Advanced Flower Capital Inc. 10-Q

Item 1. Financial Statements ADVANCED FLOWER CAPITAL INC. CONSOLIDATED BALANCE SHEETS As of September 30, 2024 December 31, 2023 (unaudited) Assets Loans held for investment at fair value (cost of $ 50,950,868 and $ 71,644,003 at September 30, 2024 and December 31, 2023, respectively, net) $ 31,372,174 $ 61,720,705 Loans held for investment at carrying value, net 234,257,042 301,265,398 Loan receivable held at carrying value, net 2,040,058 2,040,058 Current expected credit loss reserve ( 25,111,209 ) ( 26,309,450 ) Loans held for investment at carrying value and loan receivable held at carrying value, net of current expected credit loss reserve 211,185,891 276,996,006 Cash and cash equivalents 122,163,732 90,381,831 Accounts receivable — 1,837,450 Interest receivable 1,473,644 3,715,995 Prepaid expenses and other assets 422,967 688,446 Assets of discontinued operations — 31,244,622 Total assets $ 366,618,408 $ 466,585,055 Liabilities Accrued interest $ 2,170,417 $ 894,000 Due to affiliate 20,587 16,437 Dividends payable 7,221,076 9,819,695 Current expected credit loss reserve 164,664 115,473 Accrued management and incentive fees 981,785 3,471,726 Accrued direct administrative expenses 878,407 1,486,256 Accounts payable and other liabilities 658,224 704,685 Senior notes payable, net 88,461,936 88,014,558 Line of credit payable, net 60,000,000 42,000,000 Liabilities of discontinued operations — 10,000 Total liabilities 160,557,096 146,532,830 Commitments and contingencies (Note 10) Shareholders’ equity Preferred stock, par value $ 0.01 per share, 10,000 shares authorized at September 30, 2024 and December 31, 2023 and 0 and 125 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively — 1 Common stock, par value $ 0.01 per share, 50,000,000 shares authorized at September 30, 2024 and December 31, 2023 and 21,882,047 and 20,457,697 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively 218,821 204,577 Additional paid-in capital 248,194,045 349,805,890 Accumulated (deficit) earnings ( 42,351,554 ) ( 29,958,243 ) Total shareholders’ equity 206,061,312 320,052,225 Total liabilities and shareholders’ equity $ 366,618,408 $ 466,585,055 See accompanying notes to the consolidated financial statements 1 Index ADVANCED FLOWER CAPITAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Revenue Interest income $ 10,455,021 $ 16,798,426 $ 42,767,720 $ 52,974,100 Interest expense ( 1,572,705 ) ( 1,532,928 ) ( 4,749,143 ) ( 4,776,863 ) Net interest income 8,882,316 15,265,498 38,018,577 48,197,237 Expenses Management and incentive fees, net (less rebate of $ 180,552 , $ 405,276 , 769,545 and 1,311,501 , respectively) 981,785 3,574,867 8,429,575 10,592,579 General and administrative expenses 857,304 986,772 2,941,942 4,068,780 Stock-based compensation 218,643 294,014 1,131,208 705,361 Professional fees 417,466 295,502 1,231,906 1,135,977 Total expenses 2,475,198 5,151,155 13,734,631 16,502,697 (Increase) decrease in provision for current expected credit losses ( 181,370 ) ( 1,053,398 ) 1,149,050 ( 149,637 ) Realized gains (losses) on investments, net — ( 1,213,416 ) ( 93,338 ) ( 1,239,800 ) Gain (loss) on extinguishment of debt — — — 1,986,381 Change in unrealized gains (losses) on loans at fair value, net ( 4,621,702 ) 787,799 ( 9,655,396 ) ( 1,152,810 ) Net income from continuing operations before income taxes 1,604,046 8,635,328 15,684,262 31,138,674 Income tax expense 386,256 663,220 830,591 1,005,959 Net income from continuing operations 1,217,790 7,972,108 14,853,671 30,132,715 Net income from discontinued operations, net of tax 165,944 7,767 2,922,068 7,767 Net income $ 1,383,734 $ 7,979,875 $ 17,775,739 $ 30,140,482 Basic earnings per common share: Continuing operations $ 0.05 $ 0.39 $ 0.71 $ 1.47 Discontinued operations $ 0.01 $ 0.00 $ 0.14 $ 0.00 Total basic earnings per common share $ 0.06 $ 0.39 $ 0.85 $ 1.47 Diluted earnings per common share: Continuing operations $ 0.05 $ 0.39 $ 0.71 $ 1.47 Discontinued operations $ 0.01 $ 0.00 $ 0.14 $ 0.00 Total diluted earnings per common share $ 0.06 $ 0.39 $ 0.85 $ 1.47 Weighted average number of common shares outstanding: Basic weighted average shares of common stock outstanding 20,684,149 20,324,125 20,493,375 20,315,162 Diluted weighted average shares of common stock outstanding 20,785,848 20,342,880 20,543,644 20,390,385 See accompanying notes to the consolidated financial statements 2 Index ADVANCED FLOWER CAPITAL INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) Three months ended September 30, 2024 Preferred Stock Common Stock Additional Paid-In Capital Accumulated Earnings (Deficit) Total Shareholders’ Equity Shares Amount Balance at June 30, 2024 $ — 20,667,094 $ 206,671 $ 350,591,362 $ ( 36,514,212 ) $ 314,283,821 Issuance of common stock, net of offering costs — 1,214,953 12,150 12,149,217 — 12,161,367 Stock-based compensation — — — 218,643 — 218,643 Dividends declared on common shares ($ 0.33 per share) — — — — ( 7,221,076 ) ( 7,221,076 ) Distributions in connection with the Spin-Off — — — ( 114,765,177 ) — ( 114,765,177 ) Net income — — — — 1,383,734 1,383,734 Balance at September 30, 2024 $ — 21,882,047 $ 218,821 $ 248,194,045 $ ( 42,351,554 ) $ 206,061,312 Three months ended September 30, 2023 Preferred Stock Common Stock Additional Paid-In Capital Accumulated Earnings (Deficit) Total Shareholders’ Equity Shares Amount Balance at June 30, 2023 $ 1 20,457,697 $ 204,577 $ 349,216,404 $ ( 9,102,745 ) $ 340,318,237 Stock-based compensation — — — 294,014 — 294,014 Dividends declared on common shares ($ 0.48 per share) — — — — ( 9,819,695 ) ( 9,819,695 ) Net income — — — — 7,979,875 7,979,875 Balance at September 30, 2023 $ 1 20,457,697 $ 204,577 $ 349,510,418 $ ( 10,942,565 ) $ 338,772,431 See accompanying notes to the consolidated financial statements 3 Index ADVANCED FLOWER CAPITAL INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) Nine months ended September 30, 2024 Preferred Stock Common Stock Additional Paid-In- Capital Accumulated Earnings (Deficit) Total Shareholders’ Equity Shares Amount Balance at December 31, 2023 $ 1 20,457,697 $ 204,577 $ 349,805,890 $ ( 29,958,243 ) $ 320,052,225 Issuance of common stock, net of offering costs — 1,214,953 12,150 12,149,217 — 12,161,367 Stock-based compensation — 209,397 2,094 1,129,114 — 1,131,208 Dividends declared on common shares ($ 1.44 per share) — — — — ( 30,161,550 ) ( 30,161,550 ) Dividends declared on preferred shares ($ 60 per share) — — — — ( 7,500 ) ( 7,500 ) Redemption of preferred shares ( 1 ) — — ( 124,999 ) — ( 125,000 ) Distributions in connection with the Spin-Off — — — ( 114,765,177 ) — ( 114,765,177 ) Net income — — — — 17,775,739 17,775,739 Balance at September 30, 2024 $ — 21,882,047 $ 218,821 $ 248,194,045 $ ( 42,351,554 ) $ 206,061,312 Nine months ended September 30, 2023 Preferred Stock Common Stock Additional Paid-In- Capital Accumulated Earnings (Deficit) Total Shareholders’ Equity Shares Amount Balance at December 31, 2022 $ 1 20,364,000 $ 203,640 $ 348,817,914 $ ( 9,962,186 ) $ 339,059,369 Stock-based compensation — 93,697 937 692,504 — 693,441 Dividends declared on common shares ($ 1.52 per share) — — — — ( 31,113,361 ) ( 31,113,361 ) Dividends declared on preferred shares ($ 60 per share) — — — — ( 7,500 ) ( 7,500 ) Net income — — — — 30,140,482 30,140,482 Balance at September 30, 2023 $ 1 20,457,697 $ 204,577 $ 349,510,418 $ ( 10,942,565 ) $ 338,772,431 See accompanying notes to the consolidated financial statements 4 Index ADVANCED FLOWER CAPITAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine months ended September 30, 2024 2023 Operating activities: Net income $ 17,775,739 $ 30,140,482 Net income from discontinued operations, net of tax ( 2,922,068 ) ( 7,767 ) Net income from continuing operations 14,853,671 30,132,715 Adjustments to reconcile net income to net cash provided by (used in) operating activities: (Decrease) increase in provision for current expected credit losses ( 1,149,050 ) 149,637 Realized (gains) losses on investments, net 93,338 1,239,800 (Gain) loss on extinguishment of debt — ( 1,986,381 ) Change in unrealized (gains) losses on loans at fair value, net 9,655,396 1,152,810 Accretion of deferred loan original issue discount and other discounts ( 7,097,310 ) ( 4,435,186 ) Amortization of deferred financing costs - revolving credit facility 290,211 212,833 Amortization of deferred financing costs - senior notes 473,628 482,698 Stock-based compensation 1,131,208 693,441 Payment-in-kind interest ( 2,798,814 ) ( 9,404,473 ) Changes in operating assets and liabilities: Interest receivable 2,242,351 673,473 Prepaid expenses and other assets 233,257 ( 79,474 ) Interest reserve — ( 4,149,994 ) Accrued interest 1,276,417 1,130,083 Accrued management and incentive fees, net ( 2,489,941 ) ( 316,867 ) Accrued direct administrative expenses ( 607,849 ) ( 499,024 ) Accounts payable and other liabilities ( 42,311 ) ( 13,504 ) Net cash provided by (used in) operating activities of continuing operations 16,064,202 14,982,587 Net cash provided by (used in) operating activities of discontinued operations 3,271,445 7,767 Net cash provided by (used in) operating activities 19,335,647 14,990,354 Cash flows from investing activities: Issuance of and fundings on loans ( 50,022,243 ) ( 51,757,225 ) Proceeds from sales of loans 96,061,029 21,312,827 Due from affiliate — ( 1,000,000 ) Principal repayment of loans 53,259,314 49,953,251 Net cash provided by (used in) investing activities of continuing operations 99,298,100 18,508,853 Net cash (used in) provided by investing activities of discontinued operations ( 47,211,339 ) — Net cash provided by (used in) investing activities 52,086,761 18,508,853 Cash flows from financing activities: Proceeds from sale of common stock 12,335,674 — Payment of offering costs - equity offering ( 174,307 ) — Payment of financing costs ( 240,612 ) ( 225,000 ) Redemption of preferred shares ( 125,000 ) — Cash distribution in connection with the Spin-Off of SUNS ( 67,913,215 ) — Borrowings on revolving credit facility 185,000,000 21,000,000 Repayment of revolving credit facility ( 167,000,000 ) ( 81,000,000 ) Dividends paid to common and preferred shareholders ( 32,767,669 ) ( 32,705,006 ) Repayment of senior notes — ( 7,737,500 ) Net cash (used in) provided by financing activities of continuing operations ( 70,885,129 ) ( 100,667,506 ) Net cash provided by (used in) financing activities of discontinued operations — — Net cash provided by (used in) financing activities ( 70,885,129 ) ( 100,667,506 ) Net increase (decrease) in cash and cash equivalents 537,279 ( 67,168,299 ) Cash and cash equivalents, beginning of period 121,626,453 140,372,841 Cash and cash equivalents, end of period $ 122,163,732 $ 73,204,542 5 Index Supplemental disclosure of non-cash activity: Interest reserve withheld from funding of loans $ — $ 1,500,000 OID withheld from funding of loans $ 5,411,310 $ 7,398,475 Dividends declared and not yet paid $ 7,221,076 $ 9,819,695 Non-cash funding of new loan $ 14,672,640 $ — Non-cash net assets distribution in connection with the spin-off of SUNS $ 46,851,962 $ — Supplemental information: Interest paid during the period $ 2,708,888 $ 2,951,250 Income taxes paid during the period $ 939,046 $ 1,078,959 See accompanying notes to the consolidated financial statements 6 Index ADVANCED FLOWER CAPITAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of September 30, 2024 (unaudited) 1. ORGANIZATION Advanced Flower Capital Inc. (formerly known as AFC Gamma, Inc.) (the “Company” or “AFC”) is an institutional lender that was founded in July 2020 by a veteran team of investment profe ssionals. The Company primarily originates, structures, underwrites, invests in and manages senior secured mortgage loans and other types of loans and debt securities, with a specialization in loans to cannabis industry operators in states that have legalized medical and/or adult-use cannabis. 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, a Delaware limited liability company (the Company’s “Manager”), pursuant to the terms of the Amended and Restated Management Agreement, dated January 14, 2021, between the parties (as amended from time to time, the “Management Agreement”). The Company’s wholly-owned subsidiary, AFCG TRS1, LLC, a Delaware limited liability company (“TRS1”), operates as a taxable real estate investment trust subsidiary (a “TRS”). TRS1 began operating in July 2021, and the financial statements of TRS1 are consolidated within the Company’s consolidated financial statements. On July 9, 2024, the Company completed the spin-off (the “Spin-Off”) of the Company’s wholly-owned subsidiary, Sunrise Realty Trust, Inc. (“SUNS”), which held the Company’s commercial real estate (“CRE”) loan portfolio, into an independent, publicly traded REIT, SUNS. In connection with the Spin-Off, the operating results of the SUNS business through the date of the Spin-Off are reported in net income from discontinued operations, net of tax in the consolidated statements of operations for all periods presented. The related assets and liabilities are reported as assets and liabilities of discontinued operations on the consolidated balance sheets. Cash flows from the Company’s discontinued operations are presented as such in the consolidated statements of cash flows for all periods presented. Unless otherwise noted, all amounts and disclosures included in the notes to consolidated financial statements reflect only the Company’s continuing operations. For additional information, see Note 17, “Discontinued Operations.” The Company operates in one operating segment. The Company is solely focused on senior secured loans to cannabis industry operators in states where medical and/or adult-use cannabis is legal. These loans are generally held for investment and are typically secured, directly or indirectly, by real estate, equipment, cash flows and the value associated with licenses (where applicable) and/or other assets of borrowers depending on the applicable laws and regulations governing such borrowers. The Company has elected 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”). 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 shareholders and complies with various other requirements as a REIT. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and results of operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC. Refer to Note 2 to the Company’s Annual Report on Form 10-K for a description of the Company’s significant accounting policies. The Company has included disclosures below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly, (ii) have material changes or (iii) the Company views as critical as of the date of this report. 7 Index Basis of Presentation The accompanying unaudited interim consolidated financial statements and related notes have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the rules and regulations of the SEC applicable to interim financial information and include the accounts of the Company, and its wholly-owned subsidiary. The unaudited interim consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition as of and for the periods presented. All intercompany balances and transactions have been eliminated in consolidation. The current period’s results of operations will not necessarily be indicative of results that ultimately may be realized for the year ending December 31, 2024. Discontinued Operations A discontinued operation may include a component or a group of components of the Company’s operations. A disposal of a component or a group of components is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results when the following occurs: (1) a component (or group of components) meets the criteria to be classified as held for sale; (2) the component or group of components is disposed of by sale; or (3) the component or group of components is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spin-off). For any component classified as held for sale or disposed of by sale or other than by sale, qualifying for presentation as a discontinued operation, the Company reports the results of operations of the discontinued operations (including any gain or loss recognized on the disposal or loss recognized on classification as held for sale of a discontinued operation), less applicable income taxes (benefit), as a separate component in the consolidated statements of operations for current and all prior periods presented. The Company also reports assets and liabilities associated with discontinued operations as separate line items on the consolidated balance sheets for prior periods. The Company determined that the Spin-Off of SUNS in July 2024 met the criteria for classification as a discontinued operation in accordance with ASC Subtopic 205-20, Discontinued Operations (“ASC 205-20”). See Note 17 for further details. Use of Estimates in the Preparation of Financial Statements The preparation of consolidated 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 loans held for investment at fair value and current expected credit losses (“CECL”). Recent Accounting Pronouncements The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). Section 107 of the JOBS Act 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. The Company has elected to take advantage of this extended transition period. As a result, the Company 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 the Company’s financials to those of other public companies more difficult. In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023 - 07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior period s presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the impact of the update on the Company’s future consolidated financial statements. 8 Index In December 2023, the FASB issued ASU 2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 improves the transparency of income tax disclosures related to rate reconciliation and income taxes. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied prospectively, however retrospective application is permitted. The Company is currently evaluating the impact of the update on the Company’s future consolidated financial statements. 3. LOANS HELD FOR INVESTMENT AT FAIR VALUE As of September 30, 2024 and December 31, 2023, the Company’s portfolio included one and two loans held at fair value, respectively. The aggregate originated commitment under these loans was approximately $ 85.3 million and $ 94.2 million, respectively, and outstanding principal was approximately $ 53.8 million and $ 71.9 million as of September 30, 2024 and December 31, 2023, respectively. For the nine months ended September 30, 2024, the Company funded approximately $ 4.6 million in new loans and additional principal and received approximately $ 4.5 million of principal repayments of loans held at fair value and sold $ 19.3 million of the Company’s investment in Private Company B. As of September 30, 2024 and December 31, 2023, none of the Company’s loans held at fair value had floating interest rates. The following tables summarize the Company’s loans held at fair value as of September 30, 2024 and December 31, 2023: As of September 30, 2024 Fair Value (1) Carrying Value (2) Outstanding Principal (2) Weighted Average Remaining Life (Years) (3) Senior term loan $ 31,372,174 $ 50,950,868 $ 53,818,300 0.0 Total loan held at fair value $ 31,372,174 $ 50,950,868 $ 53,818,300 0.0 As of December 31, 2023 Fair Value (1) Carrying Value (2) Outstanding Principal (2) Weighted Average Remaining Life (Years) (4) Senior term loans $ 61,720,705 $ 71,644,003 $ 71,883,402 0.4 Total loans held at fair value $ 61,720,705 $ 71,644,003 $ 71,883,402 0.4 (1) Refer to Note 14. (2) 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. (3) As of September 30, 2024, the maturity date passed on the credit facility with Private Company A without repayment. (4) Weighted average remaining life is calculated based on the fair value of the loans as of December 31, 2023. As of December 31, 2023, the weighted average remaining life only reflects the remaining life of the Private Company A Credit Facility. 9 Index The following table presents changes in loans held at fair value as of and for the nine months ended September 30, 2024: Principal Original Issue Discount Unrealized Gains (Losses) Fair Value Total loans held at fair value at December 31, 2023 $ 71,883,402 $ ( 239,399 ) $ ( 9,923,298 ) $ 61,720,705 Change in unrealized gains (losses) on loans at fair value, net — — ( 9,655,396 ) ( 9,655,396 ) New fundings 4,594,027 ( 2,756,417 ) — 1,837,610 Accretion of original issue discount — 128,384 — 128,384 Loan repayments ( 4,509,069 ) — — ( 4,509,069 ) Sale of loans ( 19,284,846 ) — — ( 19,284,846 ) PIK interest 1,134,786 — — 1,134,786 Total loans held at fair value at September 30, 2024 $ 53,818,300 $ ( 2,867,432 ) $ ( 19,578,694 ) $ 31,372,174 As of September 30, 2024 , the Company ha d one l oan held at fair value on nonaccrual status. Effective March 1, 2024, the Company placed Private Company A on nonaccrual status with an outstanding principal amount of approximately $ 53.8 million and an unrealized loss of approximately $( 19.6 ) million as of September 30, 2024 . A more detailed listing of the Company’s loan held at fair value portfolio based on information available as of September 30, 2024 is as follows: Collateral Location Collateral Type (1) Fair Value (2) Carrying Value (3) Outstanding Principal (3) Interest Rate Maturity Date (4) Payment Terms (5) Private Co. A AZ, GA, MA, NM C, D $ 31,372,174 $ 50,950,868 $ 53,818,300 15.5 % (6) 5/8/2024 I/O Total loan held at fair value $ 31,372,174 $ 50,950,868 $ 53,818,300 (1) C = Cultivation Facilities, D = Dispensary/Retail Facilities. (2) Refer to Note 14. (3) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of OID and loan origination costs. (4) 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. (5) I/O = interest-only, P/I = principal and interest. P/I loans may include interest-only periods for a portion of the loan term. (6) Base weighted average interest rate of 13.0 % and payment-in-kind (“PIK”) weighted average interest rate of 2.5 %. In October 2023, AFC Agent LLC (“AFC Agent”) delivered a notice of default to Private Company A based on certain financial and other covenant defaults and began charging additional default interest of 5.0 %, beginning as of July 1, 2023, in accordance with the terms of the Private Company A Credit Facility. Effective March 1, 2024, the Company placed the borrower on nonaccrual status. The maturity date passed on the credit facility to Private Company A without repayment. In November 2023, Private Company A was placed into receivership to maintain the borrower’s operations and maximize value for the benefit of its creditors. The court-appointed receiver is determining the amount of principal payments the borrower is able to repay either from operations or from sale of collateral assets on a monthly basis. 10 Index 4. LOANS HELD FOR INVESTMENT AT CARRYING VALUE As of September 30, 2024 and December 31, 2023, t he Company’s portfolio included eleven and nine loans held at carrying value, respectively. A s of September 30, 2024 and December 31, 2023, t he aggregate originated commitment under these loans was approximately $ 260.2 million and $ 333.1 million, resp ectively, and outstanding principal was approximately $ 242.8 million and $ 314.4 million, respectively. During the nine months ended September 30, 2024, the Company funded approximately $ 65.5 million of new loans and additional principal, had approximately $ 48.8 million of principal repayments of loans held at carrying value and sold $ 90.0 million in the aggregate of the Company’s investments in Subsidiary of Public Company H and Subsidiary of Public Company M. As of September 30, 2024 and December 31, 2023, approximately 47 % and 84 %, respectively, of the Company’s loans held at carrying value had floating interest rates. As of September 30, 2024, t hese floating benchmark rates included one-month Secured Overnight Financing Rate (“SOFR”) subject to a weighted average floor of 3.6 % and quoted at 4.8 %. The following tables summarize the Company’s loans held at carrying value as of September 30, 2024 and December 31, 2023: As of September 30, 2024 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior term loans $ 242,802,878 $ ( 8,545,836 ) $ 234,257,042 2.0 Total loans held at carrying value $ 242,802,878 $ ( 8,545,836 ) $ 234,257,042 2.0 As of December 31, 2023 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior term loans $ 314,376,929 $ ( 13,111,531 ) $ 301,265,398 2.2 Total loans held at carrying value $ 314,376,929 $ ( 13,111,531 ) $ 301,265,398 2.2 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted OID and loan origination costs. (2) Weighted average remaining life is calculated based on the carrying value of the loans as of September 30, 2024 and December 31, 2023. 11 Index The following table presents changes in loans held at carrying value as of and for the nine months ended September 30, 2024: Principal Original Issue Discount Carrying Value Total loans held at carrying value at December 31, 2023 $ 314,376,929 $ ( 13,111,531 ) $ 301,265,398 New fundings 65,512,166 ( 2,654,893 ) 62,857,273 Accretion of original issue discount — 6,968,926 6,968,926 Loan repayments ( 45,237,624 ) — ( 45,237,624 ) Sale of loans ( 90,000,000 ) 251,662 ( 89,748,338 ) PIK interest 1,664,028 — 1,664,028 Loan amortization payments ( 3,512,621 ) — ( 3,512,621 ) Total loans held at carrying value at September 30, 2024 $ 242,802,878 $ ( 8,545,836 ) $ 234,257,042 As of September 30, 2024 , the Company had two loans held at carrying value on nonaccrual status. The Company placed Subsidiary of Private Company G on nonaccrual status effective December 1, 2023, with an outstanding principal amount of approximately $ 79.2 million and an amortized cost of approximately $ 77.8 million. Subsidiary of Private Company G was previously placed on nonaccrual status during various periods in 2023. The Company will recognize income related to loan activity only upon receipt of cash. During the nine months ended September 30, 2024, the Company recognized interest income of approximately $ 5.2 million related to this loan, which was received in cash. The Company placed Private Company K on nonaccrual status effective December 1, 2023, with an outstanding principal amount of approximately $ 12.2 million and an amortized cost of approximately $ 11.5 million. The Company will recognize income related to loan activity only upon receipt of cash. During the nine months ended September 30, 2024, the Company received a $ 1.3 million payment applied to the outstanding principal balance and recognized interest income of approximately $ 0.5 million related to this loan received in cash. 12 Index A more detailed listing of the Company’s loans held at carrying value portfolio based on information available as of September 30, 2024 is as follows: Collateral Location Collateral Type (1) Outstanding Principal (2) Original Issue Discount Carrying Value (2) Interest Rate Maturity Date (3) Payment Terms (4) Sub. of Private Co. G NJ, PA C, D $ 79,215,888 $ ( 1,444,847 ) $ 77,771,041 12.5 % (5) 5/1/2026 I/O Private Co. K MA C, D 12,195,762 ( 682,619 ) 11,513,143 18.8 % (6) 5/3/2027 P/I Private Co. J MO C, D 23,258,785 ( 180,396 ) 23,078,389 18.8 % (7) 9/1/2025 P/I Private Co. L OH C, D 35,597,486 ( 716,302 ) 34,881,184 13.4 % (8) 5/1/2026 P/I Sub. of Public Co. M IL, MA, MD, MI, NJ, OH, PA C, D 2,797,527 ( 189,835 ) 2,607,692 9.5 % (9) 8/27/2025 I/O Private Co. M AZ D 30,499,498 ( 2,926,290 ) 27,573,208 9.0 % (10) 7/31/2026 P/I Private Co. N - Real Estate FL C, D 18,717,068 ( 682,818 ) 18,034,250 12.8 % (11) 4/1/2028 P/I Private Co. N - Non-Real Estate FL C, D 17,200,000 ( 602,000 ) 16,598,000 12.8 % (12) 4/1/2028 P/I Private Co. O AZ, MD, MO, NJ, NV, NY, OH, OR, Canada C 2,728,647 ( 275,000 ) 2,453,647 13.5 % (13) 6/1/2028 P/I Private Co. P MI C, D 15,383,749 ( 414,896 ) 14,968,853 13.0 % (14) 7/1/2027 P/I Private Co. Q GA C, D 5,208,468 ( 430,833 ) 4,777,635 13.8 % (15) 9/1/2028 P/I Total loans held at carrying value $ 242,802,878 $ ( 8,545,836 ) $ 234,257,042 (1) For cannabis operators, C = Cultivation Facilities, D = Dispensary/Retail Facilities. (2) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted OID and loan origination costs. (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 12.5 %. Effective March 2024, pursuant to the forbearance agreement with Subsidiary of Private Company G, Subsidiary of Private Company G transitioned from a floating interest rate tied to U.S. prime rate to a fixed interest rate. Effective December 1, 2023, the Company placed the borrower on nonaccrual status. (6) Base interest rate of 12.0 % plus SOFR (SOFR floor of 1.0 %) and PIK interest rate of 2.0 %. As amended by the forbearance agreement entered into in March 2024, between 20.0 % and 80.0 % of the monthly cash interest is paid in kind from December 1, 2023 to June 1, 2024. Effective December 1, 2023, the Company placed the borrower on nonaccrual status. (7) Base interest rate of 12.0 % plus SOFR (SOFR floor of 1.0 %) and PIK interest rate of 2.0 %. (8) Base interest rate of 8.4 % plus SOFR (SOFR floor of 5.0 %). (9) Base interest rate of 9.5 %. (10) Base interest rate of 9.0 %. Quarterly cash interest is paid in kind from closing to February 1, 2024 and then payable in cash thereafter. (11) Base interest rate of 8.0 % plus SOFR (SOFR floor of 4.5 %). (12) Base interest rate of 8.0 % plus SOFR (SOFR floor of 4.5 %). (13) Base interest rate of 8.5 % plus SOFR (SOFR floor of 5.0 %). (14) Base interest rate of 13.0 %. Pursuant to the first amendment to the credit agreement entered into in August 2024, interest was paid in kind from July 1, 2024 to August 31, 2024 and then payable in cash thereafter. (15) Base interest rate of 8.75 % plus SOFR (SOFR floor of 5.0 %). 13 Index 5. LOAN RECEIVABLE HELD AT CARRYING VALUE As of September 30, 2024 and December 31, 2023, the Company’s portfolio included one loan receivable held at carrying value. The originated commitment under this loan was $ 4.0 million and outstanding principal was approximately $ 2.0 million as of September 30, 2024 and December 31, 2023, respectively. The following table presents changes in loans receivable as of and for the nine months ended September 30, 2024: Principal Original Issue Discount Carrying Value Total loan receivable held at carrying value at December 31, 2023 $ 2,041,744 $ ( 1,686 ) $ 2,040,058 Loan repayments — — — Total loan receivable held at carrying value at September 30, 2024 $ 2,041,744 $ ( 1,686 ) $ 2,040,058 As of September 30, 2024 , the Company had one loan receivable held at carrying value on nonaccrual status with an outstanding principal amount of approximately $ 2.0 million and amortized cost of approximately $ 2.0 million. 6. CURRENT EXPECTED CREDIT LOSSES The Company estimates its current expected credit losses 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 the “CECL Reserve” using a model that considers multiple datapoints and methodologies that may include 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 may include the fixed charge coverage ratio, loan-to-value ratio, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including but not limited to, the expected timing of loan repayments and 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 the Company has deemed the borrower/sponsor to be experiencing financial difficulty, the Company 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. As of September 30, 2024 and December 31, 2023, the Company’s CECL Reserve for its loans held at carrying value and loan receivable held at carrying value is approximately $ 25.3 million and $ 26.4 million, respectively, or 10.70 % and 8.71 %, respectively, of the Company’s total loans held at carrying value and loan receivable held at carrying value of approximately $ 236.3 million and $ 303.3 million, respectively, and is bifurcated between the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loan receivable held at carrying value of approximately $ 25.1 million and $ 26.3 million, respectively, and a liability for unfunded commitments of approximately $ 0.2 million and $ 0.1 million, 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. 14 Index Activity related to the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value and loan receivable held at carrying value as of and for the three and nine months ended September 30, 2024 was as follows: Outstanding (1) Unfunded (2) Total Balance at June 30, 2024 $ 24,971,603 $ 122,900 $ 25,094,503 Increase (decrease) in provision for current expected credit losses 139,606 41,764 181,370 Write-offs — — — Recoveries — — — Balance at September 30, 2024 $ 25,111,209 $ 164,664 $ 25,275,873 Outstanding (1) Unfunded (2) Total Balance at December 31, 2023 $ 26,309,450 $ 115,473 $ 26,424,923 (Decrease) increase in provision for current expected credit losses ( 1,198,241 ) 49,191 ( 1,149,050 ) Write-offs — — — Recoveries — — — Balance at September 30, 2024 $ 25,111,209 $ 164,664 $ 25,275,873 (1) As of September 30, 2024 and December 31, 2023, the CECL Reserve related to outstanding balances on loans held at carrying value and loan receivable held at carrying value is recorded within current expected credit loss reserve in the Company’s consolidated balance sheets. (2) As of September 30, 2024 and December 31, 2023, the CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within current expected credit loss reserve as a liability in the Company’s consolidated 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 by the Company. 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 — Materially exceeds performance metrics included in original or current credit underwriting and business plan 2 Low Risk — Collateral and business performance exceeds substantially all performance metrics included in original or current credit underwriting and business plan 3 Medium Risk — Collateral and business performance meets, or is on track to meet underwriting expectations; business plan is met or can reasonably be achieved 4 High Risk/ Potential for Loss — Collateral performance falls short of underwriting, material differences from business plans, defaults may exist, or may soon exist absent material improvement. Risk of recovery of interest exists 5 Impaired/ Loss Likely — Performance is significantly worse than underwriting with major variances from business plan observed. Loan covenants or financial milestones have been breached; exit from loan or refinancing is uncertain. Full recovery of principal is unlikely The risk ratings are primarily based on historical data as well as taking into account future economic conditions. 15 Index As of September 30, 2024, the carrying value, excluding the CECL Reserve, of the Company’s loans held at carrying value and loan receivable held at carrying value within each risk rating by year of origination is as follows: Risk Rating: 2024 2023 2022 2021 2020 Total 1 $ — $ — $ — $ — $ — $ — 2 — — — — — — 3 56,832,385 27,573,208 37,488,876 23,078,389 — 144,972,858 4 — — — — — — 5 — — 11,513,143 77,771,041 2,040,058 91,324,242 Total $ 56,832,385 $ 27,573,208 $ 49,002,019 $ 100,849,430 $ 2,040,058 $ 236,297,100 7. INTEREST RECEIVABLE The following table summarizes the interest receivable by the Company as of September 30, 2024 and December 31, 2023: As of September 30, 2024 As of December 31, 2023 Interest receivable $ 1,397,114 $ 2,680,188 PIK receivable 38,764 1,009,974 Unused fees receivable 37,766 25,833 Total interest receivable $ 1,473,644 $ 3,715,995 8. INTEREST RESERVE At September 30, 2024 and December 31, 2023, the Company had no loans that included a loan-funded interest reserve. For the three and nine months ended September 30, 2024, zero of aggregate interest income was earned and disbursed from the interest reserves. For the three and nine months ended September 30, 2023, approximately $ 0.6 million and $ 4.2 million, respectively, of aggregate interest income was earned and disbursed from the interest reserves. The following table presents changes in interest reserve as of and for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Beginning reserves $ — $ 1,130,541 $ — $ 3,200,944 New reserves — — — 1,526,065 Reserves disbursed — ( 579,591 ) — ( 4,176,059 ) Ending reserves $ — $ 550,950 $ — $ 550,950 9. DEBT Revolving Credit Facility On April 29, 2022, the Company entered into the Loan and Security Agreement (the “Revolving Credit Agreement”) by and among the Company, the other loan parties from time to time party thereto, the lenders party thereto, and the lead arranger, bookrunner and administrative agent party thereto, pursuant to which, the Company obtained a $ 60.0 million senior secured revolving credit facility (as amended from time to time, the “Revolving Credit Facility”). The Revolving Credit Facility has a maturity date of April 29, 2025. 16 Index The Revolving Credit Facility contains aggregate commitments of $ 60.0 million from two FDIC-insured banking institutions (which may be increased to up to $ 100.0 million in aggregate, subject to available borrowing base and additional commitments) which may be borrowed, repaid and redrawn, subject to a borrowing base based on eligible loan obligations held by the Company and subject to the satisfaction of other conditions provided under the Revolving Credit Facility. Interest is payable on the Revolving Credit Facility at the greater of (1) the applicable base rate plus 0.50 % and (2) 4.50 %, as provided in the Revolving Credit Agreement, payable in cash in arrears. Upon entering into the Revolving Credit Agreement, the Company incurred a one-time commitment fee expense of approximately $ 0.5 million, which was included in prepaid expenses and other assets on the Company’s consolidated balance sheets and amortized over the life of the facility. Commencing on the six-month anniversary of the closing date, the Revolving Credit Facility has an unused line fee of 0.25 % per annum, payable semi-annually in arrears, which is included within interest expense in the Company’s unaudited interim consolidated statements of operations. Based on the terms of the Revolving Credit Agreement, the Company’s estimated average cash balance will exceed the minimum balance required to waive the unused line fee and as such, the Company did not incur an unused line fee for the three and nine months ended September 30, 2024. As of September 30, 2024 and December 31, 2023, outstanding borrowings under the Revolving Credit Facility were $ 60.0 million and $ 42.0 million, respectively, and zero and $ 18.0 million was available for borrowing as of September 30, 2024 and December 31, 2023, respectively. The obligations of the Company under the Revolving Credit Facility are secured by certain assets of the Company comprising of or relating to loan obligations designated for inclusion in the borrowing base. In addition, the Company is subject to various financial and other covenants, including: (1) liquidity of at least $ 5.0 million, (2) annual debt service coverage of at least 1.5 to 1.0 and (3) secured debt not to exceed 25 % of total consolidated assets of the Company and its subsidiaries. 2027 Senior Notes On November 3, 2021, the Company issued $ 100.0 million in aggregate principal amount of senior unsecured notes due in May 2027 (the “2027 Senior Notes”). The 2027 Senior Notes accrue interest at a rate of 5.75 % per annum. Interest on the 2027 Senior Notes is due semi-annually on May 1 and November 1 of each year, which began on May 1, 2022. The net proceeds from the offering were approximately $ 97.0 million, after deducting the initial purchasers’ discounts and commissions and estimated offering fees and expenses payable by the Company. The Company used the proceeds from the issuance of the 2027 Senior Notes (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. The terms of the 2027 Senior Notes are governed by an indenture, dated November 3, 2021, among us, as issuer, and TMI Trust Company, as trustee (the “Indenture”). Under the Indenture, the Company is required to cause all of its existing and future subsidiaries to guarantee the 2027 Senior Notes, other than certain immaterial subsidiaries as set forth in the Indenture. TRS1 is currently a subsidiary guarantor under the Indenture. Prior to February 1, 2027, the Company may redeem the 2027 Senior Notes in whole or in part, at a price equal to the greater of 100 % of the principal amount of the 2027 Senior Notes being redeemed or a make-whole premium set forth in the Indenture, plus accrued and unpaid interest thereon to, but excluding, the applicable redemption date. On or after February 1, 2027, we may redeem the 2027 Senior Notes in whole or in part at a price equal to 100 % of the principal amount of the 2027 Senior Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Indenture also requires us to offer to purchase all of the 2027 Senior Notes at a purchase price equal to 101 % of the principal amount of the 2027 Senior Notes, plus accrued and unpaid interest if a “change of control triggering event” (as defined in the Indenture) occurs. The Indenture contains customary terms and restrictions, subject to a number of exceptions and qualifications, including restrictions on the Company’s ability to (1) incur additional indebtedness unless the Annual Debt Service Charge (as defined in the Indenture) is no less than 1.5 to 1.0, (2) incur or maintain total debt in an aggregate principal amount greater than 60 % of the Company’s consolidated Total Assets (as defined in the Indenture), (3) incur or maintain secured debt in an aggregate principal amount greater than 25 % of the Company’s consolidated Total Assets (as defined in the Indenture), and (4) merge, consolidate or sell substantially all of the Company’s assets. In addition, the Indenture also provides for customary events of default. If any event of default occurs, any amount then outstanding under the Indenture may immediately become due and payable. These events of default are subject to a number of important exceptions and qualifications set forth in the Indenture. 17 Index During the nine months ended September 30, 2023 , the Company repurchased $ 10.0 million in principal amount of the Company’s 2027 Senior Notes at 77.4 % of par value, plus accrued interest. This resulted in a gain on extinguishment of debt of approximately $ 2.0 million, recorded within the unaudited interim consolidated statements of operations. No repurchases took place during the nine months ended September 30, 2024. As of September 30, 2024 , the Company had $ 90.0 million in principal amount of the 2027 Senior Notes outstanding. The 2027 Senior Notes are due on May 1, 2027. Scheduled principal payments on the 2027 Senior Notes as of September 30, 2024 are as follows: 2027 Senior Notes Year 2024 (remaining) $ — 2025 — 2026 — 2027 90,000,000 2028 — Thereafter — Total principal 90,000,000 Deferred financing costs included in senior notes ( 1,538,064 ) Total due senior notes, net $ 88,461,936 The following tables reflect a summary of interest expense incurred during the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, 2024 2027 Senior Notes Revolving Credit Facility Total Borrowings Interest expense $ 1,293,750 $ 21,667 $ 1,315,417 Amortization of deferred financing costs 158,964 98,324 257,288 Total interest expense $ 1,452,714 $ 119,991 $ 1,572,705 Three months ended September 30, 2023 2027 Senior Notes Revolving Credit Facility Total Borrowings Interest expense $ 1,293,750 $ 10,500 $ 1,304,250 Unused fee expense — ( 26,667 ) ( 26,667 ) Amortization of deferred financing costs 158,964 96,381 255,345 Total interest expense $ 1,452,714 $ 80,214 $ 1,532,928 18 Index Nine months ended September 30, 2024 2027 Senior Notes Revolving Credit Facility Total Borrowings Interest expense $ 3,881,250 $ 104,054 $ 3,985,304 Amortization of deferred financing costs 473,628 290,211 763,839 Total interest expense $ 4,354,878 $ 394,265 $ 4,749,143 Nine months ended September 30, 2023 2027 Senior Notes Revolving Credit Facility Total Borrowings Interest expense $ 3,996,250 $ 37,167 $ 4,033,417 Unused fee expense — 47,915 47,915 Amortization of deferred financing costs 482,698 212,833 695,531 Total interest expense $ 4,478,948 $ 297,915 $ 4,776,863 10. COMMITMENTS AND CONTINGENCIES As of September 30, 2024 and December 31, 2023, the Company had the following commitments to fund various investments: As of September 30, 2024 As of December 31, 2023 Total original loan commitments $ 349,532,028 $ 431,239,913 Less: drawn commitments ( 329,390,255 ) ( 421,239,913 ) Total undrawn commitments $ 20,141,773 $ 10,000,000 The Company from time to time may be a party to litigation in the normal course of business. As of September 30, 2024, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations. On March 17, 2023, the Company appointed Brandon Hetzel to serve as its Chief Financial Officer and Treasurer in place of Brett Kaufman, effective as of such date, with Mr. Kaufman’s employment with AFC Management, LLC, the Company’s external manager (the “Manager”), terminated, effective as of April 17, 2023 (the “Separation Date”). In connection with his termination, Mr. Kaufman received (i) twelve (12) months’ worth of his current base salary, (ii) his annual target bonus, (iii) continued payment by our Manager of 100 % of the COBRA premiums for him and his dependents for a period of twelve (12) months following his Separation Date, (iv) accelerated vesting of one ( 1 ) additional tranche of each of Mr. Kaufman’s outstanding equity awards, and (v) extension of the exercise period for Mr. Kaufman’s outstanding options until one (1) year following the Separation Date, contingent on Mr. Kaufman executing and not revoking a release of claims in favor of the Company. During the nine months ended September 30, 2024 and 2023 , the Company recorded zero and approximately $ 0.7 million in severance expense within general and administrative expenses within the unaudited interim consolidated statements of operations, respectively. The Company provides loans to companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against the Company’s borrowers on the federal illegality of cannabis, the Company’s borrowers’ inability to renew or otherwise maintain their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and the Company could lose all or part of any of the Company’s loans. 19 Index The Company’s ability to grow or maintain its business with respect to the loans it makes to companies operating in the cannabis industry depends on state laws pertaining to the cannabis industry. New laws that are adverse to the Company’s borrowers 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 the Company’s ability to grow and could materially adversely affect the Company’s 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. SHAREHOLDERS’ EQUITY Series A Preferred Stock As of September 30, 2024 and December 31, 2023, the Company has authorized 10,000 preferred shares designated as 12.0 % Series A Cumulative Non-Voting Preferred Stock, par value $ 0.01 per share (the “Series A Preferred Stock”). As of September 30, 2024 and December 31, 2023, there were zero and 125 shares of Series A Preferred Stock issued and outstanding, respectively. 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, plus all accrued and unpaid dividends thereon up to and including the date fixed for redemption. 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. On June 30, 2024, the Company redeemed all 125 outstanding shares of its Series A Preferred Stock. The Series A Preferred Stock was redeemed at a price of $ 1,000 per share, plus all accrued and unpaid dividends thereon to and including the date fixed for redemption. As the shares were redeemed on June 30, 2024, there were no accrued and unpaid dividends. Common Stock During the three and nine months ended September 30, 2024 and year ended December 31, 2023 , the Company did not issue any shares of its common stock, other than shares of common stock sold under the ATM Program (hereinafter defined) and restricted stock awards granted under the Stock Incentive Plan. Shelf Registration Statement On April 5, 2022, the Company filed a shelf registration statement on Form S-3 (File No. 333-264144) (the “Shelf Registration Statement”), which was declared effective on April 18, 2022. Under the Shelf Registration Statement, the Company may, from time to time, issue and sell up to $ 1.0 billion of the Company’s common stock, preferred stock, debt securities, warrants and rights (including as part of a unit) to purchase shares of the Company’s common stock or preferred stock. 20 Index At-the-Market Offering Program (“ATM Program”) On April 5, 2022, the Company entered into an Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC and Citizens JMP Securities LLC, as Sales Agents, under which the Company may, from time to time, offer and sell shares of common stock, having an aggregate offering price of up to $ 75.0 million. Under the terms of the Sales Agreement, the Company has agreed to pay the Sales Agents a commission of up to 3.0 % of the gross proceeds from each sale of common stock sold through the Sales Agents. Sales of common stock, if any, may be made in transactions that are deemed to be “at-the-market” offerings, as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). During the three and nine months ended September 30, 2024, the Company sold an aggregate of 1,214,953 shares of the Company’s common stock under the Sales Agreement at a weighted average price of $ 10.39 per share, generating net proceeds of approximately $ 12.2 million. As of September 30, 2024, the Company’s remaining authorization under the Sales Agreement was approximately $ 51.0 million. As of September 30, 2024 , the shares of common stock sold under the ATM Program are the only offerings that have been initiated under the Shelf Registration Statement. Stock Incentive Plan The Company has established a stock incentive compensation plan (the “2020 Plan”). The 2020 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 has granted, and currently intends to continue to continue to grant, stock options and restricted stock awards 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, consultants and other service providers to the Company or any of its subsidiaries. In January 2024, the Company’s Board of Directors approved grants of restricted stock to the Company’s directors and certain officers, as well as certain employees of the Manager, with an aggregate of 209,397 shares of restricted stock granted to such eligible persons. The restricted stock granted in January 2024 under the 2020 Plan contain vesting periods that vary from immediately vested to vesting over a three-year period, with approximately 33 % vesting on each of the first, second and third anniversaries of the vesting commencement date. As of September 30, 2024, there were 2,536,289 shares of common stock granted under the 2020 Plan, underlying 2,169,852 options and 366,437 shares of restricted stock. In January 2023, the Company’s Board of Directors approved grants of restricted stock to the Company’s directors and certain officers, as well as certain employees of the Manager, with an aggregate of 125,234 shares of restricted stock granted to such eligible persons. The restricted stock granted in January 2023 under the 2020 Plan contain vesting periods that vary from immediately vested to vesting over a three-year period, with approximately 33 % vesting on each of the first, second and third anniversaries of the vesting commencement date. In June 2023, the Company granted 1,159 shares of restricted stock to James C. Fagan in connection with his appointment to the Company’s Board of Directors, which vested upon the one-year anniversary of the grant date. As of September 30, 2024, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2020 Plan (the “Share Limit”) equals 3,323,937 shares, which is an increase of 121,495 shares compared to June 30, 2024. The Share Limit increased during the third quarter of 2024 under the evergreen provision in the 2020 Plan in connection with the shares issued under the ATM Program during such time. Shares that are subject to or underlie awards that expire or, for any reason, are cancelled, terminated, forfeited, fail to vest or 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. 21 Index Modification of Stock Options and Restricted Stock Outstanding at Spin-Off Stock Options On July 9, 2024, the Company completed the separation of its CRE portfolio through the Spin-Off of SUNS. As a result, the strike price for the outstanding stock options of the Company were adjusted to give effect to the Spin-Off. All adjustments were made with the intent to preserve the intrinsic value of each award immediately before and after the Spin-Off. The Company accounted for the modification as Type I modification (probable to probable). The number of awards remained constant, while the strike prices were modified to preserve the intrinsic value of each award. The modified stock option awards otherwise retained substantially the same terms and conditions, including term and vesting provisions. The fair value of such unvested stock option awards remained constant pre- and post-Spin-Off, resulting in no incremental compensation cost. The Company will recognize the remaining unrecognized compensation cost of the original stock option awards over the remaining vesting period. The Company used the Black-Scholes option pricing model to value stock options in determining the stock-based compensation expense. The Company has elected to recognize forfeitures as they occur. Previously recognized compensation expense related to forfeitures are reversed in the period the nonvested awards are forfeited. 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 the 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 expected term for each award is based on the contractual term for all awards granted thus far under the 2020 Plan. Restricted stock grant expense is based on the Company’s stock price at the time of the grant and amortized over the vesting period. The weighted-average exercise price of stock options have been retroactively adjusted to give effect to the Spin-Off for all periods presented. The following table presents the assumptions used in the Black-Scholes pricing model of options granted under the 2020 Plan during the three and nine months ended September 30, 2024 and 2023: Assumptions: Range Expected term 7.0 years Expected volatility 40 % - 50 % Expected dividend yield 10 % - 20 % Risk-free interest rate 0.5 % - 2.0 % Expected forfeiture rate 0 % The modification date fair value of the stock options was determined using the Binomial-Lattice Model with the following assumptions on July 9, 2024: Assumptions: Range Expected term 3.1 - 4.5 years Expected volatility 31.24 % - 32.41 % Expected dividend yield 15.65 % Risk-free interest rate 4.16 % - 4.25 % Expected forfeiture rate 0 % As additional Company history and information is available, the Company determined the use of the Binomial-Lattice Model to be appropriate compared to the closed-form Black-Scholes model. The risk-free interest rate is based on the continuously compounded rates from the U.S. Treasury yield curve in effect at the date of Spin-Off. The expected term is based on the remaining contractual term of each option’s life as of the date of Spin-Off. The expected dividend yield was based on the Company’s most recent quarterly dividend divided by the three-month average stock price as of the Spin-Off date, annualized. Expected volatility is based on the remaining contractual term-matched historical volatility. In cases where the look back period exceeds the trading history of the Company’s Common Stock, the Company’s entire trading history was used. 22 Index Restricted Stock Restricted stock awards originally granted under the 2020 Plan include awards granted to employees of the Company’s manager that perform shared fun ctions pre- and post-Spin-Off. In co nnection with the Spin-Off transaction and as a result of the related modification, approximately 33 % of the remaining unrecognized compensation cost of unvested restricted stock awards will be recognized over the remaining vesting period of the Company’s former wholly-owned subsidiary, SUNS. The Company will recognize the remaining 67 % of unrecognized compensation cost of unvested restricted stock awards over the remaining vesting period. The following table summarize s the stock-based compensation expense incurred by the Company for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Stock-based compensation $ 218,643 $ 294,014 $ 1,131,208 $ 705,361 The following table summarizes the (i) non-vested options granted, (ii) vested options granted, (iii) exercised and (iv) forfeited options granted for the Company’s directors and officers and employees of the Manager as of September 30, 2024 and December 31, 2023: As of September 30, 2024 As of December 31, 2023 Non-vested 156,367 206,304 Vested 2,218,265 2,168,328 Exercised ( 5,511 ) ( 5,511 ) Forfeited ( 200,169 ) ( 200,169 ) Balance 2,168,952 2,168,952 The following tables summarize stock option activity as of and during the nine months ended September 30, 2024: Number of options Weighted-average exercise price Weighted-average remaining contractual term Aggregate intrinsic value Outstanding as of December 31, 2023 2,168,952 $ 11.46 Granted — — Exercised — — Forfeited — — Outstanding as of September 30, 2024 2,168,952 $ 11.46 3.52 years $ 529,236 Exercisable as of September 30, 2024 2,129,108 $ 11.44 3.51 years $ 526,559 T he Company did not grant any options d uring the nine months ended September 30, 2024 and 2023 . No options were exercised during the nine months ended September 30, 2024 and 2023 . As of September 30, 2024 , there was approximately $ 22.2 thousand of total unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted-average period of 1.14 years. 23 Index The following table summarizes restricted stock (i) granted, (ii) vested and (iii) forfeited for the Company’s directors and officers and employees of the Manager as of September 30, 2024 and December 31, 2023: As of September 30, 2024 As of December 31, 2023 Granted 400,371 190,974 Vested ( 102,780 ) ( 38,028 ) Forfeited ( 33,934 ) ( 33,934 ) Balance 263,657 119,012 The following tables summarize the restricted stock activity as of and during the nine months ended September 30, 2024: Number of shares of restricted stock Weighted-average grant date fair value (1) Balance as of December 31, 2023 119,012 $ 16.06 Granted 209,397 11.70 Vested ( 64,752 ) 14.50 Forfeited — — Balance as of September 30, 2024 263,657 $ 8.61 (1) The fair value of the Company’s restricted stock awards is based on the Company’s stock price on the date of grant. The weighted-average grant date fair value of the remaining unvested restricted stock awards as of September 30, 2024 has been adjusted to give effect to the Spin-Off transaction, which was completed July 9, 2024. The total fair value of shares vested during the three months ended September 30, 2024 was approximately $ 25.0 thousand. There were no shares of restricted stock granted during the three months ended September 30, 2024 and 2023. During the three months ended September 30, 2023, 18,470 shares of restricted stock vested with a weighted-average grant date fair value of $ 16.24 . The total fair value of shares vested during the three months ended September 30, 2023 was approximately $ 244.8 thousand. The total fair value of shares vested during the nine months ended September 30, 2024 was approximately $ 763.6 thousand. During the nine months ended September 30, 2023, 126,393 shares of restricted stock were granted with a weighted-average grant date fair value of $ 15.55 . During the nine months ended September 30, 2023, 38,028 shares of restricted stock vested with a weighted-average grant date fair value of $ 17.97 . The total fair value of shares vested during the nine months ended September 30, 2023 was approximately $ 489.6 thousand. As of September 30, 2024 , there was approximately $ 1.6 million of total unrecognized compensation cost related to non-vested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.91 years. 24 Index 12. EARNINGS PER SHARE The following information sets forth the computations of basic and diluted weighted average earnings per common share for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Net income from continuing operations $ 1,217,790 $ 7,972,108 $ 14,853,671 $ 30,132,715 Dividends paid on preferred stock — — ( 7,500 ) ( 7,500 ) Dividends paid on unvested restricted stock ( 167,625 ) ( 65,991 ) ( 353,021 ) ( 205,268 ) Net income from continuing operations attributable to common shareholders 1,050,165 7,906,117 14,493,150 29,919,947 Net income from discontinued operations 165,944 7,767 2,922,068 7,767 Net income attributable to common shareholders 1,216,109 7,913,884 17,415,218 29,927,714 Divided by: Basic weighted average shares of common stock outstanding 20,684,149 20,324,125 20,493,375 20,315,162 Weighted average unvested restricted stock and dilutive stock options 101,699 18,755 50,269 75,223 Diluted weighted average shares of common stock outstanding 20,785,848 20,342,880 20,543,644 20,390,385 Basic earnings per share Continuing operations $ 0.05 $ 0.39 $ 0.71 $ 1.47 Discontinued operations $ 0.01 $ 0.00 $ 0.14 $ 0.00 Total basic weighted average earnings per common share $ 0.06 $ 0.39 $ 0.85 $ 1.47 Diluted earnings per share Continuing operations $ 0.05 $ 0.39 $ 0.71 $ 1.47 Discontinued operations $ 0.01 $ 0.00 $ 0.14 $ 0.00 Total diluted weighted average earnings per common share $ 0.06 $ 0.39 $ 0.85 $ 1.47 Diluted earnings per share was computed using the treasury stock method for stock options and restricted stock. Diluted weighted average earnings per common share excluded 1,499,235 and 1,499,235 weighted average unvested restricted stock and stock options due to anti-dilutive effect for the three and nine months ended September 30, 2024, respectively, and 2,288,419 and 2,247,328 for the three and nine months ended September 30, 2023, respectively . 13. INCOME TAX A TRS is an entity taxed as a corporation that has not elected to be taxed as a REIT, in which a REIT directly or indirectly holds equity, and that has made a joint election with such REIT to be treated as a TRS. A TRS generally may engage in any business, including investing in assets and engaging in activities that could not be held or conducted directly by the Company without jeopardizing its qualification as a REIT. A TRS is subject to applicable United States federal, state and local income tax on its taxable income. In addition, as a REIT, the Company also may be subject to a 100% excise tax on certain transactions between it and its TRS that are not conducted on an arm’s-length basis. The income tax provision is included in the line item income tax expense, including excise tax. The income tax provision for the Company was approximately $ 0.4 million and $ 0.8 million for the three and nine months ended September 30, 2024, respectively. The income tax provision for the Company was approximately $ 0.7 million and $ 1.0 million for the three and nine months ended September 30, 2023, respectively. The income tax expense for the three and nine months ended September 30, 2024 and 2023 primarily related to activities of the Company’s taxable REIT subsidiary. 25 Index The income tax provision for the Company and TRS1 consisted of the following for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Current (1) $ 394,210 $ 663,220 $ 838,545 $ 1,005,689 Deferred — — — — Excise tax ( 7,954 ) — ( 7,954 ) 270 Total income tax expense, including excise tax $ 386,256 $ 663,220 $ 830,591 $ 1,005,959 (1) During the three and nine months ended September 30, 2024, the Company incurred federal taxes of approximately $ 0.3 million and $ 0.6 million and state and local taxes of approximately $ 0.1 million and $ 0.2 million, respectively. During the three and nine months ended September 30, 2023, the Company incurred federal taxes of approximately $ 0.5 million and $ 0.7 million and state and local taxes of approximately $ 0.2 million and $ 0.3 million, respectively. For the three and nine months ended September 30, 2024, the Company incurred a benefit of approximately $( 8.0 ) thousand and $( 8.0 ) thousand , respectively, for United States federal excise tax. For the three and nine months ended September 30, 2023 , the Company incurred no expense for United States 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 Loans Held for Investment The Company’s loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers where the Company does not own a controlling equity position. Alternative valuation methodologies may be used as appropriate, and can include a market analysis, income analysis, or recovery analysis. 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 borrower. 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 present fair value measurements of loans held at fair value as of September 30, 2024 and December 31, 2023: Fair Value Measurement as of September 30, 2024 Total Level 1 Level 2 Level 3 Loans held at fair value $ 31,372,174 $ — $ — $ 31,372,174 Total $ 31,372,174 $ — $ — $ 31,372,174 Fair Value Measurement as of December 31, 2023 Total Level 1 Level 2 Level 3 Loans held at fair value $ 61,720,705 $ — $ — $ 61,720,705 Total $ 61,720,705 $ — $ — $ 61,720,705 26 Index The following table presents changes in loans that use Level 3 inputs as of and for the nine months ended September 30, 2024: Nine months ended September 30, 2024 Total loans using Level 3 inputs at December 31, 2023 $ 61,720,705 Change in unrealized gains (losses) on loans at fair value, net ( 9,655,396 ) Additional fundings 4,594,027 Original issue discount and other discounts, net of costs ( 2,756,417 ) Loan repayments ( 4,509,069 ) Sale of loans ( 19,284,846 ) Accretion of original issue discount 128,384 PIK interest 1,134,786 Total loans using Level 3 inputs at September 30, 2024 $ 31,372,174 The change in unrealized losses included in the unaudited interim consolidated statements of operations attributable to loans held at fair value, categorized as Level 3, held as of September 30, 2024 is $( 14,081,406 ). The following tables summarize the significant unobservable inputs the Company used to value the loans categorized within Level 3 as of September 30, 2024 and December 31, 2023. 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 September 30, 2024 Unobservable Input Fair Value Primary Valuation Techniques Input Estimated Range Weighted Average Senior term loan $ 31,372,174 Recovery analysis Recovery rate 57.60 % - 62.40 % 60.00 % Total investment $ 31,372,174 As of December 31, 2023 Unobservable Input Fair Value Primary Valuation Techniques Input Estimated Range Weighted Average Senior term loans $ 47,627,845 Recovery analysis Recovery rate 86.10 % - 92.40 % 89.25 % Senior term loans 14,092,860 Market approach Revenue multiple 0.50 x - 0.70 x 0.60 x Total investments $ 61,720,705 Changes in market yields, revenue multiples, and recovery rates 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, while a decrease in revenue multiples and recovery rates 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. 27 Index 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 sheets, for which it is practicable to estimate that value. The following table details the book value and fair value of the Company’s financial instruments not recognized at fair value in the unaudited interim consolidated balance sheets as of September 30, 2024 : As of September 30, 2024 Carrying Value Fair Value Financial assets: Cash and cash equivalents $ 122,163,732 $ 122,163,732 Loans held for investment at carrying value $ 234,257,042 $ 211,040,795 Loan receivable held at carrying value $ 2,040,058 $ 510,436 Financial liabilities: Senior notes payable, net $ 88,461,936 $ 83,700,000 Estimates of fair value for cash and cash equivalents are measured using observable, quoted market prices, or Level 1 inputs. The Company’s loans held for investment are measured using unobservable inputs, or Level 3 inputs. The fair value of the Company’s 2027 Senior Notes is estimated using observable inputs based on the last available bid price in the market at the end of the period, or Level 2 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 receives 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 in the Management Agreement), 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. 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 pays 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, 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 and nine months ended September 30, 2024 was approximately $ 0.3 million and $ 5.6 million, respectively. The Incentive Compensation for the three and nine months ended September 30, 2023 was approximately $ 2.6 million and $ 7.9 million, respectively. The Company is required to pay all of its costs and expenses and 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. With respect to certain office expenses incurred by the Manager on behalf of the Company and other funds managed by the Manager or its affiliates, such as rent, the Manager determines each fund’s pro rata portion of such expenses in an amount equal to the proportional amount of time employees of the Manager spent providing services to the Company, as reasonably stipulated by time sheets. 28 Index The following table summarizes the related party costs incurred by the Company for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Affiliate Costs Management fees $ 909,229 $ 1,347,378 $ 3,599,338 $ 4,046,179 Less: outside fees earned ( 180,552 ) ( 405,276 ) ( 769,545 ) ( 1,311,501 ) Base management fees 728,677 942,102 2,829,793 2,734,678 Incentive fees earned 253,108 2,632,765 5,599,782 7,857,901 General and administrative expenses reimbursable to Manager 602,926 817,985 2,135,189 2,801,214 Total $ 1,584,711 $ 4,392,852 $ 10,564,764 $ 13,393,793 Amounts payable to the Company’s Manager as of September 30, 2024 and December 31, 2023 were approximately $ 1.9 million and $ 5.0 million, respectively. The Manager is a wholly-owned subsidiary of Castleground Holdings LLC (f/k/a Advanced Flower Capital Management, LLC) (the “Parent Manager”). Certain officers have ownership in the outstanding equity of the Parent Manager, including Leonard Tannenbaum, Chairman of the Board, Robyn Tannenbaum, President and Chief Investment Officer, Bernard Berman, a member of the Company’s Investment Committee, and Daniel Neville, Chief Executive Officer. Due to Affiliate Amounts due to an affiliate of the Company as of September 30, 2024 and December 31, 2023 were approximately $ 20.6 thousand and $ 16.4 thousand, respectively. Investments in Loans From time to time, the Company may co-invest with other investment vehicles managed by the 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. Additionally, the Company’s Manager or its affiliates, including AFC Agent LLC (“AFC Agent”), may from time to time serve as administrative and collateral agent to the lenders under the Company’s loans. As of September 30, 2024, there were two co-invested loans held by the Company and affiliates of the Company. 29 Index 16. DIVIDENDS AND DISTRIBUTIONS The following table summarizes the Company’s dividends declared during the nine months ended September 30, 2024 and 2023: Declaration Date Record Date Payment Date Per Common Share Distribution Amount Total Distribution Amount Regular cash dividend 3/2/2023 3/31/2023 4/14/2023 $ 0.56 $ 11,473,971 Regular cash dividend 6/15/2023 6/30/2023 7/14/2023 0.48 9,819,695 Regular cash dividend 9/15/2023 9/30/2023 10/13/2023 0.48 9,819,695 2023 Period Subtotal $ 1.52 $ 31,113,361 Regular cash dividend 3/4/2024 3/31/2024 4/15/2024 $ 0.48 $ 9,920,205 Regular cash dividend 6/13/2024 6/24/2024 7/15/2024 0.48 9,920,205 Special cash dividend 6/27/2024 7/8/2024 7/15/2024 0.15 3,100,064 Regular cash dividend 9/13/2024 9/30/2024 10/15/2024 0.33 7,221,076 2024 Period Subtotal $ 1.44 $ 30,161,550 17. DISCONTINUED OPERATIONS On July 9, 2024, the Company announced the completion of the previously announced separation and Spin-Off of the Company’s CRE portfolio into an independent, publicly-traded REIT, SUNS. The Spin-Off was effected by the distribution of all of the outstanding shares of SUNS common stock to the Company’s shareholders of record as of the close of business on July 8, 2024 (the “Record Date”). The Company’s shareholders of record as of the Record Date received one share of SUNS common stock for every three shares of the Company’s common stock held as of the Record Date. The Spin-Off was completed July 9, 2024 (the “Distribution Date”). On the Distribution Date, SUNS became an independent, publicly-traded company, trading on the Nasdaq Capital Market under the symbol “SUNS”. The Company retained no ownership interest in SUNS following the Spin-Off. On the Distribution Date, the Company recognized a reduction to additional paid-in capital of approximately $ 114.8 million in connection with the Spin-Off related to the transfer of certain assets and liabilities associated with its CRE business to SUNS. In connection with the Spin-Off, the Company entered into several agreements with SUNS that govern the relationship between the Company and SUNS following the spin-off, including the Separation and Distribution Agreement and the Tax Matters Agreement. These agreements provide for the allocation between the Company and SUNS of the assets, liabilities and obligations (including, among others, investments, property and tax-related assets and liabilities) of the Company and its subsidiaries attributable to periods prior to, at and after the Spin-Off. The operating results of the SUNS business through the date of the Spin-Off are reported in net income from discontinued operations, net of tax in the consolidated statements of operations for all periods presented. The related assets and liabilities are reported as assets and liabilities of discontinued operations on the consolidated balance sheets. Cash flows from the Company’s discontinued operations are presented as such in the consolidated statements of cash flows for all periods presented. 30 Index The following table summarizes the financial statement lines included in net income from discontinued operations, net of tax for the three and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Interest income $ 150,453 $ 7,767 $ 4,156,335 $ 7,767 Expenses General and administrative expenses ( 83 ) — ( 21,651 ) — Professional fees 15,574 — ( 1,140,762 ) — (Increase) decrease in provision for current expected credit losses — — ( 71,854 ) — Net income from discontinued operations, net of tax $ 165,944 $ 7,767 $ 2,922,068 $ 7,767 During the three and nine months ended September 30, 2024, Spin-Off costs incurred were approximately $( 15.6 ) thousand and $ 1.1 million, respectively. During the three months ended September 30, 2024, previous estimates for Spin-Off work performed were less than actuals, resulting in a credit to expense. Prior to the third quarter of 2024, Spin-Off costs were historically presented within professional fees in the consolidated statements of operations and are now included in the measurement and presentation of discontinued operations for all periods presented. There were no assets or liabilities classified as discontinued operations as of September 30, 2024. The following table summarizes the financial statement lines of assets and liabilities classified as discontinued operations as of December 31, 2023: As of December 31, 2023 Cash and cash equivalents $ 31,244,622 Total assets of discontinued operations $ 31,244,622 Accounts payable and other liabilities $ 10,000 Total liabilities of discontinued operations $ 10,000 18. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date the consolidated financial statements were available to be issued. There were no material subsequent events, other than those described below, that required disclosure in these unaudited interim consolidated financial statements. In October 2024, the Company entered into a $ 41.0 million senior secured credit facility with Private Company R, which was fully funded at closing. The loan was originated at a discount of 2.0 % and matures November 1, 2027. The loan bears interest at SOFR plus a 7.5 % spread, subject to a SOFR floor of 4.5 %. The loan is secured by substantially all assets of the borrowers, including a first-lien mortgage on the owned real property and a senior lien against the borrower’s assets, operations and the value of its cannabis licenses. The loan is also guaranteed by certain direct or indirect shareholders of the borrowers. The proceeds of the loan will be used to, among other things, refinance existing debt and provide working capital. In October 2024, the Company received a prepayment of approximately $ 0.9 million from Private Company L’s sale of certain collateral assets and a $ 17.8 thousand prepayment premium. 31 Index In November 2024, the Company entered into an agreement to purchase $ 10.0 million in outstanding principal amount of a senior secured term loan to Subsidiary of Public Company S, a publicly traded operator, at par from a third party lender and the Company expects to settle the transaction in the near future. The third party lender assigned all of its rights and obligations under such loan to the Company. The term loan under the Subsidiary of Public Company S Credit Facility accrues interest at a fixed rate per annum of 9.5 % and matures in August 2026. In November 2024, in connection with its credit facility with Private Company P, the Company entered into a limited waiver and amendment to such facility to waive certain failures by Private Company P to pay monthly cash interest payments when due. In connection with the waiver and amendment, Private Company P will make a cash payment constituting the majority of such missed interest payments of approximately $ 0.3 million, with the remaining amount due capitalized into the loan balance. Cash interest payments on the facility will restart January 1, 2025. 32 Index CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”), filed by Advanced Flower Capital Inc. (f/k/a AFC Gamma, Inc.) (the “Company,” “we,” “us,” and “our”), and the information incorporated by reference in it, or made in other reports, filings with the SEC, press releases contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend such statements to be covered by the safe harbor provisions contained therein. Some of the statements contained in this Quarterly Report, other than statements of current or historical facts, are forward-looking statements and are based on our current intent, belief, expectations and views of future events. The forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results or performance, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “could,” “would,” “will,” “can,” “continuing,” “may,” “aim,” “intend,” “ongoing,” “plan,” “predict,” “potential,” “should,” “seeks,” “likely to” or words or phrases of similar meaning. Specifically, this Quarterly Report includes forward-looking statements regarding (i) the conditions in the adult-use and medicinal cannabis markets and their impact on our business; (ii) our portfolio and strategies for the growth thereof; (iii) our working capital, liquidity and capital requirements; (iv) potential state and federal legislative and regulatory matters; (v) our expectations and estimates regarding certain tax, legal and accounting matters, including the impact on our financial statements and/or those of our borrowers; (vi) our expectations regarding our portfolio companies and their businesses, including demand, sales volume, profitability, and future growth; (vii) the amount, collectability and timing of cash flows, if any, from our loans; (viii) our expected ranges of originations and repayments; and (ix) estim ates relating to our ability to make distributions to our shareholders in the f uture. These forward-looking statements reflect management’s current views about future events, and are subject to risks, uncertainties and assumptions. Our actual results may differ materially from the future results and events expressed or implied by the forward-looking statements. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following: • our business and investment strategy; • the ability of our Manager to locate suitable loan opportunities for us and to monitor and actively manage our portfolio and implement our investment strategy; • our expectations for origination targets and repayments; • the 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 and certain state laws; • the estimated growth in and evolving market dynamics of the cannabis market; • changes in general economic conditions, in our industry and in the commercial finance and real estate markets; • the demand for cannabis cultivation and processing facilities; • shifts in public opinion and state regulation regarding cannabis; • the state of the U.S. economy generally or in specific geographic regions; • the impact of a protracted decline in the liquidity of credit markets on our business; • the amount, collectability and timing of our 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; • losses that may arise due to the concentration of our portfolio in a limited number of loans and borrowers; • our expected investment and underwriting process; • the rates of default or recovery rates on our loans; • the degree to which our hedging strategies may or may not protect us from interest rate volatility; 33 Index • the availability of investment opportunities for us within our investment guidelines; • changes in interest rates 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 (as defined below); • our ability to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes; • estimates relating to our ability to make distributions to our shareholders 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; and • uncertainties as to the impact of the Spin-Off on our business. Please see the section entitled “ Risk Factors ” located in our Annual Report on Form 10-K, filed with the SEC on March 7, 2024 and the risk factor described under Part II, Item 1A of this Quarterly Report on Form 10-Q, for a further discussion of these and other risks and uncertainties which could affect our future results. These forward-looking statements apply only as of the date of this report and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except to the extent we are legally required to disclose certain matters in SEC filings or otherwise.