3 % $ 26,058,332 0.22 x $ 2,171,528 0.22 x Private Co. D (8) Funded 12/23/2020 $ 12,000,000 9.3 % $ 12,000,000 100.0 % $ 7,538,589 0.63 x $ 7,538,589 0.63 x Private Co. E (9) Funded 3/30/2021 $ 21,000,000 14.0 % $ 21,000,000 100.0 % $ 16,102,000 0.89 x $ 16,102,000 0.77 x $ 131,440,000 100.0 % $ 293,000,000 $ 247,030,242 0.85 x $ 147,931,632 1.13 x (1) Real Estate value based on appraised value, if available. In addition, if loan funds acquisition and/or construction, figure includes expected total basis on future construction and/or acquisitions plus appraised value. (2) Public Company A real estate based on cost basis. (3) Subsidiary of Public Company C real estate based on existing cultivation property and the completed and stabilized value of the to-be-built facility. (4) Private Company A real estate based on appraised value plus future basis. (5) Private Company B real estate based on total cost basis, as completed. (6) Private Company C real estate based on total cost basis, as completed. (7) Subsidiary of Public Company D real estate based on total cost basis. (8) Private Company D real estate based on appraised value. (9) Private Company E real estate based on total cost basis, as completed. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and meet other general business needs. We use significant cash to purchase our target investments, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. Our primary sources of cash generally consist of unused borrowing capacity under our Revolving Credit Agreement, the net proceeds of future debt or equity offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. We expect that our primary sources of financing will be, to the extent available to us, through (a) credit facilities and (b) public and private offerings of our equity and debt securities. In the future, we may utilize other sources of financing to the extent available to us. As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets. We expect the principal amount of the loans we originate to increase and that we will need to raise additional equity and/or debt funds to increase our liquidity in the near future. As of March 31, 2021 and December 31, 2020, all of our cash was unrestricted and totaled approximately $126.8 million and $9.6 million, respectively. 28 Table of Contents The sources of financing for our target investments are described below. Revolving Credit Facility Pursuant to the terms of the Revolving Credit Agreement, our revolving credit facility provides revolving loan commitments of up to $50.0 million and bears interest at a fixed rate of 6% per annum, payable in cash in arrears. As of each of March 31, 2021 and December 31, 2020, we did not have any borrowings outstanding under our Revolving Credit Agreement. Future proceeds under the Revolving Credit Agreement are available to fund loans and bridge capital contributions and for general corporate purposes. We did not incur any fees or costs related to the origination of the Revolving Credit Agreement and we are not required to pay any commitment fees under the Revolving Credit Agreement. Our obligations under the Revolving Credit Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of our existing and future assets. The maturity date of the Revolving Credit Agreement is the earlier of (i) December 31, 2021 and (ii) a Refinancing Credit Facility. The Revolving Credit Agreement provides for certain covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course. To the best of our knowledge, as of March 31, 2021, we were in compliance in all material respects with all covenants contained in our Revolving Credit Agreement. In addition, the Revolving Credit Agreement contains customary events of default. In the case of an event of default, the lenders may terminate the commitments under the secured revolving credit facility and require immediate repayment of all outstanding borrowings. Such termination and acceleration would occur automatically in the event of certain bankruptcy events. Other Credit Facilities, Warehouse Facilities and Repurchase Agreements In the future, we may also use other sources of financing to fund the origination or acquisition of our target investments, including other credit facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized and may involve one or more lenders. We expect that these facilities will typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates. Capital Markets We may seek to raise further equity capital and issue debt securities in order to fund our future investments in loans. Cash Flows The following table sets forth changes in cash, cash equivalents and restricted cash for the three months ended March 31, 2021: For the three months ended March 31, 2021 Net Income $ 1,400,755 Adjustments to reconcile net income to net cash provided by / (used in) operating activities and changes in operating assets and liabilities 970,030 Net cash provided by operating activities 2,370,785 Net cash used in investing activities (6,885,056 ) Net cash provided by financing activities 121,684,423 Change in cash, cash equivalents and restricted cash $ 117,170,152 29 Table of Contents Net Cash Provided by Operating Activities For the three months ended March 31, 2021, net cash provided by operating activities totaled approximately $2.4 million. For the three months ended March 31, 2021, adjustments to net income related to operating activities primarily included net change in unrealized gain on loans at fair value of approximately $0.1 million, stock-based compensation expense of approximately $1.6 million, PIK interest of approximately $0.6 million, accretion of deferred loan original issue discount and other discounts of approximately $0.7 million and change in other assets and liabilities of approximately $0.7 million. Net Cash Used in Investing Activities For the three months ended March 31, 2021, net cash used in investing activities totaled approximately $6.9 million. The net cash used in investing activities was primarily a result of the cash used for the origination and funding of loans held for investment of approximately $7.1 million exceeding the cash received from principal repayment of loans held for investment of approximately $0.1 million and cash received from the sale of Assigned Rights of approximately $0.1 million for the three months ended March 31,2021. Net Cash Provided by Financing Activities For the three months ended March 31, 2021, net cash provided by financing activities totaled approximately $121.7 million and related to proceeds from the issuance of our common stock in our IPO of approximately $123.9 million, less approximately $2.2 million in dividends paid. Contractual Obligations and Other Commitments Our contractual obligations as of March 31, 2021 and December 31, 2020 are as follows: As of March 31, 2021 Less than 1 year 1-3 years 3-5 years More than 5 years Total Unfunded Commitments $ 33,469,664 - - - $ 33,469,664 Total $ 33,469,664 - - - $ 33,469,664 As of December 31, 2020 Less than 1 year 1-3 years 3-5 years More than 5 years Total Unfunded Commitments $ 19,825,119 - - - $ 19,825,119 Total $ 19,825,119 - - - $ 19,825,119 As of March 31, 2021 and December 31, 2020, all unfunded commitments were due in less than one year. We may enter into certain contracts that may contain a variety of indemnification obligations. The maximum potential future payment amount we could be required to pay under these indemnification obligations may be unlimited. Off-Balance Sheet Arrangements Off-balance sheet commitments consist of unfunded commitments on delayed draw loans. Other than as set forth in this quarterly report on Form 10-Q, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities. Leverage Policies We currently do not intend to have leverage of more than one times equity and intend to have substantially less drawn on any revolving credit agreements than available commitments under those agreements. Although we are not required to maintain any particular leverage ratio, we expect to employ prudent amounts of leverage and, when appropriate, to use debt as a means of providing additional funds for the acquisition of loans, to refinance existing debt or for general corporate purposes. Leverage is primarily used to provide capital for forward commitments until additional equity is raised or additional medium- to long-term financing is arranged. This policy is subject to change by management and our Board. 30 Table of Contents Dividends We will elect to be taxed as a REIT for United States federal income tax purposes and, as such, anticipate annually distributing to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid and our net capital gain. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Internal Revenue Code of 1986, as amended (the “Code”)), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year and (iii) any undistributed shortfall from its prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities. Any future determination to actually pay dividends or other distributions will be at the discretion of our Board, subject to compliance with applicable law and any contractual provisions, including under agreements for indebtedness we may incur, that restrict or limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, earnings, capital requirements, the annual distribution requirements under the REIT provisions of the Code, our REIT taxable income and other factors that our Board deems relevant. Under the Maryland General Corporation Law, we generally may only pay a dividend or other distribution if, after giving effect to the distribution, we would be able to pay our indebtedness as it becomes due in the usual course of business and our total assets exceed our total liabilities. Critical Accounting Policies and Estimates As of March 31, 2021, there were no significant changes in or changes in the application of our critical accounting policies or estimates from those presented in the Final Prospectus. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks in the ordinary course of our business. These risks primarily relate to fluctuations in interest rates. Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers. Changes in market yields may change the fair value of certain of our loans. Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, however this is mitigated to the extent our loans bear interest at a floating rate. As of March 31, 2021, a decrease of 50 bps or increase of 50 bps of the market yield would have resulted in a change in unrealized gain / (loss) of approximately $0.3 million and $0.5 million, respectively. As of March 31, 2021, we had two floating-rate loans, representing approximately 21% of our loan portfolio based on aggregate outstanding principal balances, subject to a weighted average LIBOR floor of approximately 1.0% with LIBOR quoted as 0.11%. We estimate that a hypothetical 100 basis points increase in LIBOR would result in an increase in annual interest income of approximately $23,221 and a decrease in LIBOR would not affect our interest income due to the LIBOR floor on our loans. This assumes that the weighted average LIBOR floor of our floating-rate loans remains at approximately 1.0%. Potential Impact of LIBOR Transition The Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate, or LIBOR, has announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. However, for U.S dollar LIBOR, the relevant date has been deferred to at least June 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the LIBOR administrator has indicated that it intends to cease publication of U.S. dollar LIBOR. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. These actions indicate that the continuation of U.S. LIBOR on the current basis cannot and will not be guaranteed after June 30, 2023. Moreover, it is possible that U.S. LIBOR will be discontinued or modified prior to June 30, 2023. As of March 31, 2020, two of our loans, representing approximately 21% of our loan portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to LIBOR. If LIBOR is no longer available, our applicable loan documents generally allow us to choose a new index based upon comparable information. However, if LIBOR is no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined and any changes to benchmark interest rates could increase our financing costs, which could impact our results of operations, cash flows and the market value of our loans. In addition, the elimination of LIBOR and/or changes to another index could result in mismatches with the interest rate of loans that we are financing. Changes in Fair Value of Our Assets We generally hold our target investments as long-term loans; however, we may occasionally classify some of our loans as held for sale. We may carry our loans at fair value or carrying value in our balance sheet. As of March 31, 2021 and December 31, 2020, respectively, four of our loans held for investment were carried at fair value within loans held at fair value in our balance sheets, with changes in fair value recorded through earnings. We evaluate our loans on a quarterly basis and fair value is determined by our Board through its independent Audit and Valuation Committee. We use an independent third-party valuation firm to provide input in the valuation of all of our unquoted investments, which we consider along with other various subjective and objective factors in making our evaluations. Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers. 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, we consider the current contractual interest rate, the maturity and other terms of the loan relative to risk of the borrower 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 borrower. As loans held by us are substantially illiquid with no active transaction market, we depend 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. Changes in market yields may change the fair value of certain of our loans. 31 Table of Contents 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 our loans may fluctuate from period to period. Additionally, the fair value of our 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 we 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 we were required to liquidate our investment in a loan in a forced or liquidation sale, we could realize significantly less than the value at which we had recorded such loan investment. Changes in Market Interest Rates and Effect on Net Interest Income Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations. Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally will be based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase (a) while the yields earned on our leveraged fixed-rate loan assets will remain static, and (b) at a faster pace than the yields earned on our leveraged floating-rate loan assets, which could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations. Interest Rate Cap Risk We originate and may in the future acquire floating-rate assets. These are assets in which the loans may be subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the asset’s interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements may not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our floating-rate assets would effectively be limited. In addition, floating-rate assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of cash income from such assets in an amount that is less than the amount that we would need to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations. In July 2017, the Financial Conduct Authority announced its intention to phase out LIBOR by the end of 2021 and the IBA recently announced that it will be consulting on plans to extend the cessation date for certain tenors of U.S.-dollar LIBOR until 2023. It is not possible to predict the effect of any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phase out. If LIBOR is no longer available, our applicable loan documents generally allow us to choose a new index based upon comparable information Any of these proposals or consequences could have a material adverse effect on our interest expenses. Interest Rate Mismatch Risk We may fund a portion of our origination of loans, or of loans that we may in the future acquire, with borrowings that are based on LIBOR, while the interest rates on these assets may be fixed or indexed to LIBOR or another index rate. Accordingly, any increase in LIBOR will generally result in an increase in our borrowing costs that would not be matched by fixed-rate interest earnings and may not be matched by a corresponding increase in floating-rate interest earnings. Any such interest rate mismatch could adversely affect our profitability, which may negatively impact distributions to our stockholders. Our analysis of risks is based on our Manager’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions by our Manager and our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results. 32 Table of Contents Market Conditions We believe that favorable market conditions, including an imbalance in supply and demand of credit to cannabis operating companies, have provided attractive opportunities for non-bank lenders, such as us, to finance commercial real estate loans and other loans that exhibit strong fundamentals but also require more customized financing structures and loan products than regulated financial institutions can presently provide. Additionally, to the extent that additional states legalize cannabis, our addressable market will increase. We intend to continue our track record of capitalizing on these opportunities and growing the size of our portfolio. Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable. Our Manager seeks to mitigate this risk by seeking to originate loans, and may in the future acquire loans, of higher quality at appropriate prices given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated and acquired loans. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results. In June 2016, the FASB issued ASU No. 2016-13, which replaced the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects 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”). We adopted ASU No. 2016-13 as of July 31, 2020, the date of our commencement of operations. Subsequent period increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in our statement of operations. The CECL Reserve related to outstanding balances on loans held for investment required under ASU No. 2016-13 is a valuation account that is deducted from the amortized cost basis of our loans held at carrying value and loans receivable at carrying value in our balance sheet. The CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within accounts payable and other liabilities in our balance sheet. Refer to footnote 6 to our unaudited financial statements titled “Current Expected Credit Losses” for more information on CECL. Real Estate Risk Commercial real estate loans are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. Risk Management To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing the financing, interest rate, credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio of loans. Generally, with the guidance and experience of our Manager: • we manage our portfolio through an interactive process with our Manager and service our self-originated loans through our Manager’s servicer; • we invest in a mix of floating-rate and fixed-rate loans to mitigate the interest rate risk associated with the financing of our portfolio; • we actively employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations, including utilizing our Manager’s risk management tools such as software and services licensed or purchased from third-parties and proprietary analytical methods developed by our Manager; and • we seek to manage credit risk through our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate. In addition, with respect to any particular target investment, prior to origination or acquisition our Manager’s investment team evaluates, among other things, relative valuation, comparable company analysis, supply and demand trends, shape-of-yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral. 33 Table of Contents