Advanced Flower Capital Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes and other information included in this Quarterly Report on Form 10-Q (the “Form 10-Q”). This discussion and analysis contains forward-looking statements that involve risks and uncertainties which could cause our actual results to differ materially from those anticipated in these forward-looking statements, including, but not limited to, risks and uncertainties discussed under the heading “Cautionary Note Regarding Forward-Looking Statements,” in this Form 10-Q. Overview Advanced Flower Capital Inc. is an institutional lender that was founded in July 2020 by a veteran team of investment professionals. We primarily originate, structure, underwrite, invest in and manage senior secured loans and other types of mortgage loans and debt securities, with a specialization in loans to cannabis industry operators in states that have legalized medical and/or adult-use cannabis. Our investment guidelines primarily relate to deploying capital in attractive lending opportunities to state law-compliant cannabis operators, typically secured by real estate, cash flows and license value. Our objective is to provide attractive risk-adjusted returns over time through cash distributions and capital appreciation primarily by providing loans to real estate developers and state law compliant cannabis companies. The loans we originate are primarily structured as senior loans typically secured by real estate, equipment, cashflows and the value associated with licenses (where applicable) and/or other assets of the loan parties to the extent permitted by applicable laws and the regulations governing such loan parties. Some of our cannabis-related borrowers have their equity securities listed for public trading on the Canadian Securities Exchange (“CSE”) in Canada and/or over-the-counter (“OTC”) in the United States. As states continue to legalize cannabis for medical and adult-use, an increasing number of companies operating in the cannabis industry need financing. Due to the current capital constrained cannabis market, which does not typically have access to traditional bank financing, we believe we continue to be well positioned to act as a prudent financing source to cannabis industry operators given our stringent underwriting criteria, size and scale of operations and institutional infrastructure. 34 Index We are a Maryland corporation and externally managed by AFC Management, LLC, a Delaware limited liability company (our “Manager”), pursuant to the terms of the Amended and Restated Management Agreement, dated January 14, 2021, by and between the Company and AFC Management, LLC (as amended from time to time, the “Management Agreement”). We commenced operations on July 31, 2020 and completed our initial public offering (“IPO”) in March 2021. We have elected to be taxed as a real estate investment trust (a “REIT”) under Section 856 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2020. We believe that we have qualified as a REIT and that our current and proposed method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us continuing to satisfy numerous asset, income and distribution tests, which in turn depends, in part, on our operating results and ability to obtain financing. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940 as amended (the “Investment Company Act”). Our wholly-owned subsidiary, AFCG TRS1, LLC (“TRS1”), operates as a taxable REIT subsidiary (a “TRS”). TRS1 began operating in July 2021. The financial statements of TRS1 are consolidated within our consolidated financial statements. We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period. As a result, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. We could remain an “emerging growth company” for up to five years from our initial public offering, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. Spin-Off On February 22, 2024, we announced a plan to separate into two independent, publicly traded companies - one focused on providing institutional loans to state law compliant cannabis operators in the U.S., the other an institutional commercial real estate lender focused on the Southern United States. Prior to the Spin-Off, Sunrise Realty Trust, Inc. (“SUNS”) held our CRE portfolio as our wholly-owned subsidiary. On July 9, 2024, we completed the separation of our CRE portfolio through the spin-off of SUNS into an independent, publicly traded REIT (the “Spin-Off”) through a pro-rata distribution of all of the outstanding shares of SUNS common stock to our shareholders of record as of the close of business on July 8, 2024 (the “Record Date”). Our shareholders of record as of the Record Date received one share of SUNS common stock for every three shares of our common stock held as of the Record Date. We retained no ownership interest in SUNS following the Spin-Off. 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, percentages and discussion below reflect only the results of operations and financial condition from our continuing operations. 35 Index Developments During the Third Quarter September 30, 2024: Updates to Our Loan Portfolio During the Third Quarter September 30, 2024 In July 2024, we received an approximately $10.0 million principal prepayment and a $0.2 million prepayment premium on our investment in Subsidiary of Public Company M. Following the prepayment, the aggregate outstanding principal balance on our investments in Subsidiary of Public Company M is approximately $2.8 million as of September 30, 2024. In August 2024, we entered into the fourth amendment to the credit agreement with Private Company J, pursuant to which, we, among other things, amended certain financial covenants and increased the total aggregate commitment by an additional $5.5 million, of which we have funded $3.0 million as of September 30, 2024. In August 2024, we entered into the second amendment to the credit agreement with Private Company N - Real Estate, which increased the total aggregate commitment by an additional approximately $1.8 million under the terms of the existing credit agreement. We have funded approximately $1.2 million of the increased commitment as of September 30, 2024. In August 2024, we entered into a $11.0 million senior secured credit facility with Private Company Q. The loan was originated at a discount of 4.0% and matures September 1, 2028. The loan bears interest at SOFR plus an 8.75% spread, subject to a SOFR floor of 5.0%. As of September 30, 2024, approximately $5.2 million was drawn and the remainder is available to be drawn within two years of closing. The loan is secured by substantially all assets of Private Company Q. The proceeds of the loan will be used to, among other things, pay for transactional costs and expenses, general working capital and other general corporate purposes and to fund capital expenditures in accordance with the budget. In August 2024, we entered into the first amendment to the credit agreement with Private Company P, which amended the interest payable for July 2024 and August 2024 to be paid in kind and payable in cash thereafter. In September 2024, we purchased $4.6 million of outstanding principal of a third-party syndicate partner’s minority debt as part of the credit agreement with Private Company A for approximately $1.8 million. We now hold approximately $53.8 million of outstanding principal as of September 30, 2024. In September 2024, we received a voluntary prepayment from Private Company L of approximately $1.5 million, recognizing $45.5 thousand in prepayment premium and $37.9 thousand in exit fees. Spin-Off On July 9, 2024, we completed the Spin-Off of SUNS, which held our CRE portfolio, into an independent, publicly traded REIT. See “—Spin-Off” above. At-the-Market Offering Program In April 2022, we filed our shelf registration statement on Form S-3 with the SEC, registering the offer and sale of up to $1.0 billion of securities (the “Shelf Registration Statement”). The Shelf Registration Statement enables us to issue shares of common stock, preferred stock, debt securities, warrants, rights, as well as units that include one or more of such securities. The Shelf Registration Statement also included a prospectus for the ATM Program to sell up to an aggregate of $75.0 million of shares of our common stock that may be issued and sold from time to time under the Sales Agreement, dated April 5, 2022 (the “Sales Agreement”), with Jefferies LLC and Citizens JMP Securities LLC, as Sales Agents. Under the terms of the Sales Agreement, we have agreed to pay the Sales Agents a commission of up to 3.0% of the gross proceeds from each sale of common stock under the Sales Agreement. During the three and nine months ended September 30, 2024, we sold an aggregate of 1,214,953 shares of our 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. 36 Index Dividends Declared Per Share For the nine months ended September 30, 2024 and 2023, we declared the following cash dividends: Date Declared Payable to Shareholders of Record at the Close of Business on Payment Date Amount per Share Total Amount March 2, 2023 March 31, 2023 April 14, 2023 $ 0.56 $ 11.5 million June 15, 2023 June 30, 2023 July 14, 2023 0.48 9.8 million September 15, 2023 September 30, 2023 October 13, 2023 0.48 9.8 million 2023 Period Subtotal $ 1.52 $ 31.1 million March 4, 2024 March 31, 2024 April 15, 2024 $ 0.48 $ 9.9 million June 13, 2024 June 24, 2024 July 15, 2024 0.48 9.9 million June 27, 2024 July 8, 2024 July 15, 2024 0.15 3.1 million September 13, 2024 September 30, 2024 October 15, 2024 0.33 7.2 million 2024 Period Subtotal $ 1.44 $ 30.1 million In connection with the Spin-Off, we declared a one-time dividend of $0.15 per share of our common stock, which was paid on July 15, 2024 to shareholders of record as of July 8, 2024. The aggregate amount of the one-time dividend payment was approximately $3.1 million . Recent Developments In October 2024, we 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, we 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. In November 2024, we 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 we expect to settle the transaction in the near future. The third party lender assigned all of its rights and obligations under such loan to us. 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, we 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. Key Financial Measures and Indicators As a commercial real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, book value per share and dividends declared per share. 37 Index Non-GAAP Metrics Distributable Earnings In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations. Distributable Earnings is a measure that is not prepared in accordance with GAAP. We use these non-GAAP financial measures both to explain our results to shareholders and the investment community and in the internal evaluation and management of our businesses. Our management believes that these non-GAAP financial measures and the information they provide are useful to investors since these measures permit investors and shareholders to assess the overall performance of our business using the same tools that our management uses to evaluate our past performance and prospects for future performance. The determination of Distributable Earnings is substantially similar to the determination of Core Earnings under our Management Agreement, provided that Core Earnings is a component of the calculation of any Incentive Compensation earned under the Management Agreement for the applicable time period, and thus Core Earnings is calculated without giving effect to Incentive Compensation expense, while the calculation of Distributable Earnings accounts for any Incentive Compensation earned for such time period. We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) stock-based compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) (decrease) increase in provision for current expected credit losses, (v) TRS (income) loss, net of any dividends received from TRS and (vi) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors. We believe providing Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to shareholders in assessing the overall performance of our business. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that shareholders invest in our common stock, we generally intend to attempt to pay dividends to our shareholders in an amount at least equal to such REIT taxable income, if and to the extent authorized by our Board. Distributable Earnings is one of many factors considered by our Board in authorizing dividends and, while not a direct measure of net taxable income, over time, the measure can be considered a useful indicator of our dividends. Distributable Earnings is a non-GAAP financial measure and should not be considered as a substitute for GAAP net income. We caution readers that our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings may not be comparable to similar measures presented by other REITs. 38 Index The following table provides a reconciliation of GAAP net income to distributable earnings: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Net income $ 1,383,734 $ 7,979,875 $ 17,775,739 $ 30,140,482 Adjustments to net income: Stock-based compensation expense 218,643 294,014 1,131,208 705,361 Depreciation and amortization — — — — Unrealized (gains) losses or other non-cash items 4,621,702 (787,799) 9,655,396 1,152,810 Increase (decrease) in provision for current expected credit losses (1) 181,370 1,053,398 (1,077,196) 149,637 TRS (income) loss, net of dividends 840,556 1,399,920 1,147,554 (716,684) One-time events pursuant to changes in GAAP and certain non-cash charges — — — — Distributable earnings $ 7,246,005 $ 9,939,408 $ 28,632,701 $ 31,431,606 Basic weighted average shares of common stock outstanding 20,684,149 20,324,125 20,493,375 20,315,162 Distributable earnings per basic weighted average share $ 0.35 $ 0.49 $ 1.40 $ 1.55 (1) The provision for current expected credit losses above includes approximately zero and $71.9 thousand for the three and nine months ended September 30, 2024, respectively, and zero for the three and nine months ended September 30, 2023, respectively, which is included in the net income from discontinued operations, net of tax financial statement line on the consolidated statement of operations. Book Value Per Share We believe that book value per share is helpful to shareholders in evaluating our growth as we scale our equity capital base and continue to invest in our target investments. The book value per share of our common stock as of September 30, 2024 and December 31, 2023 was approximately $9.42 and $15.64, respectively. On July 9, 2024, we completed the Spin-Off of SUNS, which had a book value of approximately $114.8 million, or $5.55 per share, on the Distribution Date. In connection with the Spin-Off, we recognized a reduction to additional paid-in capital of approximately $114.8 million related to the transfer of certain assets and liabilities associated with our CRE business to SUNS. Factors Impacting our Operating Results The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest margin, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace. Our net interest margin, which includes the accretion and amortization of OID, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by our borrowers. Results of Operations f or the three and nine months ended September 30, 2024 and 2023 Our net income from continuing operations allocable to our common shareholders for the three and nine months ended September 30, 2024, was approximately $1.2 million and $14.9 million, or $0.05 and $0.71 per basic weighted average common share from continuing operations, respectively, compared to net income from continuing operations allocable to our common shareholders of approximately $8.0 million and $30.1 million, or $0.39 and $1.47 per basic weighted average common share from continuing operations for the three and nine months ended September 30, 2023, respectively. 39 Index Interest income decreased approximately $(6.3) million, or (37.8)%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. This decrease was driven by lower interest income of approximately ($4.8) million related to Private Company A and Private Company K on nonaccrual status for the third quarter of fiscal year 2024, lower interest income of approximately ($4.1) million related to less capital deployed, partially offset by higher interest income of approximately $1.7 million related to Subsidiary of Private Company G received in cash, higher fee income of approximately $0.4 million driven by the prepayment of our investment in Subsidiary of Public Company M and higher OID income of approximately $0.4 million due to the acceleration of unaccreted OID related to the prepayment of our in investment in Subsidiary of Public Company M during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, respectively. While Subsidiary of Private Company G is currently on nonaccrual and was on nonaccrual for two out of three months in the prior period, cash received exceeded prior year income for this borrower. Interest income decreased approximately $(10.2) million, or (19.3)%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. This decrease was driven by lower interest income of approximately ($13.5) million driven by Subsidiary of Private Company G, Private Company K and Private Company A placed on nonaccrual status during fiscal year 2024, lower interest income of approximately ($4.4) million driven by less capital deployed relating to loan exits and prepayments, partially offset by higher fee income of approximately $3.7 million driven by loan exits and prepayments during the nine months ended September 30, 2024, and higher OID income of approximately $4.0 million due to the acceleration of unaccreted OID of current year loan exits and prepayments during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, respectively. Interest expense increased approximately $39.8 thousand, or 2.6%, for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023 due to an increase in borrowings on the Revolving Credit Facility. Interest expense decreased approximately $(27.7) thousand, or (0.6)%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023 driven by lower interest incurred on the 2027 Senior Notes due to a weighted average decrease in the 2027 Senior Notes principal outstanding of approximately $(2.5) million, or (2.7)%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. This relates to the repurchase of $10.0 million of our 2027 Senior Notes during the nine months ended September 30, 2023. No repurchases took place during the same period in 2024. This is partially offset by an increase in interest expense relating to the Revolving Credit Facility due to an increase in borrowings period over period. Management fees decreased approximately $(0.2) million, or (22.7)%, for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023 driven by lower outside fees earned and lower equity attributable to the Spin-Off of SUNS completed on July 9, 2024. In connection with the Spin-Off, we recognized a reduction to additional paid-in capital of approximately $114.8 million. Incentive fees decreased approximately $(2.4) million, or (90.4)%, for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, driven by lower Core Earnings (as defined in the Management Agreement). Management fees increased approximately $0.1 million, or 3.5%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023 driven by lower outside fees earned and offset by lower equity attributable to the Spin-Off of SUNS completed on July 9, 2024. In connection with the Spin-Off, we recognized a reduction to additional paid-in capital of approximately $114.8 million. Incentive fees decreased approximately $(2.3) million, or (28.7)%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, driven by lower Core Earnings (as defined in the Management Agreement). General and administrative expenses decreased approximately $(0.1) million, or (13.1)%, for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023. General and administrative expenses decreased approximately $(1.1) million, or (27.7)%, for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. This decrease was primarily due to severance expense incurred during the nine months ended September 30, 2023 attributable to the departure of our former Chief Financial Officer of approximately $0.7 million. No severance expense was incurred during the nine months ended September 30, 2024. Stock-based compensation decreased approximately $(0.1) million, or (25.6)%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. This was driven by accelerated vesting of restricted stock awards in the prior period. 40 Index Stock-based compensation increased approximately $0.4 million, or 60.4%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. This was driven by additional equity awards granted in January 2024. Professional fees increased approximately $0.1 million, or 41.3%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Prior to the third quarter of 2024, Spin-Off costs were previously 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. Professional fees increased approximately $0.1 million, or 8.4%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Prior to the third quarter of 2024, Spin-Off costs were previously 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. The net change in realized gains (losses) on investments was approximately $1.2 million for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, driven by the change in realized loss relating to the maturity of our loan to Public Company A without repayment in the prior period. The net change in realized gains (losses) on investments was approximately $1.1 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, driven by the change in realized losses relating to separate sales of our investment in Subsidiary of Public Company M and realized loss relating to our loan to Public Company A during such periods. Investments in loans held at fair value are recorded on the trade date at cost, which reflects the amount of principal funded net of any original issue discounts. An unrealized gain arises when the fair value of the loan portfolio exceeds its cost and an unrealized loss arises when the fair value of the loan portfolio is less than its cost. The net change in unrealized gain (loss) of approximately $(4.6) million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively, and $(9.7) million and $(1.2) million for the nine months ended September 30, 2024 and 2023, respectively, was mainly driven by the sale of our loan with Private Company B with an unrealized loss that was recovered, maturity of our loan with Public Company A with an unrealized loss that was realized, as well as the net change in the valuation of the loans, which was impacted by changes in market yields, revenue multiples, and recovery rates. The gain (loss) on extinguishment of debt was zero for both the three months ended September 30, 2024 and the three months ended September 30, 2023. Gain (loss) on extinguishment of debt decreased approximately $(2.0) million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. This decrease was driven by the repurchase of $10.0 million of our 2027 Senior Notes during the nine months ended September 30, 2023. No repurchases took place during the same period in 2024. 41 Index Provision for Current Expected Credit Losses The provision for current expected credit losses decreased approximately $(0.9) million, or (82.8)%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 . The provision for current expected credit losses decreased approximately $(1.3) million, or (867.9)%, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 . The balance as of September 30, 2024 was approximatel y $25.3 million , or 10.70%, of our total loans held at carrying value and loan receivable held at carrying value balance of approximately $236.3 million and was bifurcated between (i) 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 (ii) a liability for unfunded commitments of approximately $0.2 million . The balance as of September 30, 2023 was approximately $14.4 million, or 4.66%, of our total loans held at carrying value and loan receivable held at carrying value balance of approximately $310.1 million and was bifurcated between (i) 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 $14.3 million and (ii) a liability for unfunded commitments of approximately $0.2 million. The liability is based on the unfunded portion of loan commitments over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. The change in the provision for current expected credit losses for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023 was due to changes in macroeconomic factors, changes to the loan portfolio including new commitments and repayments, borrower payment status, and changes in other data points we use in estimating the reserve. Loan Portfolio The table below summarizes our total loan portfolio as of September 30, 2024, unless otherwise specified. Borrower names have been kept confidential due to confidentiality agreement obligations. Loan Names Original Funding Date (1) Loan Maturity AFC Loan, net of Syndication % of Total AFC Principal Balance as of 9/30/2024 Cash Interest Rate PIK Fixed/ Floating Amortization During Term YTM (2)(3) Public Co. A - Equipment Loans (4) 8/5/2019 3/31/2025 $ 4,000,000 1.1% $ 2,041,744 12.0% N/A Fixed Yes 8% Private Co. A (5) 5/8/2020 5/8/2024 85,285,000 24.4% 53,818,300 13.0% 2.5% Fixed No 25% Sub of Private Co. G (6) 4/30/2021 5/1/2026 73,500,000 21.0% 79,215,888 12.5% N/A Fixed No 19% Private Co. J 8/30/2021 9/1/2025 28,500,000 8.2% 23,258,785 16.8% 2.0% Floating Yes 25% Private Co. K (7) 4/28/2022 5/3/2027 13,229,626 3.8% 12,195,762 16.8% 2.0% Floating Yes 25% Private Co. L 4/20/2022 5/1/2026 42,065,937 12.0% 35,597,486 13.4% N/A Floating Yes 19% Sub of Public Co. M 8/26/2022 8/27/2025 2,797,527 0.8% 2,797,527 9.5% N/A Fixed No 23% Private Co. M (8) 7/31/2023 7/31/2026 30,000,000 8.7% 30,499,498 9.0% N/A Fixed Yes 18% Private Co. N - Real Estate 3/22/2024 4/1/2028 19,327,505 5.6% 18,717,068 12.8% N/A Floating Yes 15% Private Co. N - Non-Real Estate 3/22/2024 4/1/2028 17,200,000 4.9% 17,200,000 12.8% N/A Floating Yes 15% Private Co. O 5/20/2024 6/1/2028 7,500,000 2.1% 2,728,647 13.5% N/A Floating Yes 18% Private Co. P (9) 6/18/2024 7/1/2027 15,126,433 4.3% 15,383,749 13.0% N/A Fixed Yes 16% Private Co. Q 8/16/2024 9/1/2028 11,000,000 3.1% 5,208,468 13.8% N/A Floating Yes 17% Subtotal (10) $ 349,532,028 100.0% $ 298,662,922 12.9% 0.7% 18% Wtd Average (1) All loans originated prior to July 31, 2020 were purchased from an affiliated entity at fair value which approximated accreted and/or amortized cost plus accrued interest on July 31, 2020. (2) Estimated YTM includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features. OID is recognized as a discount to the funded loan principal and is accreted to income over the term of the loan. Loans originated before July 31, 2020 were acquired by us, net of unaccreted OID, which we accrete to income over the remaining term of the loan. In some cases, additional OID is recognized from additional purchase discounts attributed to the fair value of equity positions that were separated from the loans prior to our acquisition of such loans. 42 Index The estimated YTM calculations require management to make estimates and assumptions, including, but not limited to, the timing and amounts of loan draws on delayed draw loans, the timing and collectability of exit fees, the probability and timing of prepayments and the probability of contingent features occurring. For example, certain credit agreements contain provisions pursuant to which certain PIK interest rates and fees earned by us under such credit agreements will decrease upon the satisfaction of certain specified criteria which we believe may improve the risk profile of the applicable borrower. To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Estimated YTM is calculated using the interest rate as of September 30, 2024 applied through maturity. Actual results could differ from those estimates and assumptions. (3) Estimated YTM for the loan with Private Company A is enhanced by purchase discounts attributed to the fair value of equity warrants that were separated from the loan prior to our acquisition of such loan. The purchase discounts accrete to income over the respective remaining terms of the applicable loan. (4) Effective October 1, 2022, Public Company A equipment loan receivable was placed on nonaccrual status. (5) Cash interest and PIK interest rates for Private Company A represent a blended rate of differing cash interest and PIK interest rates applicable to each of the tranches to which the Company is a lender under the senior secured term loan credit facility with Private Company A (as may be amended, restated, and supplemented or otherwise modified from time to time, the “Private Company A Credit Facility”). In October 2023, 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, Private Company A was placed 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. (6) 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. (7) As amended by the forbearance agreement entered into in March 2024, between 20.0% and 80.0% of the monthly cash interest was paid in kind from December 1, 2023 to June 1, 2024. Effective December 1, 2023, the Company placed the borrower on nonaccrual status. (8) Quarterly cash interest is paid in kind from closing to February 1, 2024 and then payable in cash thereafter. (9) 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. (10) The interest and PIK subtotal rates are weighted average rates. Loans Held for Investment at Fair Value As of September 30, 2024 and December 31, 2023, our 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, we 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 our loans held at fair value had floating interest rates. The following tables summarize our 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 43 Index 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 to our unaudited interim consolidated financial statements titled “Fair Value” . (2) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted 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. 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 Loans Held for Investment at Carrying Value As of September 30, 2024 and December 31, 2023, our portfolio included eleven and nine loans held at carrying value, respectively. A s of September 30, 2024 and December 31, 2023, the aggregate originated commitment under these loans was approximately $260.2 million and $333.1 million, respectively, and outstanding principal was approximately $242.8 million and $314.4 million, respectively. During the nine months ended September 30, 2024, we 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 our 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 our loans held at carrying value had floating interest rates. As of September 30, 2024, these 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%. 44 Index The following tables summarize our 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. 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 45 Index Loan Receivable Held at Carrying Value As of September 30, 2024 and December 31, 2023, our 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 Collateral Overview Our loans are typically secured by various types of assets of our borrowers, including real property and certain personal property, such as cashflows and the value associated with licenses (where applicable), equipment, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers. With respect to our loans to cannabis operators, we do not have liens on cannabis inventory and are generally restricted from taking ownership of state licenses by current statutory prohibitions and exchange listing standards. The documents governing our loans also include a variety of provisions intended to provide remedies against the value associated with licenses. For example, some loan documents require a grant of a security interest in all property of the entities holding licenses to the extent not prohibited by applicable law or regulations (or requiring regulatory approval), equity pledges of entities holding licenses, receivership remedies and/or other remedies to secure the value associated with the borrowers’ licenses. Upon default of a loan, we may seek to sell the loan to a third party or have an affiliate or a third party work with the borrower to have the borrower sell collateral securing the loan to a third party or institute a foreclosure proceeding to have such collateral sold, in each case, to generate funds towards the payoff of the loan. While we believe that the appraised value of any real estate assets or other collateral securing our loans may impact the amount of the recovery in each such scenario, the amount of any such recovery from the sale of such real estate or other collateral may be less than the appraised value of such collateral and the sale of such collateral may not be sufficient to pay off the remaining balance on the defaulted loan. Becoming the holder of a license through foreclosure or otherwise, the sale of a license or other realization of the value of licenses requires the approval of regulatory authorities. As of September 30, 2024, our portfolio of assets held outside of TRS1 had a weighted average real estate collateral coverage of approximately 1.0 times our aggregate committed principal amount of such loans, with the real estate collateral coverage for each of our loans measured as of the time of closing for such loan and based on various sources of data available at such time. We calculate our weighted average real estate collateral coverage by estimating the underlying value of our real estate collateral based on various objective and subjective factors, including, without limitation, third-party appraisals, total cost basis of the subject property and/or our own internal estimates. 46 Index We may pursue a sale of a defaulted loan if we believe that a sale would yield higher proceeds or that a sale could be accomplished more quickly than a foreclosure proceeding while yielding proceeds comparable to what would be expected from a foreclosure sale. To the extent that we determine that the proceeds are more likely to be maximized through instituting a foreclosure sale or through taking title to the underlying collateral, we will be subject to the rules and regulations under state law that govern foreclosure sales and Nasdaq listing standards that do not permit us to take title to real estate while it is involved in commercial sales of cannabis. In addition, the sale of the collateral securing our loans may be difficult and even for loans to cannabis operators, the collateral securing our loans may be sold to a party outside of the cannabis industry. Therefore, any appraisal-based value of our real estate and other collateral may not equal the value of such collateral if it were to be sold to a third party in a foreclosure or similar proceeding. We may seek to sell a defaulted loan prior to commencing a foreclosure proceeding or during a foreclosure proceeding to a purchaser that is not required to comply with Nasdaq listing standards. We believe a third-party purchaser that is not subject to Nasdaq listing standards may be able to realize greater value from real estate and other collateral securing our loans with respect to loans to cannabis operators. However, we can provide no assurances that a third party would buy such loans or that the sales price of such loans would be sufficient to recover the outstanding principal balance, accrued interest, and fees. We will not own real estate as long as it is used in the commercial sale of cannabis due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their loans with us. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our shareholders and meet other general business needs. We use significant cash to purchase our target investments, repay principal and interest on our borrowings, make distributions to our shareholders and fund our operations. The sources of financing for our target investments are described below. Our primary sources of cash generally consist of unused borrowing capacity under our Revolving Credit Facility, the net proceeds of future debt or equity offerings, including in connection with the ATM Program, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. Our net cash provided by operating activities for the nine months ended September 30, 2024 of approximately $19.3 million was less than our dividend payments of $32.8 million made during the same period due to earned OID of $7.1 million and PIK repayments of $5.5 million related to the exits from Private Company I, Private Company C and Private Company B during such period. OID relates to cash withheld by the Company upon funding of its investments and is included under the ‘Supplemental disclosure of non-cash activity’ on the Consolidated Statements of Cash Flows. As of September 30, 2024 and December 31, 2023, all of our cash was unrestricted and totaled approximately $122.2 million and $90.4 million, respectively. As of September 30, 2024, we believe that our cash on hand, capacity available under our line of credit and cash flows from operations will be sufficient to satisfy the operating requirements of our business through at least the next twelve months. Capital Markets Our Shelf Registration Statement became effective on April 18, 2022, allowing us to sell, from time to time in one or more offerings, up to $1.0 billion of our securities, including common stock, preferred stock, debt securities, warrants and rights (including as part of a unit) to purchase shares of our common stock or preferred stock. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. We may also access liquidity through our ATM Program, which was established in April 2022, pursuant to which we may sell, from time to time, up to $75.0 million of our common stock. During the three and nine months ended September 30, 2024, we sold an aggregate of 1,214,953 shares of our 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, our remaining authorization under the Sales Agreement was approximately $51.0 million. Subsequent to September 30, 2024, we sold an aggregate of 70,630 shares of our common stock under the Sales Agreement at a weighted average price of $9.99 per share, generating net proceeds of approximately $0.7 million. As of November 13, 2024, our remaining authorization under the Sales Agreement was approximately $50.3 million. 47 Index We may seek to raise further equity capital and issue debt securities in order to fund our future investments in loans. As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets. We expect the principal amount of the loans we originate for cannabis operators to increase. We also expect our expanded investment focus to require additional capital. As a result, we expect we will need to raise additional equity and/or debt funds to increase our liquidity in the near future. Revolving Credit Facility On April 29, 2022, we entered into the Revolving Credit Facility. As of September 30, 2024, we had $60.0 million of borrowings outstanding and zero availability under our Revolving Credit Agreement, which may be borrowed, repaid and redrawn, subject to a borrowing base based on eligible loan obligations held by us and subject to the satisfaction of other conditions provided under the Revolving Credit Facility. 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), and contains a maturity date of April 29, 2025. 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, w e incurred a one-time commitment fee expense of approximately $0.5 million, which is 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 our unaudited interim consolidated statements of operations. Based on the terms of the Revolving Credit Agreement, our estimated average cash balance will exceed the minimum balance required to waive the unused line fee and as such, we did not incur an unused line fee for the three and nine months ended September 30, 2024. Our obligations under the Revolving Credit Facility are secured by certain assets of ours comprising of or relating to loan obligations designated for inclusion in the borrowing base. In addition, we are subject to various financial and other covenants, including: (1) liquidity of at least $5.0 million, (2) annual debt service coverage of at least 1.50 to 1.0 and (3) secured debt not to exceed 25% of total consolidated assets of us and our subsidiaries. To the best of our knowledge, as of September 30, 2024, we were in compliance in all material respects with all covenants contained in our Revolving Credit Agreement. 2027 Senior Notes On November 3, 2021, we issued $100.0 million in aggregate principal amount of 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 issuance of the 2027 Senior Notes were approximately $97.0 million, after deducting the initial purchasers’ discounts and commissions and estimated offering fees and expenses payable by us. We used the net 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 our investment strategy and (iii) for working capital and other general corporate purposes. The terms of the 2027 Senior Notes are governed by the Indenture. Under the Indenture governing the 2027 Senior Notes, we are required to cause all of our 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, we 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. 48 Index The Indenture governing the 2027 Senior Notes contains customary terms and restrictions, subject to a number of exceptions and qualifications, including restrictions on our 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 our consolidated Total Assets (as defined in the Indenture), (3) incur or maintain secured debt in an aggregate principal amount greater than 25% of our consolidated Total Assets (as defined in the Indenture); and (4) merge, consolidate or sell substantially all of our 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. We were in compliance with the terms of the Indenture as of the date of this quarterly report. The table below sets forth the material terms of our outstanding senior notes as of the date of this Quarterly Report: Senior Notes Issue Date Amount Outstanding Interest Rate Coupon Maturity Date Interest Due Dates Optional Redemption Date 2027 Senior Notes November 3, 2021 $90.0 million 5.75% May 1, 2027 May 1 and November 1 February 1, 2027 Other Credit Facilities, Warehouse Facilities and Repurchase Agreements In the future, we may also use other sources of financing to fund the origination or acquisition of our target investments, including other credit facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized and may involve one or more lenders. We expect that these facilities will typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates. Debt Service As of September 30, 2024 , we believe that our cash on hand, capacity available under our Revolving Credit Facility, and cash flows from operations will be sufficient to service our outstanding debt during the next twelve months. Cash Flows Cash provided by (used in) operating, investing and financing activities of continuing operations for the nine months ended September 30, 2024 and 2023 is as follows: September 30, 2024 2023 Net cash provided by (used in) operating activities of continuing operations $ 16,064,202 $ 14,982,587 Net cash provided by (used in) investing activities of continuing operations $ 99,298,100 $ 18,508,853 Net cash (used in) provided by financing activities of continuing operations $ (70,885,129) $ (100,667,506) Net Cash Provided by (Used in) Operating Activities of Continuing Operations Net cash provided by operating activities of continuing operations during the nine months ended September 30, 2024 was approximately $16.1 million, compared to approximately $15.0 million for the same period in 2023. The increase of approximately $1.1 million during the nine months ended September 30, 2023 to September 30, 2024 was primarily due to an increase in the change in unrealized (gains) losses on loans held at fair value of approximately $8.5 million, decrease in PIK interest of approximately $6.6 million, decrease in gain (loss) on extinguishment of debt of approximately $2.0 million, increase in interest reserve of approximately $4.1 million, increase in interest receivable of approximately $1.6 million, partially offset by a decrease in net income from continuing operations of approximately $(15.3) million, decrease in accrued management and incentive fees of approximately $(2.2) million, increase in provision for current expected credit losses of approximately $(1.3) million and increase in OID accretion of approximately $(2.7) million, respectively. 49 Index Net Cash Provided by (Used in) Investing Activities of Continuing Operations Net cash provided by investing activities of continuing operations during the nine months ended September 30, 2024 was approximately $99.3 million, compared to approximately $18.5 million for the same period in 2023. The increase in net cash provided by investing activities of approximately $80.8 million during the nine months ended September 30, 2023 to September 30, 2024 was primarily due to an decrease in issuance and fundings on loans of approximately $1.7 million, an increase in proceeds from the sale of loans of approximately $74.7 million and an increase in principal repayments of loans of approximately $3.3 million, respectively. Net Cash Provided by (Used in) Financing Activities of Continuing Operations Net cash used in financing activities of continuing operations during the nine months ended September 30, 2024 was approximately $(70.9) million, compared to approximately $(100.7) million for the same period in 2023. The decrease of approximately $29.8 million during the nine months ended September 30, 2023 to September 30, 2024 was primarily due to an increase in borrowings on the Revolving Credit Facility of $164.0 million, offset by an increase in repayments on the Revolving Credit Facility of $(86.0) million, an increase in proceeds from the ATM program of $12.3 million, a decrease in repayments of the 2027 Senior Notes of approximately $7.7 million, and an increase in cash distributions in connection with the Spin-Off of SUNS of approximately $(67.9) million, respectively. Cash provided by (used in) operating, investing and financing activities of discontinued operations for the nine months ended September 30, 2024 and 2023 is as follows: September 30, 2024 2023 Net cash provided by (used in) operating activities of discontinued operations $ 3,271,445 $ 7,767 Net cash (used in) provided by investing activities of discontinued operations $ (47,211,339) $ — Net cash provided by (used in) financing activities of discontinued operations $ — $ — Net Cash Provided by (Used in) Operating Activities of Discontinued Operations Net cash provided by operating activities of discontinued operations during the nine months ended September 30, 2024 was approximately $3.3 million, compared to approximately $7.8 thousand for the same period in 2023. The increase of approximately $3.3 million during the nine months ended September 30, 2023 to September 30, 2024 was primarily due to an increase in net income from discontinued operations of $2.9 million and changes in working capital of $0.3 million, respectively. Net Cash Provided by (Used in) Investing Activities of Discontinued Operations Net cash used in investing activities of discontinued operations during the nine months ended September 30, 2024 was approximately $(47.2) million, compared to net cash provided by investing activities of zero for the same period in 2023. The decrease of net cash used in investing activities of discontinued operations was primarily due to the issuance and fundings on loans of approximately $67.3 million, offset by principal repayments of loans of $15.1 million, respectively. Net Cash Provided by (Used in) Financing Activities of Discontinued Operations There were no cash flows related to financing activities of discontinued operations during the nine months ended September 30, 2024 and 2023. Contractual Obligations, Other Commitments, and Off-Balance Sheet Arrangements Our contractual obligations as of September 30, 2024 are as follows: As of September 30, 2024 Less than 1 year 1-3 years 3-5 years More than 5 years Total Unfunded commitments $ 13,739,804 $ 5,791,532 $ 610,437 $ — $ 20,141,773 Total $ 13,739,804 $ 5,791,532 $ 610,437 $ — $ 20,141,773 50 Index As of September 30, 2024 , all unfunded commitments were related to our total loan commitments and were available for funding in less than four years. We also had the following contractual obligations as of September 30, 2024 relating to the 2027 Senior Notes: As of September 30, 2024 Less than 1 year 1-3 years 3-5 years More than 5 years Total Contractual obligations (1) $ 5,175,000 $ 100,350,000 $ — $ — $ 105,525,000 Total $ 5,175,000 $ 100,350,000 $ — $ — $ 105,525,000 (1) Amounts include projected interest payments during the period based on interest rates in effect as of September 30, 2024 . We may enter into certain contracts that may contain a variety of indemnification obligations. The maximum potential future payment amounts we could be required to pay under these indemnification obligations may be unlimited. Off-balance sheet commitments consist of unfunded commitments on delayed draw loans. Other than as set forth in this Quarterly Report, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities. Leverage Policies We currently do not intend to have leverage of more than one times equity. While we are required to maintain our leverage ratio in compliance with the 2027 Senior Notes Indenture, we expect to employ prudent amounts of leverage and, when appropriate, to use debt as a means of providing additional funds for the acquisition of loans, to refinance existing debt or for general corporate purposes. Leverage is primarily used to provide capital for forward commitments until additional equity is raised or additional medium- to long-term financing is arranged. This policy is subject to change by management and our Board. Dividends We have elected to be taxed as a REIT for United States federal income tax purposes and, as such, intend to annually distribute to our shareholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid and excluding our net capital gain. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year and (iii) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our shareholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our shareholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our shareholders and pay tax at regular corporate rates on the retained net capital gain. The shareholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we will accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities. 51 Index Critical Accounting Policies and Estimates As of September 30, 2024 , there were no significant changes in or changes in the application of our critical accounting policies or estimates from those presented in our Annual Report on Form 10-K.