Advanced Flower Capital (AFCG) risk factors, FY2024 10-K

Risks Related to Our Business and Growth Strategy

1. 01Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition
2. 02If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer
3. 03We will allocate our cash on hand and the proceeds of our financing activities without input from our shareholders
4. 04Our loans’ lack of liquidity may adversely affect our business
5. 05Our Existing Portfolio is, and our future portfolio may be, concentrated in a limited number of loans, which subjects us to an increased risk of significant loss if any asset declines in value or if a particular borrower fails to perform as expected
6. 06and economic risks of doing business in those countries and states and any other state in which we in the future have lending exposure
7. 07Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks
8. 08We have currently foreclosed, and may need to in the future, on loans that are in default, which could result in losses
9. 09We will not own real estate as long as it is used in the commercial sale of cannabis due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their loans with us
10. 10The properties securing our loans may be subject to contingent or unknown liabilities that could adversely affect the value of these properties, and as a result, our loans
11. 11Construction loans involve an increased risk of loss
12. 12Our investments in construction loans require us to make estimates about the fair value of land improvements that may be challenged by the Internal Revenue Service
13. 13Our borrowers may be unable to renew or otherwise maintain their licenses or other requisite authorizations for their cannabis operations, which may result in such borrowers not being able to operate their businesses and defaulting on their payments to us
14. 14If our Manager overestimates the yields or incorrectly prices the risks of our loans, we may experience losses
15. 15Some of our portfolio loans may be recorded at fair value and, as a result, there will be uncertainty as to the value of these loans
16. 16Declines in market prices and liquidity in the capital markets can result in significant net unrealized losses of our portfolio, which in turn would reduce our book value
17. 17Provisions for loan losses are difficult to estimate
18. 18The loans and other assets we will obtain may be subject to impairment charges, and we may experience a decline in the fair value of our assets
19. 19Any credit ratings assigned to our loans will be subject to ongoing evaluations and revisions, and we cannot assure you that those ratings will not be downgraded
20. 20Economic recessions or downturns could impair our borrowers and harm our operating results
21. 21Our loans may be risky, and we could lose all or part of our loan
22. 22We may in the future enter into credit agreements with borrowers that may permit them to incur debt that ranks equally with, or senior to, the loans we extend to such companies under such credit agreements
23. 23Our borrowers may be highly leveraged
24. 24There may be circumstances in which our loans could be subordinated to claims of other creditors, or we could be subject to lender liability claims
25. 25As a debt investor, we are often not in a position to exert influence on borrowers, and the shareholders and management of such companies may make decisions that could decrease the value of loans to such borrower
26. 26Due to our borrowers’ involvement in the regulated cannabis industry, we and our borrowers have, and may continue to have, a difficult time obtaining or maintaining the various insurance policies that are desired to operate our business, which may expose us to additional risk and financial liabilities
27. 27Our insurance policies may not cover all losses
28. 28Subject to the approval of our Board (which must include a majority of our independent directors), our Manager may change our investment strategies or guidelines, financing strategies or leverage policies without the consent of our shareholders
29. 29We may not be able to obtain or maintain required licenses and authorizations to conduct our business and may fail to comply with various state and federal laws and regulations applicable to our business
30. 30Unstable market and economic conditions may have serious adverse consequences on our business, results of operations and financial condition
31. 31We rely on information technology in our operations, and security breaches and other disruptions in our systems could compromise our information and expose us to liability, which would cause our business and reputation to suffer
32. 32We may be required to make determinations of a borrower’s creditworthiness based on incomplete information or information that we cannot verify, which may cause us to purchase or originate loans that we otherwise would not have purchased or originated and, as a result, may negatively impact our business or reputation
33. 33Third-party diligence reports on mortgaged properties are and will be made as of a point in time and are therefore limited in scope
34. 34We operate according to specific underwriting criteria in a highly competitive market for lending and investment opportunities, both of which may limit our ability to originate or acquire desirable loans and investments in our target assets and/or our ability to yield a certain return on our investments

Risks Related to the Cannabis Industry and Related Regulations

1. 35Cannabis remains prohibited under federal law, and therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability to execute our business plan
2. 36make our loans, could result in our inability to execute our business plan and significant losses with respect to our loans to cannabis industry participants in the United States, which would adversely affect our operations, cash flow and financial condition
3. 37Our investment opportunities are limited by the current illegality of cannabis under U.S. federal law; changes in the laws, regulations and guidelines that impact the cannabis industry may cause adverse effects on our ability to make loans
4. 38Risks related to the cannabis industry may directly or indirectly affect us or our borrowers engaged in the cannabis industry
5. 39cannabis industry, which could materially and adversely affect our business, financial condition, liquidity and results of operations
6. 40The medical and adult-use cannabis industry is highly competitive, which could adversely affect our business, financial condition and results of operations
7. 41There can be no assurance that the cannabis industry will continue to exist or grow as currently anticipated
8. 42Marketing constraints under regulatory frameworks may limit a borrower’s ability to compete for market share in a manner similar to that of companies in other industries
9. 43There is uncertainty in pricing and demand for cannabis and cannabis-based products
10. 44Synthetic or hemp-derived products may compete with cannabis use and products
11. 45Cannabis businesses are subject to unfavorable U.S. tax treatment
12. 46Our reputation and ability to do business, as well as the reputation of our borrowers and their ability to do business, may be negatively impacted by the improper conduct of third parties, including but not limited to business partners, employees or agents
13. 47Laws and regulations affecting the regulated cannabis industry are continually changing, which could materially adversely affect our proposed operations, and we cannot predict the impact that future regulations may have on us
14. 48Applicable state laws may prevent us from maximizing our potential income
15. 49Borrowers operating in a highly regulated business require significant resources
16. 50Any failure or significant delay in our borrowers obtaining necessary regulatory approvals could adversely affect the ability of borrowers to conduct their businesses
17. 51Borrowers may become involved in regulatory or agency proceedings, investigations and audits
18. 52Loans to cannabis businesses may be forfeited to the federal government
19. 53We may have difficulty accessing bankruptcy courts
20. 54There may be difficulty enforcing certain of our commercial agreements and contracts
21. 55The loans that are in our Existing Portfolio, and that we expect to make in the future may, include Canadian entities within their corporate structure that have the ability to seek insolvency protections in Canada, which could materially and adversely affect our business
22. 56Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability
23. 57Liability relating to environmental matters may impact the value of properties that we may acquire upon foreclosure of the properties securing our loans
24. 58The market value of properties securing our loans acquired by us upon foreclosure may decrease if they cannot be used for cannabis related operations
25. 59FDA regulation of cannabis could negatively affect the cannabis industry, which would directly affect our financial condition
26. 60Research in the United States, Canada and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids may cause adverse effects on our or borrowers’ operations
27. 61The cannabis industry is subject to the risks inherent in an agricultural business, including the risk of crop failure
28. 62Many cannabis businesses are dependent on key personnel with sufficient experience in the cannabis industry
29. 63Our borrowers may be vulnerable to rising energy costs
30. 64Third-parties with whom we do business may perceive themselves as being exposed to reputational risk by virtue of their relationship with us and may ultimately elect not to do business with us
31. 65The cannabis industry faces significant opposition, and any negative trends may cause adverse effects on the operations of our borrowers, which could cause adverse effects on our business

Risks Related to Sources of Financing Our Business

1. 66Our growth depends on external sources of capital, which may not be available on favorable terms or at all
2. 67Global economic, political and market conditions could have a significant adverse effect on our business, financial condition, liquidity and results of operations, including a negative impact on our ability to access the debt markets on favorable terms
3. 68Our indebtedness may affect our ability to operate our business, and may have a material adverse effect on our financial condition and results of operations
4. 69We may not be able to generate sufficient cash flow to meet our debt service obligations
5. 70Monetary policy actions by the Federal Reserve could adversely impact both our borrowers and our financial condition
6. 71Any lending facilities will impose restrictive covenants
7. 72Interest 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
8. 73Any bank credit facilities that we may use in the future to finance our operations may require us to provide collateral or pay down debt
9. 74Adoption of the Basel III standards and other proposed supplementary regulatory standards may negatively impact our access to financing or affect the terms of our future financing arrangements

Risks Related to the Spin-Off

1. 75Following the Spin-Off, our financial profile changed, and we are a smaller, less diversified company than prior to the Spin-Off
2. 76Our agreements with SUNS and its subsidiaries involve potential conflicts of interest and could be less beneficial than the terms we may have otherwise received from unaffiliated third parties
3. 77Some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in SUNS

Risks Related to Our Organization and Structure

1. 78These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management
2. 79Our authorized but unissued shares of common stock and preferred stock may prevent a change in control of our Company
3. 80The Maryland General Corporation Law prohibits certain business combinations, which may make it more difficult for us to be acquired
4. 81The Charter contains provisions that make removal of our directors difficult, which could make it difficult for our shareholders to effect changes to management
5. 82Ownership limitations contained in the Charter may restrict change of control or business combination opportunities in which our shareholders might receive a premium for their shares
6. 83Maintenance of our exemption from registration under the Investment Company Act may impose significant limits on our operations. Your investment return in our common stock may be reduced if we are required to register as an investment company under the Investment Company Act
7. 84investment companies (including, for example, limitations on the ability of registered investment companies to incur leverage), none of which will be applicable to us
8. 85Rapid and steep declines in the values of our real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the Investment Company Act
9. 86Our rights and the rights of our shareholders to recover on claims against our directors and officers are limited, which could reduce our and our shareholders’ recovery against them if they negligently cause us to incur losses

Risks Related to Our Relationship with our Manager and its Affiliates

1. 87Our growth depends on the ability of our Manager to make loans on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time
2. 88There are various conflicts of interest in our relationship with our Manager that could result in decisions that are not in the best interests of our shareholders
3. 89The ability of our Manager and its officers and employees to engage in other business activities may reduce the time our Manager spends managing our business and may result in certain conflicts of interest
4. 90Terminating our Management Agreement for unsatisfactory performance of our Manager or electing not to renew the Management Agreement may be difficult and terminating our Management Agreement in certain circumstances requires payment of a substantial termination fee
5. 91Even if we terminate our Management Agreement for cause, we may be required to continue to retain our Manager for 30 days following the occurrence of events giving rise to a for-cause termination
6. 92The Incentive Compensation payable to our Manager under the Management Agreement may cause our Manager to select riskier loans to increase its Incentive Compensation
7. 93Our Manager manages our portfolio in accordance with very broad investment guidelines and our Board does not approve each loan and financing decision made by our Manager, which may result in us making riskier loans than those currently comprising our Existing Portfolio
8. 94Our Manager may change its investment process, or elect not to follow it, without the consent of our shareholders and at any time, which may adversely affect our loans
9. 95We do not have a policy that expressly prohibits our directors, managers, officers, shareholders or affiliates, as applicable, from engaging for their own account in business activities of the types conducted by us
10. 96Our Manager is subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business
11. 97In addition to other analytical tools, our Manager may utilize financial models to evaluate loan opportunities, the accuracy and effectiveness of which cannot be guaranteed
12. 98Our Manager’s and its affiliates’ liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities. As a result, we could experience poor performance or losses for which our Manager and its affiliates would not be liable

Risks Related to Our Taxation as a REIT

1. 99Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our shareholders
2. 100Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows
3. 101REIT distribution requirements could adversely affect our ability to execute our business plan and liquidity and may force us to borrow funds during unfavorable market conditions
4. 102Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive loans
5. 103The tax on prohibited transactions will limit our ability to engage in certain loans involving the sale or other disposition of property or that would otherwise subject us to a 100% penalty tax
6. 104Legislative, regulatory or administrative tax changes related to REITs could materially and adversely affect our business
7. 105Dividends payable by REITs generally do not qualify for reduced tax rates applicable to qualified dividend income
8. 106If we were considered to have actually or constructively paid a “preferential dividend” to certain of our shareholders, our status as a REIT could be adversely affected
9. 107The ability of our Board to revoke our REIT election without shareholder approval may cause adverse consequences to our shareholders
10. 108Complying with REIT requirements may limit our ability to hedge our operational risks effectively and may cause us to incur tax liabilities
11. 109To the extent the business interest deductions of our subsidiaries, if any, are deferred or disallowed, our taxable income may exceed our cash available for distributions to shareholders

Risks Related to our Common Stock

1. 110The market price for our common stock may be volatile, which could contribute to the loss of all or part of your investment
2. 111The value of our equity securities could be materially and adversely affected by our level of cash distributions
3. 112Future offerings of debt securities, which would rank senior to our common stock upon a bankruptcy liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the value of our capital stock
4. 113We 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
5. 114Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock
6. 115Our Board may change our policies without shareholder approval
7. 116There is a risk that shareholders may not receive distributions or that such dividends may not grow over time
8. 117As one of our significant shareholders and a significant beneficial owner of our Manager, Leonard M. Tannenbaum, our Chairman, can exert significant influence over our corporate actions and important corporate matters
9. 118We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies will make shares of our common stock less attractive to investors
10. 119We incur significant costs as a result of being a public company, and such costs may increase when we cease to be an emerging growth company and/or smaller reporting company
11. 120Ineffective internal controls could impact our business and operating results
12. 121Future sales of our capital stock or other securities convertible into our capital stock could cause the value of our common stock to decline and could result in dilution of your shares of our common stock
13. 122Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud