Chicago Atlantic BDC, Inc.(LIEN) - 2024 Q4 - Annual Report

IPO and Acquisitions - The company completed its IPO on February 8, 2022, raising approximately $83.3 million from the sale of 6,071,429 shares at$ 14.00 per share[20]. - On October 1, 2024, the company acquired a loan portfolio valued at $219,621,125 by issuing 16,605,372 shares of common stock[23]. - The company’s common stock began trading on the Nasdaq Global Market under the symbol "LIEN" on October 2, 2024[22]. Investment Strategy and Focus - The company has an active pipeline of investments, currently reviewing approximately$ 644 million in potential investments[35]. - The company’s investment strategy was expanded on February 20, 2024, to include investments outside the cannabis and health and wellness sectors[22]. - The company focuses on investing in private leveraged lower middle-market and middle-market companies with up to $100 million in EBITDA[35]. - The company’s investment objective is to maximize risk-adjusted returns on equity for shareholders through secured and unsecured debt investments[32]. - Chicago Atlantic's investment strategy focuses on senior secured loans, subordinated loans, and equity investments, aiming for attractive risk-adjusted returns[72]. - The company aims to maximize risk-adjusted returns on equity for shareholders by focusing on the cannabis industry and lower middle-market investment opportunities[74]. Financial Performance and Market Trends - As of December 31, 2024, Chicago Atlantic managed$ 1.9 billion in Capital Under Management, which includes total committed investor capital and available leverage[48]. - Estimated U.S. state-legal cannabis retail sales reached $32 billion in 2024, projected to grow to approximately$ 58 billion by 2030[52]. - Public and private cannabis capital raises in 2024 included $0.5 billion in equity and$ 1.2 billion in debt, indicating a shift towards increased reliance on debt financing[58]. - The number of public and private cannabis mergers and acquisitions in 2024 decreased to 45 deals, down from 67 in 2023[59]. - The capital raising environment for private credit reached $209 billion in 2024, a 5% increase over 2023, highlighting strong momentum in the market[62]. - The cannabis industry is experiencing a significant increase in demand for credit-based solutions as companies prefer less dilutive forms of growth capital[61]. - Companies in the lower middle-market are expected to continue requiring access to debt capital for growth and refinancing, creating investment opportunities[67]. - The reliance on debt financing in the cannabis industry is expected to persist until significant federal reform is enacted[56]. Management and Operations - The company has restructured its Board and management team following the Loan Portfolio Acquisition and Joint Venture[28]. - The management team possesses extensive expertise in cannabis and non-cannabis industries, enhancing the company's ability to evaluate investment opportunities[76]. - The company plans to leverage its management team's networks to become a leading investor in the legal cannabis industry and lower middle-market[77]. - The company does not have any employees; day-to-day management is handled by the Adviser and its Investment Committee[125]. - The Adviser is responsible for determining fair value and is designated as the Valuation Designee, subject to Board oversight[111]. Investment Process and Due Diligence - The investment process involves direct origination networks and relationships with entrepreneurs, private equity firms, and investment banks to identify opportunities[81]. - The company seeks to invest primarily through loans, which typically have maturities of two to six years, with interest paid on a floating rate basis[84][85]. - The investment criteria focus on businesses with durable competitive advantages, consistent operational performance, and free cash flow generation[87]. - The company employs a multi-channel sourcing strategy to identify investment opportunities, emphasizing strong management teams[89]. - The due diligence process includes a structured call with management, financial analysis, and on-site meetings to assess the portfolio company's performance and plans[92][94]. - The company monitors portfolio companies' financial trends and employs a five-level numeric rating scale to evaluate credit profiles and expected returns[104]. Valuation and Financial Reporting - The company conducts quarterly NAV determinations, with NAV per share calculated as total assets minus liabilities divided by total shares outstanding[118]. - Investments rated 1 indicate the borrower is performing above expectations, while those rated 5 indicate substantial underperformance and non-compliance with debt covenants[106]. - The fair value of investments is determined based on observable market prices or valuation techniques, with a multi-step valuation process conducted quarterly[113][114]. - Changes in market conditions can lead to fluctuations in the fair value of investments, which may differ from realized gains or losses[116][117]. - The NAV per share is adjusted based on management's assessment of material changes since the last reported NAV[123]. - The company records investments at fair value, with realized gains or losses measured against the amortized cost basis[110]. Fees and Expenses - The base management fee is calculated at an annual rate of 1.75% of the company's gross assets, excluding cash and cash equivalents[135]. - The incentive fee on income is based on the company's "Pre-Incentive Fee Net Investment Income," with a hurdle rate of 1.75% per quarter (7% annualized)[136]. - The incentive fee on capital gains equals 20% of cumulative realized capital gains, less cumulative realized capital losses and unrealized capital depreciation[139]. - The company incurred a$ 6 million Incentive Fee on Capital Gains in Year 2 from the sale of Investment A, which generated $30 million in realized capital gains[153]. - In Year 3, the company recorded an Incentive Fee on Capital Gains of$ 1.4 million based on cumulative realized capital gains[153]. - The company has an annualized hurdle rate of 1.75% and a management fee of 0.4375%[149][150]. - The Expense Limitation Agreement caps operating expenses at an annualized rate of 2.15% of the company's net assets through September 30, 2025[168]. Compliance and Governance - The company has adopted a code of ethics to establish procedures for personal investments and restrict certain personal securities transactions[208]. - Compliance policies and procedures are in place to prevent violations of federal securities laws, with annual reviews for adequacy and effectiveness[209]. - Proxy voting responsibility has been delegated to the Adviser, which will vote in the best interest of stockholders[210]. - The company is subject to periodic examination by the SEC for compliance with the 1940 Act[216]. - None of the investment policies are fundamental and may be changed without stockholder approval[217].