C. Brophy Christensen, Esq. Jeeho M. Lee, Esq. O’Melveny & Myers LLP Times Square Tower 7 Times Square New York, New York 10036 (212) 326-2000 | | | Christopher Bellini, Esq. Seth Popick, Esq. Cozen O’Connor P.C. 33 South 6th Street, Suite 3800 Minneapolis, Minnesota 55402 (612) 260-9000 |
Large accelerated filer | | | ☐ | | | | | Accelerated filer | | | ☐ | |
Non-accelerated filer | | | ☒ | | | | | Smaller reporting company | | | ☐ | |
| | | | | | Emerging growth company | | | ☒ |
Title of Each Class of Securities to be Registered | | | Proposed Maximum Aggregate Offering Price(1)(2) | | | Amount of Registration Fee(3) |
Common stock, $0.01 par value per share | | | $115,000,000 | | | $12,546.50 |
(1) | Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
(2) | Includes the aggregate offering price of additional shares that the underwriters have the option to purchase. |
(3) | This registration fee was previously paid by the registrant in connection with the filing of its Registration Statement on Form S-11 on December 28, 2020. |
• | We were recently formed and have limited operating history, and may not be able to successfully operate our business, integrate new assets and/or manage our growth or to generate sufficient revenue to make or sustain distributions to our stockholders. |
• | Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition. |
• | We are externally managed by AFC Management, LLC (our “Manager”) and our growth and success depends on our Manager, its key personnel and investment professionals, and our Manager’s ability to make loans on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns; thus, if our Manager overestimates the yields or incorrectly prices the risks of our loans or if there are any adverse changes in our relationship with our Manager, we may experience losses. |
• | We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk to our business of strict enforcement against our borrowers of the federal illegality of cannabis, and such loans lack liquidity, and we could lose all or part of any of our loans. |
• | Our ability to grow our business depends on state laws pertaining to the cannabis industry. New laws that are adverse to our borrowers may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow our business under our current business plan and could materially adversely affect our business. |
• | As a debt investor, we are often not in a position to exert influence on borrowers, and the stockholders and management of such companies may make decisions that could decrease the value of loans made to such borrower. |
• | Our growth depends on external sources of capital, which may not be available on favorable terms or at all. |
• | Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our loans. |
• | There are various conflicts of interest in our relationship with our Manager, including conflicts created by our Manager’s compensation arrangements with us, which could result in decisions that are not in the best interests of our stockholders. |
• | Maintenance of our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”), may impose significant limits on our operations. Your investment return in our Company may be reduced if we are required to register as an investment company under the Investment Company Act. |
• | We may be deemed to be Closely Held (as defined below), which, subject to our ability to redeem certain shares of our capital stock, would result in us failing to qualify as a REIT and, subject to any required approvals by our Board and our stockholders, would trigger our dissolution and windup process. |
• | Failure to qualify as a REIT for U.S. federal income tax purposes would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders. |
• | We may incur significant debt, and our governing documents and current credit facility contain no limit on the amount of debt we may incur. |
• | We may in the future pay distributions from sources other than our cash flow from operations, including borrowings, offering proceeds or the sale of assets, which means we will have less funds available for investments or less income-producing assets and your overall return may be reduced. |
• | There is currently no public market for our common stock and the value of our common stock may be volatile and could decline substantially. |
| | Price to Public | | | Underwriting Discounts and Commissions(1) | | | Proceeds to Company | |
Per Share | | | $ | | | $ | | | $ |
Total | | | $ | | | $ | | | $ |
(1) | See “Underwriting” for additional disclosure regarding of the compensation payable to the underwriters. |
Joint Book-Running Managers | ||
JMP Securities | Ladenburg Thalmann | Seaport Global Securities |
Manager | ||
Lake Street |
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Origination | | | Underwriting | | | Investment Committee | | | Legal Documentation and Post-Closing | ||||||||||||
• | | | Direct origination platform works to create enhanced yields by originating and structuring loans, as well as putting in enhanced controls | | | • | | | Disciplined underwriting process leads to a highly selective approach | | | • | | | Focused on managing credit risk through comprehensive investment review process | | | • | | | Investment team works alongside external counsel to negotiate credit agreements and collateral liens |
• | | | Platform drives increased deal flow, which provides for improved loan selectivity | | | • | | | Potential loans are screened based on four key criteria: company profile, state dynamics, regulatory matters and real estate asset considerations | | | • | | | The Investment Committee must approve each loan before commitment papers are issued | | | • | | | Emphasis is placed on financial covenants and limitations on actions that may be adverse to lenders |
• | | | Allows for specific portfolio construction and a focus on higher quality companies | | | • | | | Other tools that we frequently use to verify data include, but are not limited to: appraisals, quality of earnings, environmental reports, site visits, comparable company analyses and background checks | | | • | | | Members of the Investment Committee currently include: Leonard M. Tannenbaum, Jonathan Kalikow and Robyn Tannenbaum. It is intended that the Investment Committee will be expanded to five members consisting of the three current members and our to-be named Managing Director, Portfolio Management and General Counsel | | | • | | | Portfolio is proactively managed to monitor ongoing performance, in some instances, through seats on borrowers’ boards of directors or board observer rights |
• | | | As of December 26, 2020, we had 34 active loans in our pipeline at various stages in the diligence process, and we had passed on 185 of 229 sourced loans due to, among other reasons, lack of collateral, lack of cash flow, stage of company, no previous experience and state dynamics | | | | | | | | | | | | |
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Loan# | | | Original Funding Date(1) | | | Original Loan Maturity | | | Maturity With Extensions | | | Our Total Commitment | | | Percentage of Total Portfolio | | | Total OID(2)(5) | | | Principal Balance as of 12/26/2020 | | | Exit Fees | | | Cash Interest Rate | | | PIK Interest | | | Fixed/ Floating | | | Amortization During Term | | | Prepayment Penalty(3) | | | Extension Fee(s) | | | Unused Loan Fee | | | | | YTM IRR(3)(7) | | | ||
Public Co. A - Real Estate Loan | | | 7/3/2019 | | | 6/27/2021 | | | 12/27/2021 | | | $2,940,000 | | | 2.6% | | | 1.9% | | | $2,940,000 | | | N/A | | | 10.5% | | | N/A | | | Floating | | | No | | | Yes | | | 2.0% | | | N/A | | | | | 13.5% | | | ||
Public Co. A - Equipment Loan | | | 8/5/2019 | | | 3/5/2024 | | | 3/5/2024 | | | 4,000,000 | | | 3.5% | | | 7.6% | | | 3,352,176 | | | 5.0% | | | 12.0% | | | N/A | | | Fixed | | | Yes | | | Yes | | | N/A | | | N/A | | | | | 13.9% | | | ||
Public Co. B(4) | | | 1/31/2020 | | | 7/31/2021 | | | 7/31/2022 | | | 5,000,000 | | | 4.4% | | | 1.3% | | | 4,373,781 | | | N/A | | | 16.0% | | | N/A | | | Fixed | | | Yes | | | Yes | | | 2.0% | | | N/A | | | | | 19.4% | | | ||
Sub. of Public Co. C(5) | | | 2/12/2020 | | | 2/18/2025 | | | 2/18/2025 | | | 15,000,000 | | | 13.3% | | | 19.0% | | | 12,024,064 | | | 2.5% | | | 16.8% | | | 3.0% | | | Fixed | | | Yes | | | Yes | | | N/A | | | 0.5% | | | | | 28.6% | | | ||
Private Co. A | | | 5/8/2020 | | | 5/8/2024 | | | 5/8/2024 | | | 34,000,000 | | | 30.1% | | | 7.9% | | | 33,344,325 | | | 2.0% | | | 13.0% | | | 4.0% | | | Fixed | | | Yes | | | Yes | | | N/A | | | 2.0% | | | | | 23.4% | | | ||
Private Co. B | | | 9/10/2020 | | | 9/1/2023 | | | 9/1/2023 | | | 8,000,000 | | | 7.1% | | | 4.0% | | | 2,522,846 | | | 6.0% | | | 13.0% | | | 4.0% | | | Fixed | | | Yes | | | Yes | | | N/A | | | 5.0% | | | | | 24.2% | | | ||
Private Co. C | | | 11/5/2020 | | | 12/1/2025 | | | 12/1/2025 | | | 22,000,000 | | | 19.5% | | | 4.0% | | | 11,907,763 | | | 7.0% | | | 13.0% | | | 4.0% | | | Floating | | | Yes | | | Yes | | | N/A | | | 5.0% | | | | | 21.7% | | | ||
Sub. of Public Co. D(6) | | | 12/18/2020 | | | 12/18/2024 | | | 12/18/2024 | | | 10,000,000 | | | 8.9% | | | 1.9% | | | 10,000,000 | | | N/A | | | 12.9% | | | N/A | | | Fixed | | | No | | | Yes | | | N/A | | | N/A | | | | | 14.2% | | | ||
Private Co. D | | | 12/23/2020 | | | 1/1/2026 | | | 1/1/2026 | | | 12,000,000 | | | 10.6% | | | 8.8% | | | 12,000,000 | | | 2.0% | | | 13.0% | | | 2.0% | | | Fixed | | | Yes | | | Yes | | | N/A | | | N/A | | | | | 19.8% | | | ||
| | | | SubTotal | | | | | $ 112,940,000 | | | 100.0% | | | 7.4% | | | $ 92,464,954 | | | 3.1% | | | 13.5% | | | 2.9% | | | | | | | | | Wtd Average | | | | | 21.7% | | | |||||||||||
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(1) | All loans originated prior to July 31, 2020 were purchased from an affiliated entity at fair value plus accrued interest on July 31, 2020. |
(2) | 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. |
(3) | Assumes no prepayment penalties or early payoffs. |
(4) | On December 28, 2020, this loan was repaid in full by Public Company B at par value. |
(5) | Loan to Subsidiary of Public Company C includes a $3.0 million initial funding of a $15.0 million aggregate loan commitment, which has interest that includes 3.0% PIK interest. The amortization of the loan exceeds PIK interest. The loan also includes two early advances totaling $9.0 million against the $15.0 million aggregate loan commitment, with a 19.0% interest rate. Statistics shown are for the $15.0 million loan commitment, except the weighted average interest rate, which is based on the weighted average interest rate as of December 26, 2020. |
(6) | Loan to Subsidiary of Public Co. D does not reflect the borrower's option to request a maturity extension for an additional 364 days from the original loan maturity date, which we are not obligated to grant. |
(7) | YTM IRR for Public Company A, subsidiary of Public Company C, Private Company A and Private Company D is enhanced by purchase discounts attributed to the fair value of equity warrants that were separated from the loans prior to our acquisition of such loans. The purchase discounts accrete to income over the respective remaining terms of such loans. |
| | | | | | | | | | | | Real Estate | | | ||||||||||||||||
Borrower | | | Date | | | Our Total Commitment | | | Percentage of Total Portfolio | | | Total Funded Debt Issuance | | | Our Percentage of the Total Loan | | | Estimated Real Estate Value(1) | | | Real Estate Collateral Coverage | | | Implied Real Estate Collateral | | | Our Real Estate Collateral Coverage | | | |
Public Co. A - Real Estate Loan(2) | | | 7/3/2019 | | | $2,940,000 | | | 2.6% | | | $30,000,000 | | | 9.8% | | | $72,000,000 | | | 2.40x | | | $7,056,000 | | | 2.40x | | ||
Public Co. A - Equipment Loan | | | 8/5/2019 | | | $4,000,000 | | | 3.5% | | | $20,000,000 | | | 20.0% | | | — | | | — | | | — | | | — | | ||
Public Co. B(3)(4) | | | 1/31/2020 | | | $5,000,000 | | | 4.4% | | | $20,000,000 | | | 25.0% | | | $53,100,000 | | | 2.66x | | | $13,275,000 | | | 2.66x | | ||
Subsidiary of Public Co. C(5) | | | 2/12/2020 | | | $15,000,000 | | | 13.3% | | | $15,000,000 | | | 100.0% | | | $30,723,143 | | | 2.05x | | | $30,723,143 | | | 2.05x | | ||
Private Co. A(6) | | | 5/8/2020 | | | $34,000,000 | | | 30.1% | | | $42,500,000 | | | 80.0% | | | $51,384,281 | | | 1.21x | | | $41,107,425 | | | 1.21x | | ||
Private Co. B(7) | | | 9/10/2020 | | | $8,000,000 | | | 7.1% | | | $8,000,000 | | | 100.0% | | | $19,536,098 | | | 2.44x | | | $19,536,098 | | | 2.44x | | ||
Private Co. C(8) | | | 11/5/2020 | | | $22,000,000 | | | 19.5% | | | $22,000,000 | | | 100.0% | | | $23,733,032 | | | 1.08x | | | $23,733,032 | | | 1.08x | | ||
Subsidiary of Public Co. D(9) | | | 12/18/2020 | | | $10,000,000 | | | 8.9% | | | $120,000,000 | | | 8.3% | | | $26,058,332 | | | 0.22x | | | $2,171,528 | | | 0.22x | | ||
Private Co. D(10) | | | 12/23/2020 | | | $12,000,000 | | | 10.6% | | | $12,000,000 | | | 100.0% | | | $7,500,000 | | | 0.63x | | | $7,500,000 | | | 0.63x | | ||
| | | | $112,940,000 | | | 100.0% | | | $289,500,000 | | | 39.0% | | | $284,034,885 | | | 0.98x | | | $145,102,225 | | | 1.28x | | ||||
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(1) | To the extent the applicable loan is intended to fund any acquisitions and/or construction, the applicable figure includes expected total basis on such future construction and/or acquisitions plus appraised value. |
(2) | Public Company A real estate is based on cost basis. |
(3) | Public Company B real estate is based on cost basis. |
(4) | On December 28, 2020, this loan was repaid in full by Public Company B at par value. |
(5) | Subsidiary of Public Company C real estate is based on an existing cultivation property and the completed and stabilized value of a to-be-built facility. The anticipated completion date for the to-be-built facility is November 2021. |
(6) | Private Company A real estate is based on the cost basis of various facilities constituting real estate collateral, plus anticipated capital expenditures for one facility that is being converted for cannabis cultivation purposes. The conversion is anticipated to be completed in February 2021. |
(7) | Private Company B real estate is based on the expected total cost basis of a to-be-built facility, as completed. The anticipated completion date for the to-be-built facility is July 2021. |
(8) | Private Company C real estate is based on the costs basis of two facilities, including the capital expenditures for one facility that is being converted for cannabis cultivation purposes. The construction of the to-be-converted facility is divided into six phases. The first phase was completed in December 2020, and the anticipated completion date for the remaining phases of construction is November 2021. |
(9) | Subsidiary of Public Company D real estate based on total cost basis. |
(10) | Private Company D real estate is based on appraised value. |
Type | | | Description | | | Payment |
Base Management Fees | | | An amount equal to 0.375% of our Equity (as defined below), determined as of the last day of each quarter. The Base Management Fees are reduced by the Base Management Fee Rebate. Under no circumstances will the Base Management Fee be less than zero. Our Equity, for purposes of calculating the Base Management Fees, could be greater than or less than the amount of stockholders’ equity shown on our financial statements. The Base Management Fees are payable independent of the performance of our loan portfolio. For additional information, see “Management Compensation—Base Management Fees.” | | | Quarterly in arrears in cash. |
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Base Management Fee Rebate | | | An amount equal to 50% of the aggregate amount of any other fees earned and paid to our Manager during the applicable quarter resulting from the investment advisory services and general management services rendered by our Manager to us under our | | | Reduces the Base Management Fees on a quarterly basis. |
Type | | | Description | | | Payment |
| | Management Agreement, including any agency fees relating to our loans, but excluding the Incentive Compensation and any diligence fees paid to and earned by our Manager and paid by third parties in connection with our Manager’s due diligence of potential loans. For additional information, see “Management Compensation—Base Management Fees.” | | | ||
Incentive Compensation | | | An amount with respect to each fiscal quarter (or portion thereof that our Management Agreement is in effect) based upon our achievement of targeted levels of Core Earnings. No Incentive Compensation is payable with respect to any fiscal quarter unless our Core Earnings for such quarter exceed the amount equal to the product of (i) 2% and (ii) Adjusted Capital (as defined below) as of the last day of the immediately preceding fiscal quarter (such amount, the “Hurdle Amount”). The Incentive Compensation for any fiscal quarter will otherwise be calculated as the sum of (i) the product of (A) 50% and (B) the amount of our Core Earnings for such quarter, if any, that exceeds the Hurdle Amount, but is less than or equal to 166-2/3% of the Hurdle Amount and (ii) the product of (A) 20% and (B) the amount of our Core Earnings for such quarter, if any, that exceeds 166-2/3% of the Hurdle Amount. Such compensation is subject to Clawback Obligations (as defined below), if any. For additional information, see “Management Compensation—Incentive Compensation” and “Management Compensation—Incentive Compensation—Incentive Compensation Clawback.” | | | Quarterly in arrears in cash. |
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Expense Reimbursement | | | We pay all of our costs and expenses and reimburse our Manager or its affiliates for expenses of our Manager and its affiliates paid or incurred on our behalf, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement. Pursuant to our Management Agreement, we reimburse our Manager or its affiliates, as applicable, for our fair and equitable allocable share of the compensation, including annual base salary, bonus, any related withholding taxes and employee benefits, paid to (i) subject to review by the Compensation Committee of our Board, our Manager’s personnel serving as our Chief Executive Officer (except when the Chief Executive Officer serves as a member of the Investment Committee prior to the consummation of an internalization transaction of our Manager by us), General Counsel, Chief Compliance Officer, Chief Financial Officer, Chief Marketing Officer, Managing Director and any of our other officers, based on the percentage of his or her time spent devoted to our affairs and (ii) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment personnel of the Manager and its affiliates who spend all or a portion of their time managing our affairs, with the allocable share of the compensation of such personnel described in this clause (ii) being as reasonably determined by our Manager to appropriately reflect the amount of time spent devoted by such personnel to our affairs. The service by any personnel of our Manager and its affiliates as a member of the | | | Monthly in cash. |
Type | | | Description | | | Payment |
| | Investment Committee will not, by itself, be dispositive in the determination as to whether such personnel is deemed “investment personnel” of our Manager and its affiliates for purposes of expense reimbursement. Under our Management Agreement, we are not obligated to reimburse our Manager or its affiliates, as applicable, for any compensation paid to Mr. Tannenbaum, Mr. Kalikow or Mrs. Tannenbaum prior to the consummation of this offering. For the 2021 fiscal year, we anticipate that our Manager will not seek reimbursement for our allocable share of Mr. Kalikow’s compensation, but will seek reimbursement for our allocable share of Mrs. Tannenbaum’s compensation. For additional information, see “Management Compensation—Expense Reimbursement.” | | | ||
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Termination Fee | | | Equal to three times the sum of (i) the annual Base Management Fee and (ii) the annual Incentive Compensation, in each case, earned by our Manager during the 12-month period immediately preceding the most recently completed fiscal quarter prior to the date of termination. Such fee shall be payable upon termination of our Management Agreement in the event that (i) we decline to renew our Management Agreement, without cause, upon 180 days prior written notice and the affirmative vote of at least two-thirds of our independent directors that there has been unsatisfactory performance by our Manager that is materially detrimental to us taken as a whole, or (ii) our Management Agreement is terminated by our Manager (effective upon 60 days’ prior written notice) based upon our default in the performance or observance of any material term, condition or covenant contained in our Management Agreement and such default continuing for a period of 30 days after written notice thereof specifying such default and requesting that the same be remedied in such 30-day period. For additional information, see “Management Compensation—Termination Fee.” | | | Upon specified termination in cash. |
• | Targeting loans for origination and investment that typically have the following characteristics: |
○ | principal balance greater than $10 million; |
○ | real estate collateral coverage of at least one times the principal balance; |
○ | secured by commercial real estate properties, including cannabis cultivation facilities, processing facilities, and dispensaries; and |
○ | well-capitalized sponsors with substantial experience in particular real estate sectors and geographic markets. |
• | Diversifying our financing sources with increased access to equity and debt capital, which may provide us with a lower overall cost of funding and the ability to hold larger loan sizes, among other things. |
| | For the period from July 31, 2020 (date of commencement of operations) to September 30, 2020 | |
Net Income | | | $2,106,250 |
Adjustments to net income | | | |
Non-cash equity compensation expense | | | — |
Incentive Compensation to Manager(1) | | | — |
Depreciation and amortization | | | — |
Unrealized (gain), losses or other non-cash items | | | (1,563,800) |
One-time events pursuant to changes in GAAP and certain non-cash charges | | | — |
Core Earnings | | | $542,450 |
Adjustments to Core Earnings | | | |
Certain organizational expenses | | | 616,190 |
Adjusted Core Earnings | | | $1,158,640 |
Basic weighted average shares of common stock outstanding (in shares, on a post-split basis) | | | 5,376,411 |
Adjusted Core Earnings per Weighted Average Share (on a post-split basis) | | | $0.22 |
(1) | Our Manager has agreed to waive the Incentive Compensation for the period from July 31, 2020 (date of commencement of operations) through December 31, 2020. |
• | We were recently formed and have limited operating history, and may not be able to successfully operate our business, integrate new assets and/or manage our growth or to generate sufficient revenue to make or sustain distributions to our stockholders. |
• | Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition. |
• | We are externally managed by our Manager and our growth and success depends on our Manager, its key personnel and investment professionals, and our Manager’s ability to make loans on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns; thus, if our Manager overestimates the yields or incorrectly prices the risks of our loans or if there are any adverse changes in our relationship with our Manager, we may experience losses. |
• | We provide loans to established companies operating in the cannabis industry which involves significant risks, the risk to our business of strict enforcement against our borrowers of the federal illegality of cannabis, and such loans lack liquidity, and we could lose all or part of any of our loans. |
• | Our ability to grow our business depends on state laws pertaining to the cannabis industry. New laws that are adverse to our borrowers may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow our business under our current business plan and could materially adversely affect our business. |
• | As a debt investor, we are often not in a position to exert influence on borrowers, and the stockholders and management of such companies may make decisions that could decrease the value of loans to such borrower. |
• | Our growth depends on external sources of capital, which may not be available on favorable terms or at all. |
• | Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our loans. |
• | There are various conflicts of interest in our relationship with our Manager, including conflicts created by our Manager’s compensation arrangements with us, which could result in decisions that are not in the best interests of our stockholders. |
• | Maintenance of our exemption from registration under the Investment Company Act may impose significant limits on our operations. Your investment return in our Company may be reduced if we are required to register as an investment company under the Investment Company Act. |
• | We may be deemed to be “closely held” within the meaning of Section 856(a)(6) (without regard to Section 856(h)(2)) of the Code (“Closely Held”), subject to our ability to redeem certain shares of our capital stock, would result in us failing to qualify as a REIT and, subject to any required approvals by our Board and our stockholders, would trigger our dissolution and windup process. |
• | Failure to qualify as a REIT for U.S. federal income tax purposes would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders. |
• | We may incur significant debt, and our governing documents and current credit facility contain no limit on the amount of debt we may incur. |
• | We may in the future pay distributions from sources other than our cash flow from operations, including borrowings, offering proceeds or the sale of assets, which means we will have less funds available for investments or less income-producing assets and your overall return may be reduced. |
• | There is currently no public market for our common stock and the value of our common stock may be volatile and could decline substantially. |
• | an exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); |
• | exemption from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements; |
• | reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and |
• | an extended transition period to defer compliance with new or revised accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. |
(i) | 67,586 shares of common stock (on a pre-split basis, or 473,102 shares, on a post-split basis) expected to be reserved for future grant or issuance under our 2020 Stock Incentive Plan (after giving effect to the issuance of options referenced in clause (iii) below), which shares will automatically increase as described in “Management—2020 Stock Incentive Plan”; |
(ii) | 132,414 shares of common stock (on a pre-split basis, or 926,898 shares, on a post-split basis) issuable upon exercise of options outstanding as of December 26, 2020, having a weighted-average exercise price of approximately $103.59 per share; and |
(iii) | up to 100,000 shares of common stock (on a pre-split basis, or 700,000 shares on a post-split basis) issuable upon exercise of options authorized as of December 26, 2020, to be issued immediately prior to the consummation of this offering at an exercise price equal to the per share price to the public in this offering on a post-split basis. |
(i) | 882,770 shares of common stock (on a pre-split basis, or 6,179,392 shares, on a post-split basis) outstanding as of December 26, 2020; |
(ii) | the underwriters will not exercise their over-allotment option in this offering; |
(iii) | no issuance or exercise of stock options on or after December 26, 2020; |
(iv) | no purchases of Reserved Shares by existing stockholders or their affiliates pursuant to the indications of interest, described above or pursuant to the directed share program; |
(v) | the seven-for-one stock split of our common stock, which will occur on January 25, 2021; and |
(vi) | the effectiveness of our Articles of Amendment and Restatement, which will occur prior to the completion of this offering. |
| | As of and for the period from July 31, 2020 (date of commencement of operations) to September 30, 2020 | |
Statement of Operations Data: | | | |
Revenue | | | |
Interest Income | | | $1,594,769 |
Total revenue | | | 1,594,769 |
| | ||
Expenses | | | |
Management fees, net (less rebate of $84,167) | | | 142,067 |
General and administrative expense | | | 204,262 |
Organizational expense | | | 616,190 |
Professional fees | | | 89,800 |
Total expenses | | | 1,052,319 |
| | ||
Net realized and change in unrealized gains / (losses) on loans at fair value | | | |
Change in unrealized gains / (losses) on loans at fair value, net | | | 1,563,800 |
Total net realized and change in unrealized gains / (losses) on loans at fair value | | | 1,563,800 |
| | ||
Net Income / (loss) before income taxes | | | 2,106,250 |
Income tax expense | | | — |
Net Income / (loss) | | | 2,106,250 |
| | ||
Earnings per common share: | | | |
Basic earnings per common share (in dollars per share, on a post-split basis) | | | $0.39 |
| | ||
Weighted average number of common shares outstanding: | | | |
Basic weighted average shares of common stock outstanding (in shares, on a post-split basis)(1) | | | 5,376,411 |
| | ||
Balance Sheet Data: | | | |
Total assets(1) | | | $82,717,823 |
Total liabilities | | | $1,862,641 |
Total stockholders’ equity(1) | | | $80,855,182 |
| | ||
Other Financial Data: | | | |
Core Earnings(1)(2) | | | $542,450 |
Adjusted Core Earnings(1)(2) | | | $1,158,640 |
Adjusted Core Earnings per weighted average share of common stock (on a post-split basis)(1)(2) | | | $0.22 |
(1) | Does not give effect to the Additional Closing or the Series A Offering, the changes to our loan portfolio, the sale of Assigned Rights or the dividends to our stockholders subsequent to September 30, 2020. See “—Recent Developments” for additional information. |
(2) | We use Core Earnings and Adjusted Core Earnings to evaluate our performance excluding the effects of certain transactions and non-GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations. Each of Core Earnings and Adjusted Core Earnings is a measure that is not prepared in accordance with GAAP. We define Core Earnings as, for a given period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) Incentive Compensation, (iii) depreciation and amortization, (iv) 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 Core 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, and (v) 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 define Adjusted Core Earnings, for a specified period, as Core Earnings excluding certain non-recurring organizational expenses (such as one-time expenses related to our formation and start-up). We believe providing Core Earnings and Adjusted Core Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business. Core Earnings and Adjusted Core Earnings should not be considered as substitutes for GAAP net income. We caution readers that our methodology for calculating Core Earnings and Adjusted Core 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 Core Earnings and Adjusted Core Earnings may not be comparable to similar measures presented by other REITs. We also use Core Earnings to determine the fees we pay our Manager. For information on the fees we pay our Manager, see “Management Compensation.” The following table provides a reconciliation of GAAP net income to Core Earnings and Adjusted Core Earnings (in thousands, except per share data): |
| | For the period from July 31, 2020 (date of commencement of operations) to September 30, 2020 | |
Net Income | | | $2,106,250 |
Adjustments to net income | | | |
Non-cash equity compensation expense | | | — |
Incentive Compensation to Manager(1) | | | — |
Depreciation and amortization | | | — |
Unrealized (gains), losses or other non-cash items | | | (1,563,800) |
One-time events pursuant to changes in GAAP and certain non-cash charges | | | — |
Core Earnings | | | $542,450 |
Adjustments to Core Earnings | | | |
Certain organizational expenses | | | 616,190 |
Adjusted Core Earnings | | | $ 1,158,640 |
Basic weighted average shares of common stock outstanding (in shares, on a post-split basis) | | | 5,376,411 |
Adjusted Core Earnings per Weighted Average Share (on a post-split basis) | | | $0.22 |
(1) | Our Manager has agreed to waive the Incentive Compensation for the period from July 31, 2020 (date of commencement of operations) through December 31, 2020. |
• | the development and growth of applicable state cannabis markets; |
• | the responsibility of complying with multiple and likely conflicting state and federal laws, including with respect to retail sale, distribution, cultivation and manufacturing of cannabis, licensing, banking, and insurance; |
• | unexpected changes in regulatory requirements and other laws; |
• | difficulties and costs of managing operations in certain locations; |
• | potentially adverse tax consequences; |
• | the impact of national, regional or state specific business cycles and economic instability; and |
• | access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations. |
• | these companies may have limited financial resources and may be unable to meet their obligations, which may be accompanied by a deterioration in the value of any collateral securing our loan and a reduction in the likelihood of us realizing a return on our loan; |
• | they typically have shorter operating histories, narrower product lines and smaller market shares than larger and more established businesses, which tend to render them more vulnerable to competitors’ actions and market conditions (including conditions in the cannabis industry), as well as general economic downturns; |
• | they typically depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse effect on such borrower and, in turn, on us; |
• | there is generally less public information about these companies. Unless publicly traded, these companies and their financial information are generally not subject to the regulations that govern public companies, and we may be unable to uncover all material information about these companies, which may prevent us from making a fully informed lending decision and cause us to lose money on our loans; |
• | they generally have less predictable operating results and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; |
• | we, our executive officers and directors and our Manager may, in the ordinary course of business, be named as defendants in litigation arising from our loans to such borrowers and may, as a result, incur significant costs and expenses in connection with such litigation; |
• | changes in laws and regulations, as well as their interpretations, may have a disproportionate adverse effect on their business, financial structure or prospects compared to those of larger and more established companies; and |
• | they may have difficulty accessing capital from other providers on favorable terms or at all. |
• | a complete or partial closure of, or other operational issues at, one or more of our borrowers’ locations resulting from government or such company’s actions; |
• | the temporary inability of consumers and patients to purchase our borrowers’ cannabis products due to a number of factors, including, but not limited to, illness, dispensary closures or limitations on operations, quarantine, financial hardship, and “stay at home” orders; |
• | difficulty accessing equity and debt capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations and our borrowers’ ability to fund their business operations and meet their obligations to us; |
• | workforce disruptions for our borrowers, as a result of infections, quarantines, “stay at home” orders or other factors, could result in a material reduction in our borrowers’ cannabis cultivation, manufacturing, distribution and/or sales capacity; |
• | because of the federal regulatory uncertainty relating to the regulated cannabis industry, our borrowers have not been, and in the future likely will not be eligible, for financial relief available to other businesses; |
• | restrictions on public events for the regulated cannabis industry limit the opportunity for our borrowers to market and sell their products and promote their brands; |
• | delays in construction at the properties of our borrowers may adversely impact their ability to commence operations and generate revenues from projects; |
• | a general decline in business activity in the regulated cannabis industry would adversely affect our ability to grow our portfolio of loans to cannabis companies; and |
• | the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, would result in a deterioration in our ability to ensure business continuity during a disruption. |
• | general economic or market conditions; |
• | the market’s view of the quality of our assets; |
• | the market’s perception of our growth potential; |
• | the current regulatory environment with respect to our business; and |
• | our current and potential future earnings and cash distributions. |
• | our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt we incur or we may fail to comply with all of the other covenants contained in such debt, which is likely to result in (i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to |
• | we may be unable to borrow additional funds as needed or on favorable terms, or at all; |
• | to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense; |
• | our default under any loan with cross-default provisions could result in a default on other indebtedness; |
• | incurring debt may increase our vulnerability to adverse economic and industry conditions with no assurance that loan yields will increase with higher financing costs; |
• | we may be required to dedicate a substantial portion of our cash flow from operations to payments on the debt we may incur, thereby reducing funds available for operations, future business opportunities, stockholder distributions, including distributions currently contemplated or necessary to satisfy the requirements for REIT qualification, or other purposes; and |
• | we are not able to refinance debt that matures prior to the loan it was used to finance on favorable terms, or at all. |
• | authorize our Board, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of our preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine; |
• | authorize “blank check” preferred stock, which could be issued by our Board without stockholder approval, subject to certain specified limitations, and may contain voting, liquidation, dividend and other rights superior to our common stock; |
• | establish a classified Board such that not all members of the Board are elected at one time, which may delay the ability of our stockholders to change the membership of a majority of our Board; |
• | specify that only our Board, the chairman of our Board, our chief executive officer or president or, upon the written request of stockholders entitled to cast not less than a majority of the votes entitled to be cast, our secretary can call special meetings of our stockholders; |
• | establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our Board; |
• | provide that a majority of directors then in office, even though less than a quorum, may fill any vacancy on our Board, whether resulting from an increase in the number of directors or otherwise; |
• | specify that no stockholder is permitted to cumulate votes at any election of directors; and |
• | provide our Board the exclusive power to adopt, alter or repeal any provision of the Bylaws and to make new Bylaws. |
• | require supermajority votes of the holders of our common stock to amend specified provisions of our Charter. |
• | 80% of the votes entitled to be cast by holders of the then-outstanding shares of voting stock of such corporation; and |
• | two-thirds of the votes entitled to be cast by holders of voting stock of such corporation, other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected, or held by an affiliate or associate of the interested stockholder. |
• | we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; |
• | we could be subject to increased state and local taxes; and |
• | unless we are entitled to relief under statutory provisions, we would not be able to re-elect to be taxed as a REIT for four taxable years following the year in which we were disqualified. |
• | our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; |
• | changes in governmental policies, regulations or laws; |
• | loss of a major funding source or inability to obtain new favorable funding sources in the future; |
• | equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; |
• | actual, anticipated or perceived accounting or internal control problems; |
• | publication of research reports about us, the real estate industry or the cannabis industry; |
• | our value of the properties securing our loans; |
• | changes in market valuations of similar companies; |
• | adverse market reaction to any increased indebtedness we may incur in the future; |
• | additions to or departures of the executive officers or key personnel supporting or assisting us from our Manager or its affiliates, including our Manager’s investment professionals; |
• | speculation in the press or investment community about us or other similar companies; |
• | our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; |
• | increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock (if we have begun to make distributions to our stockholders) and which could cause the cost of our interest expenses on our debt to increase; |
• | failure to qualify or maintain our qualification as a REIT or exclusion from the Investment Company Act; |
• | price and volume fluctuations in the stock market generally; and |
• | general market and economic conditions, including the state of the credit and capital markets. |
• | use of proceeds of this offering; |
• | our business and investment strategy; |
• | the impact of COVID-19 on our business and the global economy; |
• | the ability of our Manager to locate suitable loan opportunities for us, monitor and actively manage our loan portfolio and implement our investment strategy; |
• | allocation of loan opportunities to us by our Manager; |
• | our projected operating results; |
• | actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law; |
• | the estimated growth in and evolving market dynamics of the cannabis market; |
• | the demand for cannabis cultivation and processing facilities; |
• | shifts in public opinion regarding cannabis; |
• | the state of the U.S. economy generally or in specific geographic regions; |
• | economic trends and economic recoveries; |
• | the amount and timing of our cash flows, if any, from our loans; |
• | our ability to obtain and maintain financing arrangements; |
• | our expected leverage; |
• | changes in the value of our loans; |
• | our expected portfolio of loans; |
• | our expected investment and underwriting process; |
• | rates of default or decreased recovery rates on our loans; |
• | the degree to which any interest rate or other hedging strategies may or may not protect us from interest rate volatility; |
• | changes in interest rates and impacts of such changes on our results of operations, cash flows and the market value of our loans; |
• | interest rate mismatches between our loans and our borrowings used to fund such loans; |
• | the departure of any of the executive officers or key personnel supporting and assisting us from our Manager or its affiliates; |
• | impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; |
• | our ability to maintain our exclusion or exemption from registration under the Investment Company Act; |
• | our ability to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes; |
• | estimates relating to our ability to make distributions to our stockholders in the future; |
• | our understanding of our competition; and |
• | market trends in our industry, interest rates, real estate values, the securities markets or the general economy. |
Loans Expected to Be Funded with Net Proceeds(1) | |||
No. of Loans | | | 8 |
Expected Approximate Aggregate Principal Amount | | | $103 million |
Wtd. Average OID Range | | | 2.0% - 6.0% |
Wtd. Average Cash Interest Rate Range | | | 12.0% - 14.0% |
Wtd. Average PIK Interest Range | | | 2.0% - 4.0% |
Percentage of Loans with Floating-Rate Interest Range | | | 75.0% - 100.0% |
Percentage of Loans with Amortization During Term Range | | | 90.0% - 100.0% |
Percentage of Loans with Prepayment Penalty Range | | | 75.0% - 100.0% |
Wtd. Average Unused Loan Fee Range | | | 1.0% - 5.0% |
Wtd. Average YTM IRR Range | | | 17.0% - 25.0% |
Real Estate Collateral Coverage Range | | | 1.00x - 2.08x |
(1) | The above table provides a summary of various unfunded commitments and fully-executed, non-binding term sheets relating to current financing arrangements we intend to fund utilizing proceeds from this offering, subject to the closing of the loans subject to term sheets. Other than the unfunded commitments to existing borrowers, Public Company C, Private Company A, Private Company B and Private Company C, representing an aggregate principal amount of approximately $19.8 million, we have not entered into binding definitive commitments relating to these loans. As of December 26, 2020, we had executed non-binding term sheets in connection with three loans representing approximately $62.7 million of anticipated loan commitments and had each entered into a period of exclusivity (ranging from 45 to 60 days) with respect to such proposed loans with two of the three prospective borrowers paying us expense deposits to cover the direct costs of our due diligence and underwriting process. Subsequent to December 26, 2020, we executed a non-binding term sheet with a prospective borrower for an additional loan representing approximately $21.0 million of anticipated loan commitments. In connection with this additional fully-executed, non-binding term sheet, the prospective borrower agreed to enter into a 60-day period of exclusivity with us with respect to such proposed loan and paid us an expense deposit to cover the direct costs of our due diligence and underwriting process. We are currently completing our underwriting process and negotiating definitive loan documents for each of the four potential loan investments related to these fully-executed, non-binding term sheets. Historically, approximately 90% of our fully-executed, non-binding term sheets have converted into loans. However, these four potential loans remain subject to satisfactory completion of our underwriting and due diligence processes, definitive documentation and final approval by the Investment Committee. As a result, no assurance can be given that any of these potential loans will close on the anticipated terms or at all. If these potential loans do not close, we intend to use at least 75% of the net proceeds from this offering to originate and participate in other commercial loans to companies operating in the cannabis industry that are consistent with our investment strategy, which we would expect to have similar characteristics as the terms reflected in this table. |
• | on an actual basis; |
• | on a pro forma basis, giving effect to (i) the sale and issuance by us of shares of our common stock in connection with the Additional Closing for consideration of approximately $15.19 per share (on a post-split basis), after giving effect to the reallocation of organizational costs, (ii) the sale and issuance by us of shares of our Series A Preferred Stock in connection with the Series A Offering for consideration of $1,000 per share, (iii) the seven-for-one stock split of our common stock, which will occur on January 25, 2021, and (iv) the effectiveness of our Articles of Amendment and Restatement, which will occur prior to the completion of this offering; |
• | on a pro forma as adjusted basis, giving effect to (i) the sale and issuance by us of shares of our common stock in connection with the Additional Closing for consideration of approximately $15.19 per share (on a post-split basis), after giving effect to the reallocation of organizational costs, (ii) the sale and issuance by us of shares of our Series A Preferred Stock in connection with the Series A Offering for consideration of $1,000 per share, (iii) the seven-for-one stock split of our common stock, which will occur on January 25, 2021, (iv) the effectiveness of our Articles of Amendment and Restatement, which will occur prior to the completion of this offering and (v) the sale and issuance by us of shares of our common stock in this offering, based upon the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and giving effect to the use of proceeds described herein. |
| | As of September 30, 2020 | |||||||
| | Actual | | | Pro Forma | | | Pro Forma as Adjusted(1) | |
| | (in dollars except share data) | |||||||
Cash and cash equivalents | | | $31,247,004 | | | $43,652,004 | | | |
Debt: | | | | | | | |||
Revolving Credit Facility | | | — | | | — | | | |
Stockholders’ equity: | | | | | | | |||
Preferred stock, $0.01 par value per share: 10,000 shares authorized and no shares issued and outstanding (actual); 10,000 shares authorized and 125 shares of Series A Preferred Stock issued and outstanding (pro forma and pro forma as adjusted) | | | — | | | 1 | | | |
Common stock: $0.01 par value per share: 15,000,000 shares authorized, 768,059 shares (on a pre-split basis) issued and outstanding (actual); 25,000,000 shares authorized, 6,179,392 shares issued and outstanding (pro forma); 25,000,000 shares authorized, shares issued and outstanding (pro forma as adjusted) | | | 7,681 | | | 61,794 | | | |
Additional paid-in capital | | | 78,741,251 | | | 91,092,136 | | | |
Accumulated earnings | | | 2,106,250 | | | 2,106,250 | | | |
Total stockholders’ equity | | | 80,855,182 | | | 93,260,182 | | | |
Total Capitalization | | | 80,855,182 | | | 93,260,182 | | |
(1) | Each $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of |