Advanced Flower Capital Inc.
08/14/2025 | Press release | Distributed by Public on 08/14/2025 05:31
Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)
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, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2024 and Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2025.
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, typically secured by real estate, equipment, cash flows and license value, to (i) state law-compliant cannabis operators and ancillary cannabis companies and (ii) other public and privately held middle-market companies.
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
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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.
At the August Meeting, the Board approved the Sixth Amendment, which expands our investment strategy. Accordingly, under the Sixth Amendment, we expanded our investment strategy and intend to additionally originate, structure, underwrite, invest in and manage senior secured mortgage loans and other types of loans and debt securities to companies ancillary to the cannabis industry as well as companies outside of the cannabis industry. Businesses ancillary to the cannabis industry may include, but are not limited to, brand developers, business services providers, and equipment and consumables providers. We believe there are also attractive lending opportunities in companies ancillary to and outside of the cannabis industry that could generate attractive risk-adjusted returns. The investment team has over 30 years of experience in direct lending outside of the cannabis industry across $10 billion of transactions. By expanding the investment mandate, we expect to be able to diversify its exposure across industries and credit risk profiles while maintaining deal selectivity.
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 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 1940 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.
At the August Meeting, the Board, including a majority of the Independent Directors, unanimously approved, subject to the approval of our shareholders, a new Investment Advisory Agreement between us and the Manager. If approved by our shareholders, the new Investment Advisory Agreement would enable us to operate as a BDC under the 1940 Act. We believe that the Conversion would enable us to pursue a broader array of investment opportunities, as further discussed above. The Company expects, in the coming days, to file a preliminary proxy statement with the SEC and, subsequently, to mail definitive proxy statements to its shareholders seeking their approval of (1) the new Investment Advisory Agreement and (2) in connection with its anticipated operation as a BDC, a reduction in the asset coverage ratio applicable to the us (enabling us to utilize a greater degree of leverage than would otherwise be permitted), all of which will be more fully described in the proxy statement. In addition, in the coming months, the Board will consider other matters necessary to effect our conversion to a BDC. There can be no assurance that the Board or our shareholders will approve the matters necessary for us to convert to a BDC.
We are pursuing the Conversion, which, subject to shareholder approval, will result in the Company ceasing to operate as a mortgage REIT and electing to be regulated as a BDC under the 1940 Act. Following the Conversion, we would be able to invest in a much broader universe of assets, including both real estate- and non-real estate-related assets.
We have historically targeted lending to vertically integrated cannabis companies with significant real estate holdings. Given the capital-intensive nature of the cannabis industry, combined with the high cost of capital, many operators do not own real estate, which significantly limits the universe of cannabis operators to which we can lend as a mortgage REIT. The Conversion would allow us to invest in non-real estate covered vertically integrated operators.
In addition, following the Conversion, we intend to continue investing in businesses ancillary to the cannabis industry, as contemplated under the Sixth Amendment. Ancillary cannabis businesses can have high growth potential, but often do not
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own real property and have limited access to debt capital. If completed, the transition to a BDC will enable us to significantly expand its investment universe by increasing its ability to lend to ancillary cannabis businesses as well as non-real estate covered vertically integrated operators.
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 commercial real estate ("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.
Developments During the Second Quarter June 30, 2025:
Updates to Our Loan Portfolio During the Second Quarter June 30, 2025
In April 2025, we received a voluntary prepayment from Private Company L of approximately $2.0 million, which was applied to our outstanding principal balance, recognizing $48.8 thousand in exit fees.
In April 2025, we entered into a $14.0 million senior secured credit facility with Subsidiaries of Private Company V. The loan was originated at a discount of 3.0% and matures April 1, 2029. The loan bears cash interest at 12.5% and 1.5% interest paid-in kind. At closing, approximately $10.5 million was drawn and the remainder is available to be drawn within one year of closing.
In May 2025, we were fully repaid on our loan with Private Company T at par plus accrued interest. The outstanding principal of the senior secured term loan on the date of repayment was approximately $7.7 million.
In May 2025, we were fully repaid on our loan with Subsidiary of Public Company M at par plus accrued interest. The outstanding principal of our investment on the date of repayment was approximately $2.8 million.
In June 2025, we deemed our equipment loan receivable with Public Company A uncollectible and wrote off the remaining balance. At the time of write-off, the equipment loan with Public Company A had an outstanding principal balance of approximately $1.8 million and amortized cost of approximately $1.8 million. Prior to the write-off, the loan receivable had a CECL Reserve that was fully reserved for. In the second quarter of 2025, we wrote off $1.8 million, which was equal to the carrying value of the loan receivable, excluding the CECL Reserve at the time the loan was written off.
In April 2025, we and AFC Agent (collectively, the "AFC Parties") commenced separate legal actions against (i) two shareholders of the parent of Subsidiary of Private Company G in the United States District Court for the Southern District of New York asserting claims for violations of the Racketeer Influenced and Corrupt Organizations Act, breach of a shareholder guaranty, tortious interference with contract, fraud, aiding and abetting fraud, and conversion and (ii) the parent of Subsidiary of Private Company G in New York state court asserting a claim for breach of contract arising from its failure to satisfy its obligations under a guaranty agreement related to the Company's credit facility with Subsidiary of Private Company G. In June 2025, the AFC Parties filed an amended complaint against two shareholders of the parent of Subsidiary of Private Company G, asserting claims for breach of contract, tortious interference with contract, fraud, aiding and abetting fraud, and conversion. In April 2025, two Subsidiary of Private Company G-affiliated cannabis companies (the "Plaintiffs") that are borrowers the Company's credit facility with Subsidiary of Private Company G filed a complaint in the United States District Court for the District of New Jersey alleging, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of the New York Uniform Commercial Code in connection with the Company's termination of a forbearance agreement between the parties. On May 9, 2025, the court granted Plaintiffs' request for a preliminary injunction, enjoining the Company from seizing any of Plaintiffs' assets or
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cash or seeking any remedy for Subsidiary of Private Company G's failure to (a) cooperate in the foreclosure proceeding on the Pennsylvania property; (b) provide annual audited financial statements for fiscal years 2023 and 2024; or (c) obtain a certificate of occupancy for the New Jersey facility by May 15, 2024. The AFC parties have appealed the preliminary injunction ruling to the Third Circuit Court of Appeals and are seeking an expeditious resolution of the appeal. Following the filing of the appeal, the Plaintiffs filed an amended complaint in the District Court, asserting an additional claim seeking declaratory relief regarding the loan balance. The credit facility to Subsidiary of Private Company G matures on May 1, 2026.
Because each of these actions are in their early stages, no reasonable estimate of possible outcomes resulting from these legal actions can be made at this time.
At-the-Market Offering Program
In April 2022, we filed a shelf registration statement on Form S-3 with the SEC, registering the offer and sale of up to $1.0 billion of securities (the "Prior Shelf Registration Statement"). The Prior Shelf Registration Statement enabled 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. On April 17, 2025, we filed a new shelf registration statement on Form S-3 (File No. 333-286604) (the "Shelf Registration Statement") to replace the Prior Shelf Registration Statement, which was declared effective on April 25, 2025.
The Prior 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.
The ATM Program and related Sales Agreement expired in April 2025, in connection with the expiration of our Prior Shelf Registration Statement. During the three and six months ended June 30, 2025, the Company did not sell any shares of the Company's common stock under the Sales Agreement. We do not currently have an ATM program, but we may enter into a new ATM program and related sales agreement in the future pursuant to which sales may be made under the Shelf Registration Statement.
Dividends Declared Per Share
For the six months ended June 30, 2025, we declared the following cash dividend:
| Date Declared | Payable to Shareholders of Record at the Close of Business on | Payment Date | Amount per Share | Total Amount | ||||||||||||||||||||||
| March 11, 2025 | March 31, 2025 | April 15, 2025 | $ | 0.23 | $ | 5,197,082 | ||||||||||||||||||||
| June 13, 2025 | June 30, 2025 | July 15, 2025 | 0.15 | 3,389,267 | ||||||||||||||||||||||
|
2025 Period Subtotal
|
$ | 0.38 | $ | 8,586,349 | ||||||||||||||||||||||
Recent Developments
In July 2025, AFC Agent delivered a notice of default and acceleration to Private Company P based on certain payment defaults, including the failure to make its interest payment when due for July 1, 2025, and began charging additional default interest of 5.0%, in accordance with the terms of the credit facility with Private Company P. The loan with Private Company P on nonaccrual status effective June 1, 2025. AFC Agent, on behalf of the Company and its affiliates, is actively pursuing judicial and non-judicial remedies against Private Company P.
In August 2025, 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 a 4.0% discount. The term loan under the Subsidiary of Public Company S Credit Facility accrues interest at a fixed rate per annum of 12.5% and matures in August 2030. Concurrently, our existing $10.0 million investment with Subsidiary of Public Company S was repaid at par plus accrued interest and we recognized an exit fee of approximately $0.2 million.
At the August Meeting, the Board approved the Sixth Amendment, which expands the Company's investment strategy (as discussed above in "Note 1-Organization"). In addition, the Board approved at the August Meeting a new Investment
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Advisory Agreement, which will be submitted to shareholders for approval. The proposal related to the new Investment Advisory Agreement relates to the Conversion (as discussed above in "Note 18-Subsequent Events").
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.
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 June 30, 2025 and December 31, 2024 was approximately $8.18 and $9.02, respectively.
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.
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The following table provides a reconciliation of GAAP net income (loss) to distributable earnings:
|
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| Net (loss) income | $ | (13,164,651) | $ | 16,446,121 | $ | (9,096,966) | $ | 16,392,005 | |||||||||||||||
| Adjustments to net income (loss): | |||||||||||||||||||||||
| Stock-based compensation expense | 484,502 | 369,343 | 1,038,251 | 912,565 | |||||||||||||||||||
| Depreciation and amortization | - | - | - | - | |||||||||||||||||||
| Unrealized losses (gains) or other non-cash items | 1,055,970 | 1,420,001 | 1,741,448 | 5,033,694 | |||||||||||||||||||
|
Provision for (reversal of) current expected credit losses(1)(2)
|
14,074,320 | (6,190,240) | 13,374,896 | (1,258,566) | |||||||||||||||||||
| TRS loss (income), net of dividends | 934,187 | (624,235) | 870,605 | 306,998 | |||||||||||||||||||
| One-time events pursuant to changes in GAAP and certain non-cash charges | - | - | - | - | |||||||||||||||||||
| Distributable earnings | $ | 3,384,328 | $ | 11,420,990 | $ | 7,928,234 | $ | 21,386,696 | |||||||||||||||
| Basic weighted average shares of common stock outstanding | 22,114,341 | 20,400,004 | 22,106,205 | 20,396,940 | |||||||||||||||||||
| Distributable earnings per basic weighted average share | $ | 0.15 | $ | 0.56 | $ | 0.36 | $ | 1.05 | |||||||||||||||
(1) The provision for current expected credit losses above includes zero and zero for the three and six months ended June 30, 2025, respectively, and approximately $71.9 thousand and $71.9 thousand for the three and six months ended June 30, 2024, respectively, in connection with the Spin-Off, which is included in the net income from discontinued operations, net of tax financial statement line on the consolidated statements of operations.
(2) The provision for (reversal of) current expected credit losses is presented net of the current period write-off. Refer to Note 6.
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.
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Results of Operations for the three and six months ended June 30, 2025 and 2024
The following table summarizes our consolidated results of operations for the three and six months ended June 30, 2025 and 2024:
|
Three months ended June 30, |
Six months ended June 30, |
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| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Interest income | $ | 8,061,509 | $ | 17,977,945 | $ | 16,519,757 | $ | 32,312,699 | |||||||||||||||
| Interest expense | (1,858,174) | (1,573,275) | (3,673,445) | (3,176,438) | |||||||||||||||||||
| Net interest income | 6,203,335 | 16,404,670 | 12,846,312 | 29,136,261 | |||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Management and incentive fees, net (less rebate of $260,742, $214,190, $389,322 and $588,993, respectively) | 680,358 | 3,985,028 | 1,496,548 | 7,447,790 | |||||||||||||||||||
| General and administrative expenses | 845,750 | 1,032,785 | 1,580,707 | 2,084,638 | |||||||||||||||||||
| Stock-based compensation | 484,502 | 369,343 | 1,038,251 | 912,565 | |||||||||||||||||||
| Professional fees | 361,104 | 367,408 | 733,040 | 814,440 | |||||||||||||||||||
| BDC conversion expenses | 226,780 | - | 226,780 | - | |||||||||||||||||||
| Total expenses | 2,598,494 | 5,754,564 | 5,075,326 | 11,259,433 | |||||||||||||||||||
| (Provision for) reversal of current expected credit losses | (15,851,566) | 6,262,094 | (15,152,142) | 1,330,420 | |||||||||||||||||||
| Realized (losses) gains on investments, net | - | - | - | (93,338) | |||||||||||||||||||
| Change in unrealized gains (losses) on loans at fair value, net | (1,055,970) | (1,420,001) | (1,741,448) | (5,033,694) | |||||||||||||||||||
| Net (loss) income from continuing operations before income taxes | (13,302,695) | 15,492,199 | (9,122,604) | 14,080,216 | |||||||||||||||||||
| Income tax (benefit) expense | (138,044) | 285,975 | (25,638) | 444,335 | |||||||||||||||||||
| Net (loss) income from continuing operations | (13,164,651) | 15,206,224 | (9,096,966) | 13,635,881 | |||||||||||||||||||
Net income (loss) from continuing operations. Our net loss from continuing operations allocable to our common shareholders for the three and six months ended June 30, 2025, was approximately $(13.2) million and $(9.1) million, or $(0.60) and $(0.42) per basic weighted average common share from continuing operations, respectively, compared to net income from continuing operations allocable to our common shareholders of approximately $15.2 million and $13.6 million, or $0.74 and $0.66 per basic weighted average common share from continuing operations for the three and six months ended June 30, 2024, respectively.
Interest income. Interest income decreased approximately $(9.9) million, or (55.2)%, for the three months ended June 30, 2025, as compared to the three months ended June 30, 2024. The decrease was driven by three loan exits in the prior period, resulting in less interest income of $(8.8) million, which included nonrecurring prior period activity such as: repayment of past due cash interest of approximately $2.3 million, acceleration of unaccreted OID upon exit of $1.9 million, default interest of approximately $0.6 million when the loan with Subsidiary of Public Company H was sold and repaid in cash in June 2024, $1.0 million exit fee recognized with the sale of Private Company B in June 2024 and $1.7 million exit fee recognized in May 2024 related to the repayment of our loan with Private Company C. Loans on nonaccrual status had lower interest income of $(2.4) million period over period for the three months ended.
Interest income decreased $(15.8) million, or (48.9)%, for the six months ended June 30, 2025 as compared to the six months ended June 30, 2024. This decrease was driven by fewer exits and related fees in the current period compared to the prior period. During the six months ended June 30, 2024, four loans were exited, which included $(8.2) million nonrecurring prior period interest income relating to: repayment of past due cash interest of approximately $2.3 million, acceleration of unaccreted OID upon exit of $1.9 million, default interest of approximately $0.6 million when the loan with Subsidiary of Public Company H was sold and repaid in cash in June 2024, $1.0 million exit fee recognized with the sale of Private Company B in June 2024, $1.7 million exit fee recognized in May 2024 related to the repayment of our loan with Private Company C, and repayment of past due interest in cash of $0.7 million when our loan with Private Company I was
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repaid in March 2024. Loans on nonaccrual status had lower interest income of $(4.2) million period over period for the six months ended.
Interest expense. Interest expense increased approximately $0.3 million, or 18.1%, for the three months ended June 30, 2025, as compared to the three months ended June 30, 2024, driven by an increase in borrowings on our Revolving Credit Facility resulting in additional interest expense of $0.3 million.
Interest expense increased approximately $0.5 million, or 15.6%, for the six months ended June 30, 2025, as compared to the six months ended June 30, 2024, driven by an increase in borrowings on our Revolving Credit Facility resulting in additional interest expense of $0.4 million and an increase in unused fees of $0.1 million, respectively.
Management and incentive fees, net. Management fees decreased approximately $(0.4) million, or (39.8)%, for the three months ended June 30, 2025, as compared to the three months ended June 30, 2024. Management fees decreased approximately $(0.6) million, or (28.8)%, for the six months ended June 30, 2025, as compared to the six months ended June 30, 2024. The decrease in both the three and six months ended period over period was driven 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 $115 million.
Incentive fees decreased approximately $(2.9) million and $(5.3) million, for the three and six months ended June 30, 2025, as compared to the three and six months ended June 30, 2024, respectively, driven by lower Core Earnings (as defined in the Management Agreement). There was no incentive fee incurred during the three and six months ended June 30, 2025.
General and administrative expenses. General and administrative expenses decreased approximately $(0.2) million, or (18.1)%, and decreased $(0.5) million, or (24.2)%, and for the three and six months ended June 30, 2025, as compared to the three and six months ended June 30, 2024, respectively. The decrease in both the three and six months ended was primarily due to less reimbursable shared expenses allocated by our Manager of approximately $(0.2) million and $(0.4) million, respectively.
Stock-based compensation. Stock-based compensation increased $0.1 million, or 31.2%, and $0.1 million, or 13.8%, for the three and six months ended June 30, 2025 as compared to the three and six months ended June 30, 2024, respectively.
Professional fees. Professional fees decreased approximately $(6.3) thousand, or (1.7)%, and decreased $(0.1) million, or (10.0)%, for the three and six months ended June 30, 2025 as compared to the three and six months ended June 30, 2024, respectively.
BDC conversion expenses. BDC conversion expenses are expensed as incurred and primarily include legal fees related to the creation and organization of our election to be regulated as a BDC. The Conversion process began during the second quarter of 2025 and we incurred approximately $0.2 million and $0.2 million of conversion expenses during the three and six months ended June 30, 2025, respectively. No such costs were incurred in the prior year.
Realized (losses) gains.The decrease in realized losses recognized for the three and six months ended June 30, 2025, compared to the three and six months ended June 30, 2024, was driven by a realized loss recognized in the prior period due to separate sales of our investment in Subsidiary of Public Company M. There were no realized losses recognized during the three and six months ended June 30, 2025, respectively.
Unrealized (losses) gains.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 $0.4 million and $3.3 million for the three and six months ended June 30, 2025, compared to the three and six months ended June 30, 2024, respectively, was driven by the sale of our loan with Private Company B in the prior period with an unrealized loss that was recovered, 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.
Income tax (benefit) expense. Income taxes decreased approximately $(0.4) million, or (148.3)%, and decreased $(0.5) million, or (105.8)%, for the three and six months ended June 30, 2025 as compared to the three and six months ended June 30, 2024, respectively. The change was driven by an excise tax refund received in the current period of approximately $(0.1) million and lower federal and state taxes incurred driven by lower taxable income.
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Provision for Current Expected Credit Losses
The provision for current expected credit losses increased approximately $22.1 million, or 353.1%, and $16.5 million, or 1238.9%, for the three and six months endedJune 30, 2025 as compared to the three and six months ended June 30, 2024, respectively. The balance as of June 30, 2025 was approximately $44.0 million, or 14.61%, of our total loans held at carrying value with a balance of approximately $300.9 million and was bifurcated between (i) the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value of approximately $43.8 millionand (ii) a liability for unfunded commitments of approximately $0.1 million. The balance as of June 30, 2024 was approximately $25.1 million, or 10.54%, of our total loans held at carrying value and loan receivable held at carrying value balance of approximately $238.0 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 $25.0 million and (ii) a liability for unfunded commitments of approximately $0.1 million. June 30, 2024 CECL Reserve balances exclude the commercial real estate loan portfolio and related CECL Reserve of SUNS in connection with the Spin-Off. The CRE CECL Reserve is included within discontinued operations for the prior periods presented. 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 when determining the amount to allocate to its CECL Reserve. 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 six months ended June 30, 2025compared to the three and six months ended June 30, 2024 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 June 30, 2025, our portfolio was comprised of 15 loans (such portfolio, our "Existing Portfolio"). The aggregate originated commitment under these loans was approximately $370.3 million and outstanding principal was approximately $359.6 million as of June 30, 2025. As of June 30, 2025, 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 associated with licenses (where applicable), equipment, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
As of June 30, 2025, we had four loans on nonaccrual status, which included three loans held for investment with a carrying value of $104.2 million and carrying value net of CECL Reserve of $65.3 million, and one loan held at fair value with an outstanding principal balance of $51.2 million and fair value of $26.8 million.
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The table below summarizes our total loan portfolio as of June 30, 2025, 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 6/30/2025 | Cash Interest Rate | PIK |
Fixed/ Floating |
Amortization During Term |
YTM
(2)(3)
|
||||||||||||||||||||||
|
Private Co. A(4)
|
5/8/2020 | 5/8/2024 | $ | 42,520,761 | 11.5% | $ | 51,186,315 | 13.0% | 2.5% | Fixed | No | 17% | ||||||||||||||||||||
|
Sub of Private Co. G(5)
|
4/30/2021 | 5/1/2026 | 73,164,277 | 19.8% | 78,880,165 | 12.5% | N/A | Fixed | No | 17% | ||||||||||||||||||||||
| Private Co. J | 8/30/2021 | 9/1/2025 | 28,500,000 | 7.7% | 23,359,234 | 16.3% | 2.0% | Floating | Yes | 25% | ||||||||||||||||||||||
|
Private Co. K(6)
|
4/28/2022 | 5/3/2027 | 13,229,626 | 3.6% | 12,195,762 | 16.3% | 2.0% | Floating | Yes | 22% | ||||||||||||||||||||||
| Private Co. L | 4/20/2022 | 5/1/2026 | 32,757,254 | 8.7% | 30,443,356 | 13.0% | N/A | Floating | Yes | 19% | ||||||||||||||||||||||
|
Private Co. M
|
7/31/2023 | 7/31/2026 | 30,000,000 | 8.1% | 26,599,497 | 9.0% | N/A | Fixed | Yes | 18% | ||||||||||||||||||||||
| Private Co. N - Real Estate | 3/22/2024 | 4/1/2028 | 19,327,505 | 5.2% | 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 | 4.6% | 17,200,000 | 12.5% | N/A | Floating | Yes | 16% | ||||||||||||||||||||||
| Private Co. O | 5/20/2024 | 6/1/2028 | 7,500,000 | 2.0% | 5,014,073 | 13.5% | N/A | Floating | Yes | 18% | ||||||||||||||||||||||
|
Private Co. P(7)
|
6/18/2024 | 7/1/2027 | 15,126,433 | 4.1% | 15,609,914 | 13.0% | N/A | Fixed | Yes | 16% | ||||||||||||||||||||||
| Private Co. Q | 8/16/2024 | 9/1/2028 | 11,000,000 | 3.0% | 6,072,508 | 13.8% | N/A | Floating | Yes | 18% | ||||||||||||||||||||||
| Private Co. R | 10/4/2024 | 11/1/2027 | 41,000,000 | 11.1% | 36,427,033 | 12.0% | N/A | Floating | Yes | 15% | ||||||||||||||||||||||
| Sub. of Public Co. S | 11/19/2024 | 8/12/2026 | 10,000,000 | 2.7% | 10,000,000 | 9.5% | N/A | Fixed | No | 10% | ||||||||||||||||||||||
| Private Co. U | 2/14/2025 | 3/1/2028 | 15,000,000 | 4.1% | 15,000,000 | 14.0% | N/A | Fixed | Yes | 16% | ||||||||||||||||||||||
| Sub of Private Co. V | 4/1/2025 | 4/1/2029 | 14,000,000 | 3.8% | 12,276,704 | 12.5% | 1.5% | Fixed | Yes | 17% | ||||||||||||||||||||||
|
Subtotal(8)
|
$ | 370,325,856 | 100.0% | $ | 359,592,066 | 12.7% | 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 June 30, 2025 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)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.
(5)Effective December 1, 2023, the Company placed the borrower on nonaccrual status.
(6)Effective December 1, 2023, the Company placed the borrower on nonaccrual status.
(7)Effective June 1, 2025, the Company placed the borrower on nonaccrual status.
(8)The interest and PIK subtotal rates are weighted average rates.
Loans Held for Investment at Fair Value
As of June 30, 2025 and December 31, 2024, our portfolio includedoneloan held at fair value. The aggregate commitment
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under this loan was approximately $42.5 million and $44.4 million, respectively, and outstanding principal was approximately $51.2 million and $53.1 million as of June 30, 2025 and December 31, 2024, respectively. For the six months ended June 30, 2025, we received approximately $1.9 million of principal repayments of loans held at fair value. As of June 30, 2025 and December 31, 2024, our loan held at fair value did not have a floating interest rate.
The following tables summarize our loan held at fair value as of June 30, 2025and December 31, 2024:
| As of June 30, 2025 | |||||||||||||||||||||||
|
Fair Value(1)
|
Carrying Value(2)
|
Outstanding
Principal(2)
|
Weighted Average
Remaining Life
(Years)(3)
|
||||||||||||||||||||
| Senior term loan | $ | 26,847,222 | $ | 48,318,884 | $ | 51,186,315 | 0.0 | ||||||||||||||||
| Total loan held at fair value | $ | 26,847,222 | $ | 48,318,884 | $ | 51,186,315 | 0.0 | ||||||||||||||||
| 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 | ||||||||||||||||
(1)Refer to Note 13 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 June 30, 2025 and December 31, 2024, the maturity date passed on the credit facility with Private Company A without repayment.
The following table presents changes in loans held at fair value as of and for the six months ended June 30, 2025:
| Principal |
Original Issue Discount |
Unrealized Gains (Losses) | Fair Value | ||||||||||||||||||||
| Total loan held at fair value at December 31, 2024 | $ | 53,108,449 | $ | (2,867,431) | $ | (19,730,214) | $ | 30,510,804 | |||||||||||||||
| Change in unrealized gains (losses) on loans at fair value, net | - | - | (1,741,448) | (1,741,448) | |||||||||||||||||||
| Loan repayments | (1,922,134) | - | - | (1,922,134) | |||||||||||||||||||
| Total loan held at fair value at June 30, 2025 | $ | 51,186,315 | $ | (2,867,431) | $ | (21,471,662) | $ | 26,847,222 | |||||||||||||||
Loans Held for Investment at Carrying Value
As of June 30, 2025 and December 31, 2024, ourportfolio included 14 and 14 loans held at carrying value, respectively. As of June 30, 2025 and December 31, 2024, the aggregate originated commitment under these loans was approximately $327.8 million and $312.8 million, respectively, and outstanding principal was approximately $308.4 million and $301.8 million, respectively. During the six months ended June 30, 2025, we funded approximately $30.0 million of new loans and additional principal and had approximately $23.6 million of principal repayments of loans held at carrying value. As of June 30, 2025 and December 31, 2024, approximately 49% and 52%, respectively, of our loans held at carrying value had
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floating interest rates. As of June 30, 2025, these floating benchmark rates included one-month Secured Overnight Financing Rate ("SOFR") quoted at 4.3% and subject to a weighted average floor of 3.8% based on outstanding principal.
The following tables summarize our loans held at carrying value as of June 30, 2025 and December 31, 2024:
| As of June 30, 2025 | |||||||||||||||||||||||
|
Outstanding
Principal(1)
|
Original Issue Discount |
Carrying
Value(1)
|
Weighted
Average
Remaining Life
(Years)(2)
|
||||||||||||||||||||
| Senior term loans | $ | 308,405,751 | $ | (7,459,543) | $ | 300,946,208 | 1.6 | ||||||||||||||||
| Total loans held at carrying value | $ | 308,405,751 | $ | (7,459,543) | $ | 300,946,208 | 1.6 | ||||||||||||||||
| 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 | ||||||||||||||||
(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 June 30, 2025 and December 31, 2024.
The following table presents changes in loans held at carrying value as of and for the six months ended June 30, 2025:
| Principal |
Original Issue Discount |
Carrying Value | |||||||||||||||
| Total loans held at carrying value at December 31, 2024 | $ | 301,755,791 | $ | (8,493,417) | $ | 293,262,374 | |||||||||||
| New fundings | 29,978,647 | (795,000) | 29,183,647 | ||||||||||||||
| Accretion of original issue discount | - | 1,828,874 | 1,828,874 | ||||||||||||||
| Loan repayments | (13,608,683) | - | (13,608,683) | ||||||||||||||
| PIK interest | 266,550 | - | 266,550 | ||||||||||||||
| Loan amortization payments | (9,986,554) | - | (9,986,554) | ||||||||||||||
| Total loans held at carrying value at June 30, 2025 | $ | 308,405,751 | $ | (7,459,543) | $ | 300,946,208 | |||||||||||
Loan Receivable Held at Carrying Value
As of June 30, 2025 and December 31, 2024, our portfolio included zero and one loan receivable held at carrying value. The originated commitment under this loan was $4.0 million and outstanding principal was approximately zero and $1.9 million as of June 30, 2025 and December 31, 2024, respectively. During the six months ended June 30, 2025, we received $0.1 million of principal repayments of loan receivable held at carrying value. Based on discussions with the collateral agent, we do not expect future proceeds and deemed the remaining balance on the loan with Public Company A to be uncollectible. Prior to the write-off, the loan receivable had a CECL Reserve that was fully reserved for. In the second quarter of 2025, we wrote off $1.8 million, which was equal to the carrying value of the loan receivable, excluding the CECL Reserve at the time the loan was written off.
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The following table presents changes in loans receivable as of and for the six months ended June 30, 2025:
| Principal |
Original Issue Discount |
Carrying Value |
|||||||||||||||
| Total loan receivable held at carrying value at December 31, 2024 | $ | 1,897,324 | $ | (1,686) | $ | 1,895,638 | |||||||||||
| Loan repayments | (118,392) | - | (118,392) | ||||||||||||||
| Loan write-off | (1,778,932) | 1,686 | (1,777,246) | ||||||||||||||
| Total loan receivable held at carrying value at June 30, 2025 | $ | - | $ | - | $ | - | |||||||||||
Collateral Overview
Our loans are typically secured by various types of assets of our borrowers, including real property and certain personal property, such as cash flows 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 June 30, 2025, 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.
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.
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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, the net proceeds of future debt or equity offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results.
Our net cash provided by operating activities for the six months ended June 30, 2025 of approximately $5.7 million was less than our dividends declared of $8.6 million made during the same period due to earned OID of $1.8 million. 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 June 30, 2025 and December 31, 2024, all of our cash was unrestricted and totaled approximately $3.4 million and $103.6 million, respectively.
As of June 30, 2025, we believe that our cash on hand, capacity available under the Revolving 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 current Shelf Registration Statement became effective on April 25, 2025, 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. As of June 30, 2025, the ATM Program was no longer in effect.
The ATM Program and related Sales Agreement expired in April 2025, in connection with the expiration of our Prior Shelf Registration Statement. During the three months ended June 30, 2025, we did not sell any shares of our common stock under the Sales Agreement. We do not currently have an ATM program, but we may enter into a new ATM program and related sales agreement in the future pursuant to which sales may be made under the Shelf Registration Statement.
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, which contained initial aggregate commitments of $60.0 million from two FDIC-insured banking institutions, (which may be increased to up to $100.0 million in aggregate, subject to available borrowing base and additional commitments) which may be borrowed, repaid and redrawn, subject to a borrowing base based on eligible loan obligations held by us and subject to the satisfaction of other conditions provided under the Revolving Credit Agreement. The Revolving Credit Facility's initial maturity date of April 29, 2025 was extended to April 29, 2028 under Amendment Number Four to the Revolving Credit Agreement, as described further below.
In April 2025, we entered into Amendment Number Four 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. The Amendment, among other things, (i) extends the maturity date of the Agreement to April 29, 2028, (ii) increases the interest rate floor from 4.00% to 7.00%, (iii) permits certain restricted payments to be made upon the Company meeting certain terms and conditions, and (iv) expands the collateral secured under the Agreement from assets comprising of or relating to loan obligations designed for inclusion in the borrower base to substantially all of the Company's and its
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subsidiaries' assets. In connection with the amendment, the Revolving Credit Facility has a lead commitment of $30.0 million from a FDIC-insured banking institution (which may be increased up to $100.0 million in aggregate, subject to available borrowing base and additional commitments) which may be borrowed, repaid and redrawn, subject to a borrowing base based on eligible loan obligations held by the Company and subject to the satisfaction of other conditions provided under the Revolving Credit Facility.
In June 2025, we entered into Amendment Number Five to the 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. The Amendment among other things increased the commitment from the lenders by $20.0 million, to a total aggregate commitment of $50.0 million.
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 June 30, 2025, 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.
In April 2025, in conjunction with the entry by the Company into Amendment Number Four to the Revolving Credit Facility, we terminated that certain AFCF Credit Agreement, dated December 17, 2024. At the time of termination, we had no borrowings outstanding and $40.0 million of availability under our AFCF Credit Agreement. As of June 30, 2025, the AFCF Credit Facility was no longer in effect.
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.
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
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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 June 30, 2025, 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 six months endedJune 30, 2025 and 2024 is as follows:
|
Six months ended June 30, |
|||||||||||
| 2025 | 2024 | ||||||||||
| Net cash provided by (used in) operating activities of continuing operations | $ | 5,681,365 | $ | 14,013,649 | |||||||
| Net cash (used in) provided by investing activities of continuing operations | $ | (3,547,884) | $ | 96,634,888 | |||||||
| Net cash (used in) provided by financing activities of continuing operations | $ | (102,333,876) | $ | (27,097,400) | |||||||
Net Cash Provided by (Used in) Operating Activities of Continuing Operations
Net cash provided by operating activities of continuing operations during the six months ended June 30, 2025 was approximately $5.7 million, compared to approximately $14.0 million for the same period in 2024. The decrease of approximately $(8.3) million period over period was primarily due lower revenue and related incoming cash payments from borrowers due to loans on nonaccrual status and no sales of loans in the current year, partially offset by lower management and incentive paid to our Manager period over period.
Net Cash (Used in) Provided by Investing Activities of Continuing Operations
Net cash used in investing activities of continuing operations during the six months ended June 30, 2025 was approximately $(3.5) million, compared to approximately $96.6 million for the same period in 2024. The decrease in net cash used in investing activities of approximately $(100.2) million during the six months ended June 30, 2024 to June 30, 2025 was primarily due to a decrease on loan repayments of approximately $(14.2) million and a decrease in loan repayments from the prior period of $(96.1) million.
Net Cash (Used in) Provided by Financing Activities of Continuing Operations
Net cash used in financing activities of continuing operations during the six months ended June 30, 2025 was approximately $(102.3) million, compared to approximately $(27.1) million for the same period in 2024. The decrease of approximately $(75.2) million during the six months ended June 30, 2024 to June 30, 2025 was primarily due to a decrease in borrowings on the Revolving Credit Facility and the AFCF Credit Facility of $(59.5) million in the aggregate and increase in repayments on the Revolving Credit Facility and the AFCF Credit Facility of $(23.1) million in the aggregate.
Index
Cash provided by (used in) operating, investing and financing activities of discontinued operations for the six months endedJune 30, 2025 and 2024 is as follows:
|
Six months ended June 30, |
|||||||||||
| 2025 | 2024 | ||||||||||
| Net cash provided by (used in) operating activities of discontinued operations | $ | - | $ | 2,678,448 | |||||||
| Net cash (used in) provided by investing activities of discontinued operations | $ | - | $ | (37,557,988) | |||||||
| 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 six months ended June 30, 2025 was zero, compared to approximately $2.7 million for the same period in 2024. The decrease of approximately $(2.7) million during the six months ended June 30, 2024 to June 30, 2025 was primarily due to a decrease in net income from discontinued operations of $(2.8) million and changes in working capital of $0.1 million, respectively.
Net Cash Provided by (Used in) Investing Activities of Discontinued Operations
Net cash used in investing activities of discontinued operations during the six months ended June 30, 2025 was zero, compared to net cash provided by investing activities of $(37.6) million for the same period in 2024. The increase of net cash used in investing activities of discontinued operations was primarily due to the issuance and fundings on loans of approximately $(50.8) million, offset by principal repayments of loans of $13.3 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 six months ended June 30, 2025 and 2024.
Contractual Obligations, Other Commitments, and Off-Balance Sheet Arrangements
Our contractual obligations as of June 30, 2025 are as follows:
| As of June 30, 2025 | |||||||||||||||||||||||||||||
|
Less than 1 year |
1-3 years | 3-5 years |
More than 5 years |
Total | |||||||||||||||||||||||||
| Unfunded commitments | $ | 5,209,223 | $ | 4,927,492 | $ | - | $ | - | $ | 10,136,715 | |||||||||||||||||||
| Total | $ | 5,209,223 | $ | 4,927,492 | $ | - | $ | - | $ | 10,136,715 | |||||||||||||||||||
As of June 30, 2025, 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 June 30, 2025relating to the 2027 Senior Notes:
| As of June 30, 2025 | |||||||||||||||||||||||||||||
|
Less than 1 year |
1-3 years | 3-5 years |
More than 5 years |
Total | |||||||||||||||||||||||||
|
Contractual obligations(1)
|
$ | 5,175,000 | $ | 95,175,000 | $ | - | $ | - | $ | 100,350,000 | |||||||||||||||||||
| Total | $ | 5,175,000 | $ | 95,175,000 | $ | - | $ | - | $ | 100,350,000 | |||||||||||||||||||
(1) Amounts include projected interest payments during the period based on interest rates in effect as of June 30, 2025.
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
Index
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.
Critical Accounting Policies and Estimates
As of June 30, 2025, 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.
Advanced Flower Capital Inc. published this content on August 14, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on August 14, 2025 at 11:32 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]