10-Q 1 brhc10024268_10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number: 001-39995

AFC GAMMA, INC.

(Exact name of registrant as specified in its charter)

Maryland

(State or other jurisdiction of incorporation or organization)

85-1807125

(I.R.S. Employer Identification Number)

525 Okeechobee Blvd., Suite 1770, West Palm Beach, FL 33401

(Address of principal executive offices) (Zip Code)

(561) 510-2390

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, $0.01 par value per share

Trading Symbol(s)

AFCG

Name of each exchange on which registered

Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. ☐

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☐

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Common stock, $0.01 par value

Outstanding at May 11, 2021

13,366,877

AFC GAMMA, INC.

TABLE OF CONTENTS

INDEX

Part I.	Financial Information
Item 1.	Financial Statements	1
	Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	1
	Statement of Operations for the three months ended March 31, 2021 (unaudited)	2
	Statement of Stockholders’ Equity for the three months ended March 31, 2021 (unaudited)	3
	Statement of Cash Flows for the three months ended March 31, 2021 (unaudited)	4
	Notes to Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	34
Part II.	Other Information	35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AFC GAMMA, INC.

BALANCE SHEETS

	As Of
	March 31, 2021			December 31, 2020
	(unaudited)
Assets
Loans held for investment at fair value (cost of $48,833,111 and $46,994,711 at March 31, 2021 and December 31, 2020, respectively, net)	$	50,252,049		$	48,558,051

Loans held for investment at carrying value		39,152,936			31,837,031
Loan receivable at carrying value		3,240,855			3,348,263
Current expected credit loss reserve		(248,317	)		(404,860	)
Loans held for investment at carrying value and loan receivable at carrying value, net of current expected credit loss reserve		42,145,474			34,780,434

Cash and cash equivalents		126,793,972			9,623,820
Interest receivable		1,205,304			927,292
Prepaid expenses and other assets		1,109,038			72,095
Total assets	$	221,505,837		$	93,961,692

Liabilities
Interest reserve	$	3,243,484		$	1,325,750
Current expected credit loss reserve		283,180			60,537
Accrued management fees		876,662			222,127
Accrued direct administrative expenses		365,567			550,671
Accounts payable and other liabilities		404,939			154,895
Total liabilities		5,173,832			2,313,980
Commitments and contingencies (Note 10)
Stockholders' Equity
Preferred stock, par value $0.01 per share, 10,000 shares authorized at March 31, 2021 and December 31, 2020 and 125 shares issued and outstanding at March 31, 2021 and December 31, 2020		1			1
Common stock, par value $0.01 per share, 25,000,000 and 15,000,000 shares authorized at March 31, 2021 and December 31, 2020, respectively, and 13,366,877 and 6,179,392 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		133,669			61,794
Additional paid-in-capital		216,504,726			91,068,197
Accumulated earnings (deficit)		(306,391	)		517,720
Total stockholders' equity		216,332,005			91,647,712

Total liabilities and stockholders' equity	$	221,505,837		$	93,961,692

(See accompanying notes to the Financial Statements)

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AFC GAMMA, INC.

STATEMENT OF OPERATIONS

	For the three months ended March 31, 2021
	(unaudited)
Revenue
Interest Income	$	4,685,005
Total revenue		4,685,005
Expenses
Management and incentive fees, net (less rebate of $237,743)		876,662
General and administrative expense		462,518
Stock-based compensation		1,599,115
Professional fees		135,453
Total expenses		3,073,748
Provision for current expected credit losses		(66,100	)
Change in unrealized gains / (losses) on loans at fair value, net		(144,402	)
Net income before income taxes		1,400,755
Income tax expense		-
Net income	$	1,400,755

Earnings per common share:
Basic earnings per common share (in dollars per share)	$	0.20
Diluted earnings per common share (in dollars per share)	$	0.19

Weighted average number of common shares outstanding:
Basic weighted average shares of common stock outstanding (in shares)		7,144,670
Diluted weighted average shares of common stock outstanding (in shares)		7,485,048

(See accompanying notes to the Financial Statements)

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AFC GAMMA, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2021

(unaudited)

	Preferred Stock		Common Stock				Additional Paid- In-Capital		Accumulated Earnings (Deficit)			Total Stockholders' Equity
	Preferred Stock		Shares		Amount		Additional Paid- In-Capital		Accumulated Earnings (Deficit)			Total Stockholders' Equity
Balance at December 31, 2020	$	1		6,179,392	$	61,794	$	91,068,197	$	517,720		$	91,647,712
Issuance of common stock, net of offering cost		-		7,187,485		71,875		123,837,414		-			123,909,289
Stock-based compensation		-		-		-		1,599,115		-			1,599,115
Dividends declared and paid on common shares ($0.36 per share)		-		-		-		-		(2,224,866	)		(2,224,866	)
Net income		-		-		-		-		1,400,755			1,400,755
Balance at March 31, 2021 (unaudited)	$	1		13,366,877	$	133,669	$	216,504,726	$	(306,391	)	$	216,332,005

(See accompanying notes to the Financial Statements)

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AFC GAMMA, INC.

STATEMENT OF CASH FLOWS

	For the three months ended March 31, 2021
Operating activities:	(unaudited)
Net income	$	1,400,755
Adjustments to reconcile net income / (loss) to net cash provided by / (used in) operating activities:
Provision for current expected credit losses		66,100
Change in unrealized gains / (losses) on loans at fair value, net		144,402
Accretion of deferred loan original issue discount and other discounts		(707,751	)
Stock-based compensation		1,599,115
PIK interest		(559,004	)
Changes in operating assets and liabilities:
Interest reserve		(82,266	)
Interest receivable		(278,012	)
Prepaid expenses and other assets		67,971
Accrued management fees, net		654,535
Accrued direct administrative expenses		(185,104	)
Accounts payable and other liabilities		250,044
Net cash provided by / (used in) operating activities		2,370,785

Cash flows from investing activities:
Issuance of and fundings on loans		(7,096,075	)
Proceeds from sales of Assigned Rights		103,302
Principal repayment of loans		107,717
Net cash provided by / (used in) investing activities		(6,885,056	)

Cash flows from financing activities:
Proceeds from sale of common stock		127,003,125
Payment of offering costs		(3,093,836	)
Dividends paid		(2,224,866	)
Net cash provided by / (used in) financing activities		121,684,423

Change in cash, cash equivalents and restricted cash		117,170,152
Cash, cash equivalents and restricted cash, beginning of period		9,623,820
Cash, cash equivalents and restricted cash, end of period	$	126,793,972

Supplemental disclosure of non-cash financing and investing activity:
Interest reserve withheld from funding of loan	$	2,000,000
Sale of Assigned Rights	$	1,104,914

Supplemental information:
Interest paid during the period	$	-
Income taxes paid during the period	$	-

(See accompanying notes to the Financial Statements)

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AFC GAMMA, INC.

NOTES TO FINANCIAL STATEMENTS

As of March 31, 2021

(unaudited)

1.	ORGANIZATION

AFC Gamma, Inc. (the “Company” or “AFCG”) is a commercial real estate (“CRE”) finance company primarily engaged in originating, structuring, and underwriting senior secured loans and other types of loans. The Company was formed and commenced operations on July 31, 2020. The Company is a Maryland corporation and completed its initial public offering (the “IPO”) in March 2021. The Company is externally managed by AFC Management, LLC (“AFC Management” or the Company’s “Manager”), a Delaware limited liability company, pursuant to the terms of a management agreement (as amended, the “Management Agreement”).

The Company operates as one operating segment and is primarily focused on financing senior secured loans and other types of loans for established cannabis industry operators in states where medical and /or adult use cannabis is legal. These loans are generally held for investment and are secured, directly or indirectly, by real estate, equipment, licenses and/or other assets of borrowers depending on the applicable laws and regulations governing such borrowers.

The Company intends to elect to be taxed as a real estate investment trust (“REIT”) for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2020. The Company generally will not be subject to United States federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income prior to the deduction for dividends paid to stockholders and complies with various other requirements as a REIT.

2.	SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim financial statements should be read in conjunction with the audited financial statements and the related management's discussion and analysis of financial condition and results of operations included in the Company's final prospectus relating to our IPO filed with the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”) on March 19, 2021 (the “Final Prospectus”).

Refer to Note 2 to the Company’s financial statements in the Final Prospectus for a description of the Company’s significant accounting policies. The Company has included disclosure below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly, (ii) have material changes or (ii) the Company views as critical as of the date of this report.

Basis of Presentation

The accompanying unaudited interim financial statements and related notes have been prepared on the accrual basis of accounting in conformity with United States generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the SEC applicable to interim financial information. These unaudited interim financial statements reflect all adjustments and reclassifications that, in the opinion of management, are considered necessary for a fair statement of the balance sheets, statement of operations, statement of stockholders’ equity, and statement of cash flows for the periods presented.

The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the year ending December 31, 2021.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant estimates include the valuation of investments.

The spread of a novel strain of coronavirus (“COVID-19”) has caused significant business disruptions in the United States beginning in the first quarter of 2020 and has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as quarantines, shelter-in-place or total lock-down orders and business imitations and shutdowns (subject to exceptions for certain “essential” operations and businesses). Over the course of the COVID-19 pandemic, medical cannabis companies have been deemed “essential” by 29 states administering shelter-in-place orders and adult use cannabis has been deemed “essential” in eight of those states. Consequently, the impact of the COVID-19 pandemic and the related regulatory and private sector response on our financial and operating results for the period ended March 31, 2021 was somewhat mitigated as all of our borrowers were permitted to continue to operate during this pandemic. Regardless, the full extent of the economic impact of the business disruptions caused by COVID-19 is uncertain. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving, and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including the regulated cannabis industry. Although some of these measures have been lifted or scaled back, a recent resurgence of COVID-19 in certain parts of the world, including the United States, may lead to more restrictions to reduce the spread of COVID-19. The extent of any effect that these disruptions may have on the operations and financial performance of the Company will depend on future developments, including possible impacts on the performance of the Company’s loans, general business activity, and ability to generate revenue, which cannot be determined.

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Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this ASU on its financial statements.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01is effective immediately for all entities. An entity may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. If an entity elects to apply any of the amendments for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election. The amendments do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Company is currently evaluating the impact, if any, of this ASU on its financial statements.

In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, which is an update to clarify that an entity should reevaluate whether a callable debt security is within the scope of 310-20-35-33 for each reporting period. ASU No. 2020-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, the amendments in ASU No. 2020-08 are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted for all other entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. All entities should apply the amendments in this update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company has adopted this new standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.

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3.	LOANS HELD FOR INVESTMENT AT FAIR VALUE

As of March 31, 2021 and December 31, 2020, the Company’s portfolio included four loans held at fair value. The aggregate originated commitment under these loans was approximately $62.4 million and $59.9 million, respectively, and outstanding principal was approximately $52.2 million and $50.8 million, respectively, as of March 31, 2021 and December 31, 2020. For the three months ended March 31, 2021, the Company funded approximately $1.0 million of outstanding principal. As of March 31, 2021 and December 31, 2020, approximately 0% and 6.0%, respectively, of the Company’s loans held at fair value have floating interest rates. As of December 31, 2020, these floating rates were subject to LIBOR floors, with a weighted average floor of 2.5%, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated).

The following tables summarize the Company’s loans held at fair value as of March 31, 2021 and December 31, 2020:

	As of March 31, 2021
	Fair Value ⁽²⁾		Carrying Value ⁽¹⁾		Outstanding Principal ⁽¹⁾		Weighted Average Remaining Life (Years)⁽³⁾

Senior Term Loans	$	50,252,049	$	48,833,111	$	52,212,608		3.1
Total loans held at fair value	$	50,252,049	$	48,833,111	$	52,212,608		3.1

	As of December 31, 2020
	Fair Value ⁽²⁾		Carrying Value ⁽¹⁾		Outstanding Principal ⁽¹⁾		Weighted Average Remaining Life (Years)⁽³⁾

Senior Term Loans	$	48,558,051	$	46,994,711	$	50,831,235		3.3
Total loans held at fair value	$	48,558,051	$	46,994,711	$	50,831,235		3.3

(1)	The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted purchase discount, deferred loan fees and loan origination costs.

(2)	Refer to Footnote 14.

(3)	Weighted average remaining life is calculated based on the fair value of the loans as of March 31, 2021 and December 31, 2020.

The following table presents changes in loans held at fair value as of and for the three months ended March 31, 2021:

	Principal		Original Issue Discount			Unrealized Gains / (Losses)			Fair Value

Total loans held at fair value at December 31, 2020	$	50,831,235	$	(3,836,524	)	$	1,563,340		$	48,558,051
Change in unrealized gains / (losses) on loans at fair value, net		-		-			(144,402	)		(144,402	)
New fundings		992,000		(142,982	)		-			849,018
Accretion of original issue discount		-		600,009			-			600,009
PIK Interest		389,373		-			-			389,373
Total loans held at fair value at March 31, 2021	$	52,212,608	$	(3,379,497	)	$	1,418,938		$	50,252,049

A more detailed listing of the Company’s loans held at fair value portfolio based on information available as of March 31, 2021 is as follows:

	Collateral Location	Collateral Type ⁽⁹⁾		Fair Value ⁽²⁾		Carrying Value ⁽¹⁾		Outstanding Principal ⁽¹⁾		Interest Rate				Maturity Date ⁽³⁾	Payment Terms ⁽⁴⁾

Private Co. A	AZ, MI, MD, MA		C , D	$	32,834,697	$	32,384,888	$	34,672,331		17.0	%	⁽⁵⁾	5/8/2024		P/I
Private Co. B	MI		C		2,495,922		2,290,381		2,548,159		17.0	%	⁽⁶⁾	9/1/2023		P/I
Public Co. A	NV		C		2,874,629		2,840,108		2,945,317		14.0	%	⁽⁷⁾	12/21/2021		I/O
Sub. Of Public Co. C	FL		C		12,046,801		11,317,734		12,046,801		18.0	%	⁽⁸⁾	2/18/2025		P/I
Total loans held at fair value				$	50,252,049	$	48,833,111	$	52,212,608

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(1)	The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount (“OID”) and loan origination costs.

(2)	Refer to Footnote 14.

(3)

Certain loans are subject to contractual extension options and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.

(4)	I/O = interest only, P/I = principal and interest. P/I loans may include interest only periods for a portion of the loan term.

(5)	Base interest rate of 13% and payment-in-kind (“PIK”) interest rate of 4%.

(6)	Base interest rate of 13% and PIK interest rate of 4%.

(7)	Base interest rate of 12% and PIK interest rate of 2%.

(8)

Loan to Subsidiary of Public Company C is a $15,000,000 aggregate loan commitment with an initial funding of $3,000,000 at a base interest rate of 13.5% and PIK interest rate of 3% and subsequent advances of $9,000,000 at a base interest rate of 19%. The weighted average interest rate is 18.0% at March 31, 2021.

(9)	C = Cultivation Facilities, D = Dispensaries

4.	LOANS HELD FOR INVESTMENT AT CARRYING VALUE

As of March 31, 2021 and December 31, 2020, the Company’s portfolio included four and three loans, respectively, held at carrying value. The aggregate originated commitment under these loans was approximately $65 million and $44 million, respectively, and outstanding principal was approximately $42.9 million and $33.9 million, respectively, as of March 31, 2021 and December 31, 2020. During the three months ended March 31, 2021, the Company funded approximately $8.9 million of outstanding principal. As of March 31, 2021 and December 31, 2020, approximately 49% and 35%, respectively, of the Company’s loans held at carrying value have floating interest rates. These floating rates are subject to LIBOR floors, with a weighted average floor of 1% and 1%, respectively, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated).

The following tables summarize the Company’s loans held at carrying value as of March 31, 2021 and December 31, 2020:

	As of March 31, 2021
	Outstanding Principal ⁽¹⁾		Original Issue Discount			Carrying Value ⁽¹⁾		Weighted Average Remaining Life (Years)⁽²⁾

Senior Term Loans	$	42,940,850	$	(3,787,914	)	$	39,152,936		4.5
Total loans held at carrying value	$	42,940,850	$	(3,787,914	)	$	39,152,936		4.5

	As of December 31, 2020
	Outstanding Principal ⁽¹⁾		Original Issue Discount			Carrying Value ⁽¹⁾		Weighted Average Remaining Life (Years)⁽²⁾

Senior Term Loans	$	33,907,763	$	(2,070,732	)	$	31,837,031		4.7
Total loans held at carrying value	$	33,907,763	$	(2,070,732	)	$	31,837,031		4.7

(1)	The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount and loan origination costs.

(2)	Weighted average remaining life is calculated based on the carrying value of the loans as of March 31, 2021 and December 31, 2020.

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The following table presents changes in loans held at carrying value as of and for the three months ended March 31, 2021:

	Principal		Original Issue Discount			Carrying Value

Total loans held at carrying value at December 31, 2020	$	33,907,763	$	(2,070,732	)	$	31,837,031
New Fundings		8,863,455		(1,824,614	)		7,038,841
Accretion of original issue discount		-		107,432			107,432
PIK Interest		169,632					169,632
Total loans held at carrying value at March 31, 2021	$	42,940,850	$	(3,787,914	)	$	39,152,936

A more detailed listing of the Company’s loans held at carrying value portfolio based on information available as of March 31, 2021 is as follows:

	Collateral Location	Collateral Type ⁽⁸⁾		Outstanding Principal ⁽¹⁾		Original Issue Discount			Carrying Value ⁽¹⁾		Interest Rate				Maturity Date ⁽²⁾	Payment Terms ⁽³⁾

Private Co. C	PA		C , D	$	13,895,465	$	(807,869	)	$	13,087,596		17.0	%	⁽⁴⁾	12/1/2025		P/I
Private Co. D	OH, AR		D		12,045,385		(983,237	)		11,062,148		15.0	%	⁽⁵⁾	1/1/2026		P/I
Sub. of Public Co. D	PA		C		10,000,000		(172,194	)		9,827,806		12.9	%	⁽⁶⁾	12/18/2024		I/O
Private Co. E	OH		C , D		7,000,000		(1,824,614	)		5,175,386		17.0	%	⁽⁷⁾	4/1/2026		P/I
Total loans held at carry value				$	42,940,850	$	(3,787,914	)	$	39,152,936

(1)	The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted purchase discount, deferred loan fees and loan origination costs.

(2)

(3)	I/O = interest only, P/I = principal and interest. P/I loans may include interest only periods for a portion of the loan term.

(4)	Base interest rate of 12% plus LIBOR (LIBOR floor of 1%) and PIK interest rate of 4%.

(5)	Base interest rate of 13% and PIK interest rate of 2%.

(6)	Base interest rate of 12.9%.

(7)	Base interest rate of 12% plus LIBOR (LIBOR floor of 1%) and PIK interest rate of 4%.

(8)	C = Cultivation Facilities, D = Dispensaries

5.	LOAN RECEIVABLE AT CARRYING VALUE

As of March 31, 2021 and December 31, 2020, the Company’s portfolio included one loan receivable at carrying value. The originated commitment under this loan was approximately $4 million and outstanding principal was approximately $3.2 million and $3.4 million as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, the Company received repayments of $0.1 million of outstanding principal.

The following table presents changes in loans receivable as of and for the three months ended March 31, 2021:

	Principal			Original Issue Discount			Carrying Value

Total loans receivable at carrying value at December 31, 2020	$	3,352,176		$	(3,913	)	$	3,348,263
Principal repayment of loans		(107,717	)		-			(107,717	)
Accretion of original issue discount		-			309			309
Total loans receivable at carrying value at March 31, 2021	$	3,244,459		$	(3,604	)	$	3,240,855

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6.	CURRENT EXPECTED CREDIT LOSSES

The Company estimates its current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”) using a model that considers multiple datapoints and methodologies that may include the likelihood of default and expected loss given default for each individual loan, 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 includes fixed charge coverage ratio, loan-to-value, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s loan portfolio and (iv) the Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve, which may include (i) whether cash from the borrower’s operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where 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. In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company may consider historical market loan loss data provided by a third-party data service. The third party’s loan database includes historical loss data for commercial mortgage-backed securities, or CMBS which the Company believes is a reasonably comparable and available data set to its type of loans. The Company utilized macroeconomic data that reflects a current recession; however, the short and long-term economic implications of the COVID-19 pandemic and its financial impact on the Company are highly uncertain. The CECL Reserve takes into consideration the macroeconomic impact of the COVID-19 pandemic on CRE properties and is not specific to any loan losses or impairments on the Company’s loans held for investment.

As of March 31, 2021 and December 31, 2020, the Company’s CECL Reserve for its loans held at carrying value and loans receivable at carrying value is $531,497 and $465,397, respectively, or 125 and 132 basis points, respectively, of the Company’s total loans held at carrying value and loans receivable at carrying value of $42,393,791 and $35,185,294, respectively, and is bifurcated between the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loans receivable at carrying value of $248,317 and $404,860, respectively, and a liability for unfunded commitments of $283,180 and $60,537, respectively. The liability was based on the unfunded portion of the loan commitment over the full contractual period over which the Company is exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion.

Activity related to the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value and loans receivable at carrying value as of and for the three months ended March 31, 2021 was as follows:

	Outstanding ⁽¹⁾			Unfunded ⁽²⁾		Total
Balance at December 31, 2020	$	404,860		$	60,537	$	465,397
Provision for current expected credit losses		(156,543	)		222,643		66,100
Write-offs		-			-		-
Recoveries		-			-		-
Balance at March 31, 2021	$	248,317		$	283,180	$	531,497

(1)	As of March 31, 2021 and December 31, 2020, the CECL Reserve related to outstanding balances on loans at carrying value and loans receivable at carrying value is recorded within current expected credit loss reserve in the Company's balance sheets.

(2)	As of March 31, 2021 and December 31, 2020, the CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within other liabilities in the Company's balance sheets.

The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, projected cash flow, loan structure and exit plan, loan-to-value ratio, fixed charge coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows:

	Rating		Definition
	1		Very Low Risk
	2		Low Risk
	3		Medium Risk
	4		High Risk/ Potential for Loss
	5		Impaired/Loss Likely

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The risk ratings are primarily based on historical data as well as taking into account future economic conditions.

As of March 31, 2021, the carrying value, excluding the CECL Reserve, of the Company’s loans held at carrying value and loans receivable at carrying value within each risk rating by year of origination is as follows:

Risk Rating:	2021		2020		Total
1	$	-	$	-	$	-
2		-		-		-
3		5,175,386		33,977,550		39,152,936
4		-		3,240,855		3,240,855
5		-		-		-
Total	$	5,175,386	$	37,218,405	$	42,393,791

7.	INTEREST RECEIVABLE

The following tables summarize the interest receivable by the Company as of March 31, 2021 and December 31, 2020:

	As of March 31, 2021		As of December 31, 2020

Interest receivable	$	954,349	$	675,795
PIK receivable		210,588		177,183
Unused fees		40,367		74,314
Total interest receivable	$	1,205,304	$	927,292

8.	INTEREST RESERVE

At March 31, 2021 and December 31, 2020, the Company had two and one loans, respectively, that included a loan funded interest reserve. For the three months ended March 31, 2021, approximately $82 thousand of interest income was earned and disbursed from the interest reserve.

The following table presents changes in interest reserve as of and for the three months ended March 31, 2021:

	Three months ended March 31, 2021
Initial reserves	$	1,325,750
New reserves		2,000,000
Reserves disbursed		(82,266	)
Total Interest reserve	$	3,243,484

DEBT

The Company obtained a secured revolving credit loan (the “Revolving Loan”) from AFC Finance, LLC, an affiliate of the Company’s management. The Revolving Loan has a loan commitment of $40,000,000 and bears interest of 8% per annum, payable in cash in arrears. The Company did not incur any fees or cost related to the origination of the Revolving Loan and the Revolving Loan does not have any unused fees. The maturity date of the Revolving Loan is the earlier of (i) July 31, 2021 and (ii) the date of the closing of any Refinancing Credit Facility (as defined below) in accordance with terms in the Revolving Loan agreement. The Revolving Loan is secured by the assets of the Company. For the three months ended March 31, 2021, the Company did not utilize its Revolving Loan and therefore no interest expense was incurred. The Revolving Loan was amended in May 2021, see Note 17. Subsequent Events.

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10.	COMMITMENTS AND CONTINGENCIES

As of March 31, 2021 and December 31, 2020, the Company had the following commitments to fund various senior term loans, equipment loans and bridge loans.

	As of March 31, 2021			As of December 31, 2020

Total original loan commitments	$	130,684,459		$	107,292,176
Less: drawn commitments		(97,214,795	)		(87,467,057	)
Total undrawn commitments	$	33,469,664		$	19,825,119

The Company from time to time may be a party to litigation in the normal course of business. As of March 31, 2021, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations.

We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement of federal laws regarding the federal illegality of cannabis, and lack liquidity, and we could lose all or part of any of our investments.

Our ability to grow or maintain our business depends on state laws pertaining to the cannabis industry. New laws that are adverse to our portfolio companies may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow and could materially adversely affect our business.

Management’s plan to mitigate risks include monitoring the legal landscape as deemed appropriate. Also, should a loan default or otherwise be seized, the Company may be prohibited from owning cannabis assets and thus could not take possession of collateral, in which case the Company would look to sell the loan, which could result in the Company realizing a loss on the transaction.

11.	STOCKHOLDERS’ EQUITY

Series A Preferred Stock

As of March 31, 2021 and December 31, 2020, the Company has authorized 10,000 preferred shares and issued 125 of the preferred shares designated as 12.0% Series A Cumulative Non-Voting Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”).

The Series A Preferred Stock entitles the holders thereof to receive cumulative cash dividends at a rate per annum of 12.0% of the liquidation preference of $1,000 per share plus all accumulated and unpaid dividends thereon. The Company generally may not declare or pay, or set apart for payment, any dividend or other distribution on any shares of the Company’s stock ranking junior to the Series A Preferred Stock as to dividends, including the Company’s common stock, or redeem, repurchase or otherwise make payments on any such shares, unless full, cumulative dividends on all outstanding shares of Series A Preferred Stock have been declared and paid or set apart for payment for all past dividend periods. The holders of the Series A Preferred Stock generally have no voting rights except in limited circumstances, including certain amendments to the Company’s charter and the authorization or issuance of equity securities senior to or on parity with the Series A Preferred Stock. The Series A Preferred Stock is not convertible into shares of any other class or series of our stock. The Series A Preferred Stock is senior to all other classes and series of shares of the Company’s stock as to dividend and redemption rights and rights upon the Company’s liquidation, dissolution and winding up.

Upon written notice to each record holder of the Series A Preferred Stock as to the effective date of redemption, the Company may redeem the shares of the outstanding Series A Preferred Stock at the Company’s option, in whole or in part, at any time for cash at a redemption price equal to $1,000 per share, for a total of $125,000 for the 125 shares outstanding, plus all accrued and unpaid dividends thereon to and including the date fixed for redemption, plus a redemption premium of $50 per share if the shares are redeemed on or before December 31, 2021. Shares of the Series A Preferred Stock that are redeemed shall no longer be deemed outstanding shares of the Company and all rights of the holders of such shares will terminate.

Common Stock

The Board of Directors of the Company (the “Board”) approved a seven-for-one stock split of the Company's common stock effective on January 25, 2021. All common shares, stock options, and per share information presented in the financial statements have been adjusted to reflect the stock split on a retroactive basis for all periods presented, including reclassifying an amount equal to the increase in par value of common stock from additional paid-in capital. There was no change in the par value of the Company's common stock. Upon consummation of the Company’s IPO, any stockholder that held fractional shares received cash in lieu of such fractional shares based on the public offering price of the shares of the Company’s common stock at IPO. This resulted in the reduction of 15 shares issued and outstanding.

On March 23, 2021, the Company completed its IPO of 6,250,000 shares of its common stock at a price of $19.00 per share, raising $118,750,000 in gross proceeds. The underwriters also exercised their over-allotment option to purchase up to an additional 937,500 shares of the Company’s common stock at a price of $19.00 per share, which was completed on March 26, 2021, raising $17,812,500 in additional gross proceeds. The underwriting commissions of $8,312,500 and $1,246,875, respectively, are reflected as a reduction of additional paid-in capital on the statement of stockholders’ equity. The Company incurred approximately $3,093,836 of expenses in connection with the IPO, which is reflected as a reduction in additional paid-in capital. The net proceeds to the Company totaled approximately $123,909,289. The Company intends to use the net proceeds of the IPO (i) to fund loans related to unfunded commitments to existing borrowers, (ii) to originate and participate in commercial loans to companies operating in the cannabis industry that are consistent with the Company’s investment strategy and (iii) for working capital and other general corporate purposes. Until appropriate investments can be identified, the Company may invest this balance in interest-bearing short-term investments, including money market accounts or funds, commercial mortgage-backed securities and corporate bonds, which are consistent with the Company’s intention to qualify as a REIT and to maintain our exclusion from registration under the Investment Company Act of 1940, as amended.

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Equity Incentive Plan

The Company has established an equity incentive compensation plan (the “Plan”). The Company’s Board authorized the adoption of the Plan (the “2020 Plan”) and approved stock option grants of 1,616,098 shares of common stock as of March 31, 2021. The Board or one or more committees appointed by the Board will administer the 2020 Plan. The Plan authorizes stock options, stock appreciation rights, restricted stock, stock bonuses, stock units and other forms of awards granted or denominated in the Company’s common stock or units of common stock. The 2020 Plan retains flexibility to offer competitive incentives and to tailor benefits to specific needs and circumstances. Any award may be structured to be paid or settled in cash. The Company currently intends to grant stock options to participants in the 2020 Plan, but it may also grant any other type of award available under the 2020 Plan in the future. Persons eligible to receive awards under the 2020 Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company, employees of the Manager and certain directors and consultants and other service providers to the Company or any of its subsidiaries.

The current maximum number of shares of the Company common stock that may be delivered pursuant to awards under the 2020 Plan (the “Share Limit”) equals 2,100,000 shares. Shares that are subject to or underlie awards that expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under the 2020 Plan will not be counted against the Share Limit and will again be available for subsequent awards under the 2020 Plan. Shares that are exchanged by a participant or withheld by the Company as full or partial payment in connection with any award granted under the 2020 Plan, as well as any shares exchanged by a participant or withheld by us to satisfy tax withholding obligations related to any award granted under the 2020 Plan, will not be counted against the Share Limit and will again be available for subsequent awards under the 2020 Plan. To the extent that an award is settled in cash or a form other than shares, the shares that would have been delivered had there been no such cash or other settlement will not be counted against the Share Limit and will again be available for subsequent awards under the 2020 Plan.

The exercise price of any options granted under the 2020 Plan will be at net asset value or greater; provided, however, the exercise price will be at least equal to the market price of the underlying shares on the grant date. The options granted under the 2020 Plan have an ordinary term of up to ten years. An option may either be an incentive stock option or a nonqualified stock option. Options generally may not be transferred to third parties for value and do not include dividend equivalent rights.

The following table summarizes the (i) non-vested options granted, (ii) vested options granted and (iii) forfeited options granted for the Company’s directors and officers and employees of the Manager as of March 31, 2021 and December 31, 2020:

	As of March 31, 2021			As of December 31, 2020
Non-vested		183,114			142,814
Vested		1,449,518			800,618
Forfeited		(16,534	)		(16,534	)
Balance		1,616,098			926,898

The Company uses the Black-Scholes option pricing model to value stock options in determining the share-based compensation expense. Forfeitures are recognized as they occur. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The expected dividend yield was based on the Company’s expected dividend yield at grant date. Expected volatility is based on the estimated average volatility of similar companies due to the lack of historical volatilities of the Company’s common stock. The share-based compensation expense for the Company was approximately $1,599,115 for the three months ended March 31, 2021.

The following table presents the assumptions used in the option pricing model of options granted under the 2020 Plan:

Assumptions	Range
Expected volatility		40% - 50	%
Expected dividend yield		10% - 20	%
Risk-free interest rate		0.5% - 1.5	%
Expected forfeiture rate		0	%

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The following table summarizes stock option activity during the three months ended March 31, 2021:

		Three months ended March 31, 2021				Weighted-Average Grant Date Fair Value Per Option
Balance as of December 31, 2020			926,898

SEC Form 10-Q filed by AFC Gamma Inc.