Advanced Flower Capital Inc. 10-K

Item 7. 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 our accompanying notes and other information included in this Annual Report. 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 “Risk Factors,” in this Annual Report. Unless the context otherwise requires, as used in this section the terms “we,” “us,” “our,” or “AFC,” refers to Advanced Flower Capital Inc. Business 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, equipment, 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 state law compliant cannabis companies. The loans we originate are primarily structured as senior loans typically secured by real estate, equipment, cash flows 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. Spin-Off On February 22, 2024, we announced a plan to separate into two independent, publicly traded companies. 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 company (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. 74 Table of Contents Developments During the Year Ended December 31, 2024: Updates to Our Loan Portfolio During the Year Ended December 31, 2024 During the year ended December 31, 2024, we received approximately $21.8 million in aggregate principal prepayments f rom Private Company L’s sale of certain collateral assets, which was applied to our outstanding principal balance, recognizing $0.6 million in prepayment premiums and $0.04 million in exit fees. In January 2024, we delivered a reservation of rights letter to Private Company K with respect to the occurrence of certain events of default, including the failure to make principal and interest payments when due and to deliver monthly statements as required under the credit agreement with Private Company K. In March 2024, we entered into a forbearance agreement with Private Company K, pursuant to which we agreed to forbear from exercising certain remedies as a result of certain defaults under the credit agreement. In exchange for such forbearance, Private Company K agreed to, among other things, (i) additional reporting requirements and (ii) contribute additional cash equity in an aggregate amount of up to $5.5 million in increments on or before August 31, 2024 or obtain a combination of additional equity and debt financing in an aggregate amount of up to $8.5 million in increments on or before August 31, 2024, with certain of the proceeds applied to the outstanding obligations under the credit agreement. The existing credit agreement was amended by the forbearance agreement entered into with Private Company K to require a portion of cash interest payments to instead be paid in kind from December 2023 to May 2024, interest for the remainder of the months during the term of the forbearance agreement to be payable in cash in arrears and payments of principal during the term of the forbearance to be deferred. As part of the equity requirements under the forbearance agreement with Private Company K, we received a cash payment of approximately $1.5 million in June 2024, which was applied to the outstanding interest and principal under the credit agreement with Private Company K. In June 2024, we delivered a reservation of rights letter to Private Company K with respect to the occurrence of certain events of default under the credit agreement and the forbearance agreement, including the failure to make principal and interest payments when due. See “ Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments ” regarding recent updates with respect to our loan with Private Company K. In March 2024, we sold $6.0 million of our investment in Subsidiary of Public Company M, which was sold for approximately 94% of face value, compared to a blended weighted-average carrying value of 96%, resulting in a realized loss of approximately $0.1 million. In July 2024, we received an approximately $10.0 million principal prepayment and $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 December 31, 2024. In March 2024, we were repaid on all outstanding principal under the loan to Private Company I, which was previously placed on nonaccrual status, effective May 1, 2023. In addition to the repayment of the outstanding principal amount of approximately $3.8 million, we also received and recognized past due cash interest of approximately $0.7 million during the year ended December 31, 2024. During the year ended December 31, 2024, we received approximately $5.2 million in aggregate principal prepayments from Private Company A’s sale of certain collateral assets and monthly payments, which was applied to our outstanding principal balance. Effective March 1, 2024, we placed Private Company A on nonaccrual status. AFC Agent continues to monitor the court-appointed receivership installed to maintain the borrower’s operations and maximize value for the benefit of its creditors. 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 $53.1 million of outstanding principal as of December 31, 2024. In March 2024, we entered into the 2024 Subsidiary of Private Company G Forbearance Agreement, pursuant to which we agreed to forbear from exercising certain remedies as a result of certain events of default under the credit agreement and under the 2023 Subsidiary of Private Company G Forbearance Agreement. In exchange for such forbearance, Subsidiary of Private Company G agreed to, among other things, (i) contribute additional cash equity in an aggregate amount of not less than $3.0 million before April 30, 2024, (ii) sell certain assets, the proceeds of which will be applied to pay down outstanding obligations under the credit agreement, (iii) enter into a management services agreement with a third party with respect to Subsidiary of Private Company G’s operations in Pennsylvania, (iv) enter into a consulting or similar agreement with a third party with respect to Subsidiary of Private Company G’s operations in New Jersey, and (v) deliver additional reporting requirements. In addition, the existing credit agreement was amended by 2024 Subsidiary of Private Company G Forbearance Agreement to, for the remaining life of the loan (so long as Subsidiary of Private Company G complies with its obligations under the 2024 Subsidiary of Private Company G Forbearance Agreement): (a) remove the financial 75 Table of Contents covenants, (b) revise the existing cash flow sweep such that 75% of excess cash flow is paid toward current interest, accrued interest and principal, (c) change the interest rate on the loans to 12.5% per annum, a minimum portion of which is payable in cash pursuant to the excess cash flow sweep, and the remainder of which, if any, is paid in kind, and (d) remove required amortization payments. In May 2024, we delivered a reservation of rights letter to Subsidiary of Private Company G with respect to the occurrence of certain events of default under the 2024 Subsidiary of Private Company G Forbearance Agreement , including the failure to deliver proceeds of cash equity contributions and other deliverables by the deadlines set forth in the 2024 Subsidiary of Private Company G Forbearance Agreement . The Company agreed to a cure period and to continue the forbearance period so long as the deliverables were made by the cure date, with which the Subsidiary of Private Company G was able to comply. See “ Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments ” regarding recent updates with respect to our loan with Subsidiary of Private Company G. In March 2024, we entered into two senior secured credit facilities with Private Company N totaling $34.0 million, which were fully funded at closing. The loans are bifurcated between Private Company N Real Estate and Private Company N Non-Real Estate with commitments of $16.8 million and $17.2 million, respectively, and were originated at a discount of 4.0%, for a net funded amount of approximately $16.1 million and $16.5 million, respectively. The loans each bear interest at an annual rate of SOFR plus 8.0%, subject to a SOFR floor of 4.5%, and mature on April 1, 2028. In May 2024, we entered into the first amendment to the credit agreement with Private Company N - Real Estate, which increased the commitment size approximately $0.7 million and is fully funded under the same terms of the existing credit agreement. 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. As of December 31, 2024, the loan with Private Company N - Real Estate is fully funded. In May 2024, we entered into a $7.5 million senior secured credit facility with Private Company O. The loan bears interest at SOFR plus an 8.5% spread, subject to a SOFR floor of 5.0%, and matures June 1, 2028. As of December 31, 2024, approximately $3.3 million was drawn and the remainder is available to be drawn within one year of closing. In May 2024, Private Company C repaid its loan in full. The loan had an original maturity date of December 1, 2025 and the outstanding principal of Private Company C on the date of repayment was approximately $3.5 million. We received exit fees of approximately $1.7 million. In June 2024, we sold our loan with Private Company B at par plus accrued interest. The outstanding principal of the Private Company B credit facility on the date of the sale was approximately $19.3 million. In previous quarters, we noted that the Private Company B credit facility matured, but was not repaid, in September 2023 and the borrower was placed in receivership. In addition to the repayment of the outstanding principal amount of $19.3 million upon the sale, we also received an exit fee of approximately $1.0 million. Concurrently with the sale of the loan to Private Company B, we entered into an approximately $15.1 million senior secured credit facility with Private Company P. The borrower has since been removed from receivership and Private Company P is pursuing a foreclosure over the assets. The loan bears interest at a fixed rate of 13.0%. The credit agreement has a maturity date of three years, provided that in the event Private Company P has not acquired the assets of Private Company B within one year from closing, subject to a 120 day extension on the terms therein, our loan to Private Company P becomes due and payable. The loan is secured by substantially all assets of Private Company P (and will include the assets of Private Company B when acquired). 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 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 made 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 restarted January 1, 2025. In June 2024, we sold the Subsidiary of Public Company H credit facility at par plus accrued interest to a third-party. The outstanding principal on the date of the sale was $84.0 million. During the first quarter of fiscal year 2024, we noted that the borrower failed to make its April interest payment. In addition to the repayment of the outstanding principal amount of $84.0 million, we also received and recognized past due cash interest of approximately $2.3 million and default interest of approximately $0.6 million when sold during the year ended December 31, 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, (i) amended certain financial covenants, (ii) increased the total aggregate commitment by an 76 Table of Contents additional $5.5 million, of which we have funded $4.5 million as of December 31, 2024 and (iii) consented to Private Company J’s acquisition of three Missouri dispensaries and sale of one of its cultivation facilities. 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 December 31, 2024, approximately $5.8 million was drawn and the remainder is available to be drawn within two years of closing. 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%. 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 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 December 2024, we entered into an agreement to purchase approximately $8.9 million in outstanding principal amount of a senior secured term loan to Private Company T at par from a third party lender and the third party lender assigned all of its rights and obligations under such loan to us. The term loan under the Private Company T Credit Facility accrues interest at a fixed rate per annum of 11.25% and matures in July 2027. Revolving Credit Facility On March 26, 2024, the Company entered into Amendment Number One to Loan and Security Agreement, by and among the Company, as borrower, the lenders party thereto and the lead arranger, bookrunner and administrative agent party thereto, pursuant to which, among other things, the parties agreed expand the borrowing base to include funds maintained in a borrowing base cash account. On July 18, 2024, the Company entered into Amendment Number Two to Loan and Security Agreement, by and among the Company, as borrower, the lenders party thereto, and the lead arranger, bookrunner and administrative agent party thereto, pursuant to which, among other things, the parties agreed to exclude certain subsidiaries from the calculation of certain financial covenants so long as such subsidiaries are considered immaterial under the terms of the Loan and Security Agreement. On January 24, 2025, the Company entered into Amendment Number Three to Loan and Security Agreement, by and among the Company, as borrower, the lenders party thereto, and the lead arranger, bookrunner and administrative agent party thereto, pursuant to which, among other things, the parties agreed to reduce the procedural requirements for obligor loan receivables to become eligible under the borrowing base. AFCF Credit Facility In December 2024, we entered into an unsecured revolving credit agreement (the “AFCF Credit Agreement”), by and among the Company, as borrower, the lenders party thereto from time to time, and AFC Finance, LLC, as agent and lender. AFC Finance, LLC is wholly owned by Leonard M. Tannenbaum, Chairman of the Company’s Board of Directors. The AFCF Credit Agreement provides for an unsecured revolving credit facility (the “AFCF Credit Facility”) with a $40.0 million commitment, which may be borrowed, repaid and redrawn, subject to a draw fee and the other conditions provided in the AFCF Credit Agreement. Interest is payable on the AFCF Credit Facility at a rate per annum equal to 8.00%. The AFCF Credit Facility matures on the earlier of (i) December 31, 2025 and (ii) the date of the closing of any unsecured debt with principal of at least $40.0 million used to refinance the AFCF Credit Agreement. 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 77 Table of Contents 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 year ended December 31, 2024, we sold an aggregate of 1,582,960 shares of our common stock under the Sales Agreement at a weighted average price of $10.24 per share, generating net proceeds of approximately $15.6 million. As of December 31, 2024, the Company’s remaining authorization under the Sales Agreement was approximately $47.4 million. Dividends Declared Per Share For the year ended December 31, 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 December 15, 2023 December 31, 2023 January 12, 2024 0.48 9.8 million 2023 Period Subtotal $ 2.00 $ 40.9 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 December 13, 2024 December 31, 2024 January 15, 2025 0.33 7.4 million 2024 Period Subtotal $ 1.77 $ 37.5 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 . Based on our current estimates and assumptions, we expect to generate distributable earnings at, or around, $0.23 per basic weighted average common share for the first two fiscal quarters of 2025. However, this estimate is preliminary and may change. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Recent Developments In January 2025, AFC Agent placed Private Company K in a consensual receivership to operate the collateral assets for the benefit of the Company, as a secured lender, and all other stakeholders. In February 2025, we entered into a $15.0 million senior secured credit facility with Private Company U, which was fully funded at closing. The loan was originated at a discount of 2.50% and matures March 1, 2028. The loan bears interest at 14.00%. In February 2025, AFC Agent, on behalf of the Company and the other lenders, initiated a mortgage foreclosure proceeding in connection with the 2024 Subsidiary of Private Company G Forbearance Agreement over a cultivation facility owned by Subsidiary of Private Company G. The Company also delivered a reservation of rights letter to Subsidiary of Private Company G concerning the occurrence of events of default and forbearance defaults under the credit agreement and the 2024 Subsidiary of Private Company G Forbearance Agreement, respectively, including unpermitted payments, the failure to maintain and preserve one of Subsidiary of Private Company G’s cannabis licenses and its cultivation facility and its failure to cooperate with us in the foreclosure proceeding. We believe these defaults have had a material adverse impact on Subsidiary of Private Company G’s ability to operate its business and make payments under the credit agreement. AFC Agent is also therefore pursuing a payment guarantee from the parent company and the beneficial shareholders of Subsidiary of Private Company G that guaranteed the loan. For more information on related risks, s ee “ Risk Factors—Risks Related to Our Business and Growth Strategy— Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks .” 78 Table of Contents 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. 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) provision for (reversal of) 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. 79 Table of Contents The following table provides a reconciliation of GAAP net income to distributable earnings: Years ended December 31, 2024 2023 Net income $ 16,784,205 $ 20,951,999 Adjustments to net income: Stock-based compensation expense 1,390,978 1,008,148 Depreciation and amortization — — Unrealized losses (gains) or other non-cash items 9,806,916 8,513,364 Provision for (reversal of) current expected credit losses (1) 4,233,310 12,132,718 TRS loss (income), net of dividends 2,711,006 (1,158,946) One-time events pursuant to changes in GAAP and certain non-cash charges — — Distributable earnings $ 34,926,415 $ 41,447,283 Basic weighted average shares of common stock outstanding 20,821,239 20,321,091 Distributable earnings per basic weighted average share $ 1.68 $ 2.04 (1) The provision for current expected credit losses above includes approximately $71.9 thousand and zero in connection with the Spin-Off for the years ended December 31, 2024 and 2023, respectively, which is included in the net income from discontinued operations, net of tax financial statement line on the consolidated statements 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 December 31, 2024 and 2023 was approximately $9.02 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 portfolio 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 years ended December 31, 2024 and 2023 Our net income from continuing operations allocable to our common shareholders for the year ended December 31, 2024, was approximately $13.9 million, or $0.64 per basic weighted average common share from continuing operations, compared to net income from continuing operations allocable to our common shareholders of approximately $20.7 million, or $1.01 per basic weighted average common share from continuing operations for the year ended December 31, 2023, respectively. Interest income decreased approximately $(18.3) million, or (26.0)%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. This decrease was driven by lower interest income of approximately ($17.9) million driven by Subsidiary of Private Company G, Private Company K and Private Company A on nonaccrual status during fiscal year 2024, lower interest income of approximately ($7.7) million driven by less capital deployed relating to loan exits and prepayments, partially offset by higher fee income of approximately $3.8 million driven by loan exits and prepayments during the year ended December 31, 2024, and higher OID income of approximately $3.5 million due to the acceleration of unaccreted OID of current year loan exits and prepayments during the year ended December 31, 2024, as compared to the year ended December 31, 2023, respectively. 80 Table of Contents Interest expense decreased approximately $(21.1) thousand, or (0.3)%, for the year ended December 31, 2024, as compared to the year ended December 31, 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 $(1.9) million, or (2.0)%, for the year ended December 31, 2024, as compared to the year ended December 31, 2023, due to the repurchase of $10.0 million of our 2027 Senior Notes during the year ended December 31, 2023. No repurchases took place during the year ended December 31, 2024. The decrease in interest expense year-over-year is also driven by less unused fees incurred due to an increase in borrowings on the credit facilities. Relatedly, this is partially offset by an increase in interest expense on such borrowings year-over-year on both the Revolving Credit Facility and AFCF Credit Facility. Management fees decreased approximately $(0.1) million, or (2.9)%, for the year ended December 31, 2024, as compared to the year ended December 31, 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 $(3.6) million, or (34.7)%, for the year ended December 31, 2024, as compared to the year ended December 31, 2023, driven by lower Core Earnings (as defined in the Management Agreement), as well as lower Adjusted Capital (as defined in the Management Agreement) attributable to the Spin-Off. General and administrative expenses decreased approximately $(1.0) million, or (20.7)%, for the year ended December 31, 2024, as compared to the year ended December 31, 2023. This decrease was primarily due to severance expense incurred during the year ended December 31, 2023 attributable to the departure of our former Chief Financial Officer of approximately $0.7 million. No severance expense was incurred during the year ended December 31, 2024. Stock-based compensation increased approximately $0.4 million, or 38.0%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. This was driven by additional equity awards granted in January and December 2024. Professional fees increased approximately $0.1 million, or 5.8%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The net change in realized gains (losses) on investments was approximately $1.2 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023, driven by the net change in realized losses relating to separate sales of our investment in Subsidiary of Public Company M of approximately $33.7 thousand and realized loss relating to our loan to Public Company A of approximately $1.2 million during such periods. In the prior year, the credit facility with Public Company A matured without repayment. The agent on the credit facility placed the borrower in default, and we recorded a realized loss of approximately $(1.2) million during such period. 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 $(9.8) million and $(8.5) million for the years ended December 31, 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. Gain on extinguishment of debt decreased approximately $(2.0) million for the year ended December 31, 2024 as compared to the year ended December 31, 2023. This decrease was driven by the repurchase of $10.0 million of our 2027 Senior Notes during the year ended December 31, 2023. No repurchases took place during the year ended December 31, 2024. Provision for Current Expected Credit Losses The provision for current expected credit losses decreased approximately $(8.0) million, or (65.7)%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023 . The balance as of December 31, 2024 was approximatel y $30.6 million , or 10.36%, of our total loans held at carrying value and loan receivable held at carrying value balance of approximately $295.2 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 $30.4 million and (ii) a liability for unfunded commitments of approximately $0.2 million . The balance as of December 31, 2023 was approximately $26.4 million, or 8.71%, of our total loans held at carrying value and loan receivable held at carrying value balance of approximately $303.3 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 81 Table of Contents receivable held at carrying value of approximately $26.3 million and (ii) a liability for unfunded commitments of approximately $0.1 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 year ended December 31, 2024 compared to the year ended December 31, 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 As of December 31, 2024 , our portfolio was comprised of 16 loans (such portfolio, our “Existing Portfolio”). The aggregate originated commitment under these loans was approximately $361.3 million and outstanding principal was approximately $356.8 million as of December 31, 2024. As of December 31, 2024, our portfolio had a weighted-average estimated YTM of approximately 18% and was secured by various types of assets of our borrowers, including real property and personal property, such as cash flows and the value associ ated with licenses (where applicable), equipment, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers. The table below summarizes our total loan portfolio as of December 31, 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 12/31/2024 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% $ 1,897,324 12.0% N/A Fixed Yes 7% Private Co. A (5) 5/8/2020 5/8/2024 44,442,895 12.3% 53,108,449 13.0% 2.5% Fixed No 18% Sub of Private Co. G (6) 4/30/2021 5/1/2026 73,500,000 20.3% 79,215,888 12.5% N/A Fixed No 18% Private Co. J 8/30/2021 9/1/2025 28,500,000 7.9% 24,290,184 16.3% 2.0% Floating Yes 25% Private Co. K (7) 4/28/2022 5/3/2027 13,229,626 3.7% 12,195,762 16.3% 2.0% Floating Yes 23% Private Co. L 4/20/2022 5/1/2026 34,708,473 9.6% 34,129,999 13.0% 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 8.3% 29,599,498 9.0% N/A Fixed Yes 18% Private Co. N - Real Estate 3/22/2024 4/1/2028 19,327,505 5.3% 19,327,505 12.5% N/A Floating Yes 16% Private Co. N - Non-Real Estate 3/22/2024 4/1/2028 17,200,000 4.8% 17,200,000 12.5% N/A Floating Yes 16% Private Co. O 5/20/2024 6/1/2028 7,500,000 2.1% 3,347,647 13.5% N/A Floating Yes 18% Private Co. P (9) 6/18/2024 7/1/2027 15,126,433 4.2% 15,609,914 13.0% N/A Fixed Yes 16% Private Co. Q 8/16/2024 9/1/2028 11,000,000 3.0% 5,817,755 13.8% N/A Floating Yes 17% Private Co. R 10/4/2024 11/1/2027 41,000,000 11.3% 39,519,968 12.0% N/A Floating Yes 15% Sub. of Public Co. S 11/19/2024 8/12/2026 10,000,000 2.8% 10,000,000 9.5% N/A Fixed No 10% Private Co. T 12/18/2024 7/26/2027 8,945,972 2.5% 8,704,144 11.3% N/A Fixed Yes 12% Subtotal (10) $ 361,278,431 100.0% $ 356,761,564 12.6% 0.6% 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. 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 December 31, 2024 applied through maturity. Actual results could differ from those estimates and assumptions. 82 Table of Contents (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 2024 Subsidiary of Private Company G Forbearance Agreement, 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 was 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. 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 made 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 restarted January 1, 2025. (10) The interest and PIK subtotal rates are weighted average rates. Loans Held for Investment at Fair Value As of December 31, 2024 and 2023, our portfolio included one and two loans held at fair value, respectively. The aggregate commitment under these loans was approximately $44.4 million and $94.2 million, respectively, and outstanding principal was approximately $53.1 million and $71.9 million as of December 31, 2024 and 2023 , respectively. For the year ended December 31, 2024, we funded approximately $4.6 million in new loans and additional principal and received approximately $5.2 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 December 31, 2024 and 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 December 31, 2024 and 2023 : As of December 31, 2024 Fair Value (1) Carrying Value (2) Outstanding Principal (2) Weighted Average Remaining Life (Years) (3) Senior term loan $ 30,510,804 $ 50,241,018 $ 53,108,449 0.0 Total loan held at fair value $ 30,510,804 $ 50,241,018 $ 53,108,449 0.0 83 Table of Contents 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 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 December 31, 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 year ended December 31, 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 — — (9,806,916) (9,806,916) New fundings 4,594,027 (2,756,416) — 1,837,611 Accretion of original issue discount — 128,384 — 128,384 Loan repayments (5,218,919) — — (5,218,919) Sale of loans (19,284,846) — — (19,284,846) PIK interest 1,134,785 — — 1,134,785 Total loans held at fair value at December 31, 2024 $ 53,108,449 $ (2,867,431) $ (19,730,214) $ 30,510,804 Loans Held for Investment at Carrying Value As of December 31, 2024 and 2023 , our portfolio included fourteen and nine loans held at carrying value, respectively. A s of December 31, 2024 and 2023 , the aggregate originated commitment under these loans was approximately $312.8 million and $333.1 million, respectively, and outstanding principal was approximately $301.8 million and $314.4 million, respectively. During the year ended December 31, 2024, we funded approximately $128.8 million of new loans and additional principal, had approximately $53.4 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 December 31, 2024 and 2023 , approximately 52% and 84%, respectively, of our loans held at carrying value had 84 Table of Contents floating interest rates. As of December 31, 2024, these floating benchmark rates included one-month Secured Overnight Financing Rate (“SOFR”) subject to a weighted average floor of 3.8% and quoted at 4.3%. The following tables summarize our loans held at carrying value as of December 31, 2024 and 2023 : As of December 31, 2024 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior term loans $ 301,755,791 $ (8,493,417) $ 293,262,374 1.9 Total loans held at carrying value $ 301,755,791 $ (8,493,417) $ 293,262,374 1.9 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 December 31, 2024 and 2023 . The following table presents changes in loans held at carrying value as of and for the year ended December 31, 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 128,796,860 (3,474,893) 125,321,967 Accretion of original issue discount — 7,841,345 7,841,345 Loan repayments (46,126,637) — (46,126,637) Sale of loans (90,000,000) 251,662 (89,748,338) PIK interest 2,006,992 — 2,006,992 Loan amortization payments (7,298,353) — (7,298,353) Total loans held at carrying value at December 31, 2024 $ 301,755,791 $ (8,493,417) $ 293,262,374 Loan Receivable Held at Carrying Value As of December 31, 2024 and 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 $1.9 million and $2.0 million as 85 Table of Contents of December 31, 2024 and 2023 , respectively. During the year ended December 31, 2024, we received approximately $0.1 million of principal repayments of loan receivable held at carrying value. The following table presents changes in loans receivable as of and for the year ended December 31, 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 (144,420) — (144,420) Total loan receivable held at carrying value at December 31, 2024 $ 1,897,324 $ (1,686) $ 1,895,638 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 the Revolving Credit Facility and the AFCF 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 year ended December 31, 2024 of approximately $21.6 million was less than our dividend payments of $40.0 million made during the same period due to earned OID of $8.0 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 December 31, 2024 and 2023, all of our cash was unrestricted and totaled approximately $103.6 million and $90.4 million, respectively. As of December 31, 2024, we believe that our cash on hand, capacity available under the Revolving Credit Facility, AFCF Credit Facility 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 year ended December 31, 2024, we sold an aggregate of 1,582,960 shares of our common stock under the Sales Agreement at a weighted average price of $10.24 per share, generating net proceeds of approximately $15.6 million. As of December 31, 2024, our remaining authorization under the Sales Agreement was approximately $47.4 million. 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. 86 Table of Contents Revolving Credit Facility On April 29, 2022, we entered into the Revolving Credit Facility. As of December 31, 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. All outstanding borrowings under the Revolving Credit Facility were subsequently repaid in full on January 2, 2025. 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 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 year ended December 31, 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 December 31, 2024, we were in compliance in all material respects with all covenants contained in our Revolving Credit Agreement. AFCF Credit Facility In December 2024, we entered into the AFCF Credit Facility, which provides for an unsecured revolving credit facility with a $40.0 million commitment, which may be borrowed, repaid and redrawn, subject to a draw fee and the other conditions provided in the AFCF Credit Agreement . As of December 31, 2024, we had $40.0 million of borrowings outstanding and zero availability under our AFCF Credit Agreement. All outstanding borrowings under the AFCF Credit Facility were subsequently repaid in full on January 2, 2025. See “Developments During the Year Ended December 31, 2024— AFCF Credit Facility” above. 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. 87 Table of Contents 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 Annual 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 December 31, 2024 , we believe that our cash on hand, capacity available under our Revolving Credit Facility and AFCF 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 year ended December 31, 2024 and 2023 is as follows: Years ended December 31, 2024 2023 Net cash provided by (used in) operating activities of continuing operations $ 18,286,230 $ 20,984,312 Net cash provided by (used in) investing activities of continuing operations $ 42,362,420 $ 28,519,379 Net cash (used in) provided by financing activities of continuing operations $ (34,724,749) $ (68,494,701) Net Cash Provided by (Used in) Operating Activities of Continuing Operations Net cash provided by operating activities of continuing operations during the year ended December 31, 2024 was approximately $18.3 million, compared to approximately $21.0 million for the same period in 2023. The decrease of approximately $(2.7) million during the year ended December 31, 2023 to December 31, 2024 was primarily due to an increase in the change in unrealized (gains) losses on loans held at fair value of approximately $1.3 million, decrease in PIK interest of approximately $7.8 million, decrease in gain (loss) on extinguishment of debt of approximately $2.0 million, increase in interest reserve of approximately $4.7 million, partially offset by a decrease in net income from continuing operations of approximately $(6.9) million, decrease in accrued management and incentive fees of approximately $(1.1) million, decrease in provision for current expected credit losses of approximately $(8.0) million and increase in OID accretion of approximately $(1.8) million, respectively. 88 Table of Contents Net Cash Provided by (Used in) Investing Activities of Continuing Operations Net cash provided by investing activities of continuing operations during the year ended December 31, 2024 was approximately $42.4 million, compared to approximately $28.5 million for the same period in 2023. The increase in net cash provided by investing activities of approximately $13.8 million during the year ended December 31, 2023 to December 31, 2024 was primarily due to an increase in issuance and fundings on loans of approximately $(60.7) million, an increase in proceeds from the sale of loans of approximately $74.7 million. Net Cash Provided by (Used in) Financing Activities of Continuing Operations Net cash used in financing activities of continuing operations during the year ended December 31, 2024 was approximately $(34.7) million, compared to approximately $(68.5) million for the same period in 2023. The decrease of approximately $33.8 million during the year ended December 31, 2023 to December 31, 2024 was primarily due to an increase in borrowings on the Revolving Credit Facility and the AFCF Credit Facility of $222.0 million in the aggregate, offset by an increase in repayments on the Revolving Credit Facility of $(146.0) million, an increase in proceeds from the ATM program of $15.8 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 year ended December 31, 2024 and 2023 is as follows: Years ended December 31, 2024 2023 Net cash provided by (used in) operating activities of discontinued operations $ 3,271,445 $ 244,622 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 year ended December 31, 2024 was approximately $3.3 million, compared to approximately $0.2 million for the same period in 2023. The increase of approximately $3.0 million during the year ended December 31, 2023 to December 31, 2024 was primarily due to an increase in net income from discontinued operations of $2.7 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 year ended December 31, 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 year ended December 31, 2024 and 2023. Contractual Obligations, Other Commitments, and Off-Balance Sheet Arrangements Our contractual obligations as of December 31, 2024 are as follows: As of December 31, 2024 Less than 1 year 1-3 years 3-5 years More than 5 years Total Unfunded commitments $ 5,152,353 $ 5,182,246 $ — $ — $ 10,334,599 Total $ 5,152,353 $ 5,182,246 $ — $ — $ 10,334,599 89 Table of Contents As of December 31, 2024 , all unfunded commitments were related to our total loan commitments and were available for funding in less than two years. We also had the following contractual obligations as of December 31, 2024 relating to the 2027 Senior Notes: As of December 31, 2024 Less than 1 year 1-3 years 3-5 years More than 5 years Total Contractual obligations (1) $ 5,175,000 $ 97,762,500 $ — $ — $ 102,937,500 Total $ 5,175,000 $ 97,762,500 $ — $ — $ 102,937,500 (1) Amounts include projected interest payments during the period based on interest rates in effect as of December 31, 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 Annual 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. 90 Table of Contents Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP which requires the use of estimates and assumptions that involve the exercise of judgment as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we believe apply to us based on the nature of our initial operations. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments used to prepare our consolidated financial statements are based upon reasonable assumptions given the information available to us at that time. Those accounting policies and estimates that we believe are most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below. Loans Held at Fair Value We originate commercial real estate debt and related instruments generally to be held for investment. Although we generally hold our target investments as long-term loans, we may occasionally classify some of our loans as held for sale. We may carry our loans at fair value or amortized cost in our consolidated balance sheet. As of December 31, 2024 and 2023, one and two loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, respectively, with changes in fair value recorded through earnings. Refer to Note 14 to our consolidated financial statements titled “Fair Value” for more information on the valuations of the loans. Loans are generally collateralized by real estate, equipment, cash flows and the value associated with licenses (where applicable) and/or other assets of borrowers to the extent permitted by applicable laws and the regulations governing such borrowers. The extent of any credit deterioration associated with the performance and/or value of the underlying collateral property and the financial and operating capability of the borrower could impact the expected amounts received. We monitor performance of our loans held for investment portfolio under the following methodology: (i) borrower review, which analyzes the borrower’s ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (ii) economic review, which considers underlying collateral (i.e., leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service, as well as the residual loan balance at maturity); (iii) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (iv) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective. We follow Accounting Standards Codification (“ASC”) 825-10, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASC 825-10”), which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. We have elected the ASC 825-10 option to report selected financial assets and liabilities at fair value. We also follow ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure of fair value measurements. ASC 820-10 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires us to assume that the loan is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820-10, we have considered its principal market as the market in which we exit our investments with the greatest volume and level of activity. ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below: • Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. • Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. • Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. 91 Table of Contents If inputs used to measure fair value fall into different levels of the fair value hierarchy, a loan’s level is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the loan. This includes loans that are valued using “bid” and “ask” prices obtained from independent third-party pricing services or directly from brokers. Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, we obtain and analyze readily available market quotations provided by pricing vendors and brokers for all of our loans for which quotations are available. In determining the fair value of a particular loan, pricing vendors and brokers use observable market information, including both binding and non-binding indicative quotations. GAAP requires disclosure of fair value information about financial and nonfinancial assets and liabilities, whether or not recognized in the consolidated financial statements, for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows using market yields, or other valuation methodologies. Any changes to the valuation methodology will be reviewed by our management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that the valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial and nonfinancial assets and liabilities could result in a different estimate of fair value at the reporting date. We use inputs that are current as of the measurement date, which may fall within periods of market dislocation, during which price transparency may be reduced. Current Expected Credit Loss Reserve (“CECL”) We estimate our 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 our current and future view of the macroeconomic environment. We may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve, which may include (i) whether cash from the borrower’s operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we may elect to apply a practical expedient in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a specific CECL allowance. Revenue Recognition Interest income from loans is accrued based on the outstanding principal amount and the contractual terms of each loan. Revenue from OID is also recognized in interest income from loans over the initial loan term as a yield adjustment using the effective interest method. Management places loans on nonaccrual status when principal or interest payments are past due 30 days or more or when full recovery of interest and principal is doubtful. Accrued and unpaid interest is generally reversed against interest income in the period the loan is placed on nonaccrual status. Interest payments received on nonaccrual loans are generally recognized on a cash basis and may be recognized as income or applied to principal depending upon management’s judgment regarding the borrower’s ability to make pending principal and interest payments. Nonaccrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current. We may make exceptions to placing a loan on nonaccrual status if the loan has sufficient collateral value and is in the process of collection. Delayed draw loans earn interest or unused fees on the undrawn portion of the loan, which is recognized as interest income in the period earned. Other fees, including prepayment fees and exit fees, are also recognized as interest income when received. Any such fees will be generated in connection with our investments and recognized as earned in accordance with GAAP. 92 Table of Contents Payment-in-Kind Interest We have loans in our portfolio that contain PIK provisions. The PIK interest computed at the contractual rate specified in each applicable agreement is accrued and added to the principal balance of the loan and recorded as interest income. The PIK interest added to the principal balance is typically amortized and paid in accordance with the loan agreements. In cases where the loans do not amortize, the PIK interest is collected upon repayment of the outstanding principal. To maintain our status as a REIT, this non-cash source of income is included in taxable income and will increase the dividend paid to shareholders for the year earned, even though the Company has not yet collected the cash. Income Taxes We are a Maryland corporation and have elected to be taxed as a REIT under the Code, commencing with our taxable year ended December 31, 2020. We believe we have qualified, and our 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 satisfying numerous asset, income and distribution tests which depend, in part, on our operating results. To continue to qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually to our shareholders at least 90% of our REIT taxable income prior to the deduction for dividends paid and excluding our net capital gain. To the extent that 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 1) 85% of our ordinary income for the calendar year, 2) 95% of our capital gain net income for the calendar year, and 3) any Required Distributions 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 a 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 will be 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 it is determined that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. The annual expense is calculated in accordance with applicable tax regulations. Excise tax expense is included in the line item income tax expense. Our wholly-owned subsidiary, TRS1, operates as a TRS and began operating in July 2021. 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 us 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, we may also be subject to a 100% excise tax on certain transactions between us and our 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 in the consolidated statements of operations included in this Annual Report. FASB ASC Topic 740, Income Taxes (“ASC 740”), prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are well documented and supported as of December 31, 2024. Based on our evaluation, there is no reserve for an y uncertain income tax positions. Accrued interest and penalties, if any, are included within other liabilities in the consolidated balance sheets. JOBS Act Accounting Election The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of the extended transition period for complying with new or 93 Table of Contents revised financial accounting standards. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act, (b) in which we have total annual revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which generally means the market value of our common equity that is held by non-affiliates exceeds $700 million as of the end of the prior fiscal year’s second fiscal quarter; and (2) the date on which we have issued more than $1 billion in non-convertible debt securities during the prior three-year period. Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Pending Adoption See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K, which describes recent accounting pronouncements that we have adopted and are pending adoption.