Executive Summary / Key Takeaways

• Niche Market Dominance: Chicago Atlantic BDC ($LIEN) stands as the sole Business Development Company (BDC) focused on lending to the cannabis industry, complemented by strategic investments in other underserved markets, enabling differentiated risk-adjusted returns.
• Robust Financial Performance & Asset Quality: The company reported a weighted average yield on debt investments of 16.1% as of June 30, 2025, significantly outpacing the BDC average of 11.8%. Its portfolio is 100% senior secured with no non-accruals, showcasing strong asset quality and disciplined underwriting.
• Strategic Growth & Ample Liquidity: LIEN achieved record fundings of $39.1 million in Q2 2025 and boasts a robust pipeline of approximately $780 million. With $125.4 million in liquidity as of August 14, 2025, the company is well-positioned for continued net portfolio growth through year-end.
• Regulatory Resilience & "Goldilocks" Scenario: While underwriting based on the regulatory status quo, management views potential cannabis rescheduling to Schedule III as a "Goldilocks scenario," promising increased borrower cash flow, M&A, and capital expenditures, all while competition remains limited.
• Attractive Shareholder Returns: LIEN has maintained a consistent $0.34 per share quarterly dividend for four consecutive quarters, with an expressed intent to grow this component of shareholder returns as the platform scales.

A Niche Powerhouse Emerges in Specialty Finance

Chicago Atlantic BDC, Inc. ($LIEN), initially founded as Silver Spike Investment Corp. in January 2021, has rapidly evolved into a distinctive specialty finance company. Operating as an externally managed, closed-end, non-diversified management investment company, LIEN elected BDC status under the Investment Company Act of 1940 and Regulated Investment Company (RIC) status for tax purposes. Its core mandate is to maximize risk-adjusted returns for shareholders by investing primarily in secured debt, unsecured debt, equity warrants, and direct equity investments within highly complex and regulated industries.

A pivotal moment in LIEN's history occurred on October 1, 2024, with the acquisition of a substantial loan portfolio from Chicago Atlantic Loan Portfolio, LLC (CALP). This $219.62 million transaction, exchanged for 16.61 million newly issued shares, coincided with a strategic joint venture and the company's rebranding to Chicago Atlantic BDC, Inc., solidifying its market identity. This transformation underscored LIEN's commitment to its unique investment thesis: leveraging specialized expertise to deploy capital in markets often overlooked by traditional lenders.

LIEN's overarching strategy is anchored in disciplined underwriting, focusing on strong operators, diversified cash flows, low leverage, high amortization, and robust collateral coverage. This methodical approach is designed to manage downside risk and protect principal, a critical differentiator in its chosen markets. The company's investment objective is to capitalize on nascent industry growth, generating current income from debt investments and capital appreciation from equity and equity-related investments.

Competitive Landscape and Differentiated Positioning

LIEN operates in a specialized segment of the financial services industry, facing both direct and indirect competition. Direct competitors include other finance companies and REITs with exposure to the cannabis sector, such as AFC Gamma, Inc. (AFCG), NewLake Capital Partners, Inc. (NLCP), and Innovative Industrial Properties, Inc. (IIPR). Indirect competitors encompass traditional financial institutions, private equity firms offering general lending, and emerging blockchain-based financing platforms.

LIEN's competitive advantage stems from its unique positioning as the only BDC focused on and able to lend to cannabis companies. This niche strategy, coupled with its sub-strategies in other underserved markets, creates a significant barrier to entry for traditional lenders. While AFCG also specializes in cannabis lending, LIEN's emphasis on partnerships with private equity and management teams for growth initiatives and acquisitions provides a more collaborative and flexible approach to deal structures. Unlike NLCP and IIPR, which primarily focus on real estate-backed financing, LIEN's model offers holistic financing solutions, including equity, potentially yielding greater upside in company growth.

The Chicago Atlantic platform is recognized as a "dominant originator in the cannabis space" and is actively developing a "leading brand in non-cannabis direct lending." This dual focus allows LIEN to capture a broader range of idiosyncratic opportunities not typically available to other BDCs or private funds. Its disciplined underwriting, consistently applied across all verticals, further differentiates it by prioritizing strong covenant packages and low debt-to-enterprise value ratios, regardless of industry or market sentiment.

Proprietary Underwriting: LIEN's Core Technology

While LIEN does not disclose a specific hardware or software technology, its core technological differentiation lies in its proprietary, data-driven underwriting platform and methodology. This advanced analytical framework is a foundational strength, enabling the company to navigate the complexities of highly regulated and underserved industries, particularly cannabis.

The tangible benefits of this "technology" are evident in LIEN's operational and financial performance. Its deep industry knowledge, cultivated through years of specialized focus, translates into stronger customer loyalty and a more robust deal pipeline. This expertise allows for superior risk assessment and deal structuring, leading to higher pricing power and improved margins. For instance, LIEN's weighted average yield on debt investments of 16.1% significantly surpasses the BDC average of 11.8%, directly reflecting its ability to command premium returns in less competitive markets.

The company's continuous refinement of its analytical platform and underwriting processes serves as its ongoing "R&D." This iterative improvement aims to enhance risk management capabilities, optimize capital allocation, and identify emerging opportunities with attractive leverage profiles. For investors, this technological moat contributes directly to LIEN's competitive advantage, financial performance, and long-term growth strategy by ensuring a consistent flow of high-quality, high-yield investments while mitigating inherent industry risks.

Strategic Pillars and Market Dynamics

LIEN's investment strategy is bifurcated, with a primary focus on the cannabis ecosystem and complementary sub-strategies in other underserved markets.

Cannabis Lending: A Compliance-First Approach

The cannabis segment constitutes the largest portion of LIEN's portfolio, representing 78.5% of total investments at fair value ($241.29 million) as of June 30, 2025. All cannabis investments are meticulously designed to comply with applicable laws and regulations, including U.S. federal laws, with equity investments strictly limited to compliant companies. LIEN targets entities demonstrating strong growth or EBITDA positive profiles, those seeking capital without equity dilution, and companies with robust cash flow, low leverage, and attractive pricing due to industry complexity.

Recent market dynamics in the cannabis sector have presented new opportunities. LIEN has observed the emergence of larger cannabis companies undergoing operational or balance sheet restructurings, leading to the sale of profitable, cash-flow-positive assets. Additionally, Employee Stock Ownership Plan (ESOP) transactions are becoming a notable avenue for private companies seeking liquidity and exit opportunities. Management consistently underwrites investments based on the regulatory status quo, not speculating on potential federal rescheduling or legalization. This conservative stance ensures that investments are grounded in current cash flow and collateral profiles.

However, the prospect of cannabis rescheduling (e.g., to Schedule III) is viewed by management as a "Goldilocks scenario." Such a change would dramatically increase after-tax cash flow for borrowers, leading to higher equity valuations, increased M&A activity, and greater capital expenditures. Crucially, as cannabis would still be federally illegal under Schedule III, competition from traditional lenders would likely remain limited, allowing LIEN to capitalize on an expanded opportunity set with its existing competitive advantages. State-level momentum, such as Ohio's recent launch of an adult-use program and Florida's upcoming vote, further underscores the evolving landscape.

Non-Cannabis Sub-Strategies: Diversification and Enhanced Alpha

Complementing its cannabis focus, LIEN has strategically diversified into three non-cannabis sub-strategies, which collectively accounted for 21.5% of total investments at fair value ($66.21 million) as of June 30, 2025. These include:

• Growth & Technology: Targeting industry leaders and disruptive companies with strong growth trajectories needing capital for expansion.
• Esoteric Asset-Based Lending: Focusing on established companies with strong cash flow in industries with idiosyncratic or reputational risks, limiting access to traditional capital.
• Liquidity Solutions: Addressing event-driven opportunities like mergers, acquisitions, or refinancings for established businesses in complex industries.

These sub-strategies expand LIEN's addressable market, diversify its portfolio, and enhance its ability to deliver "differentiated credit alpha." The company applies the same methodical and quantitatively-driven underwriting approach across these verticals, prioritizing strong management teams, robust growth outlooks, and leading industry positions.

Financial Performance and Operational Excellence

LIEN's financial performance in the first half of 2025 reflects the successful integration of its acquired portfolio and its active deployment strategy. For the second quarter ended June 30, 2025, gross investment income reached $13.1 million, an increase from $11.9 million in Q1 2025. Net investment income for Q2 2025 was $7.7 million, or $0.34 per share, consistent with Q1 2025. Net assets stood at $302 million, with a Net Asset Value (NAV) per share of $13.23. The company's investment portfolio's amortized cost surged by $253.3 million from June 30, 2024, to June 30, 2025, primarily due to the Loan Portfolio Acquisition and subsequent deployments.

Operational highlights for Q2 2025 include record fundings of $39.1 million in new debt investments across nine portfolio companies, with three new borrowers. This momentum continued into Q3 2025, with $24.7 million funded to six borrowers (four new) as of August 14, 2025. While loan repayments and amortization totaled $22.3 million in Q2 2025 and $48 million in Q3 2025 to date, management expects originations to remain active, driving net portfolio growth for the year.

Key financial metrics underscore LIEN's differentiated competitive standing:

• Yield: A weighted average yield on debt investments of 16.1% as of June 30, 2025, significantly exceeds the average BDC yield of 11.8%.
• Asset Quality: The entire debt portfolio is senior secured, a stark contrast to the BDC industry average of 18% exposure to second lien or subordinated debt. Furthermore, LIEN reported no non-accruals, compared to an industry average of 3.8% of costs.

• Leverage: The portfolio remains underlevered, with only $5 million of debt outstanding as of June 30, 2025, against a BDC average of 1.1x. Management anticipates maintaining leverage well below industry averages even with full utilization of its credit facility.

• Interest Rate Profile: 76% of the portfolio features floating interest rates, with 46% already having reached their respective interest rate floors, providing a degree of protection against declining rates.

LIEN's liquidity position is robust, with approximately $125.4 million available as of August 14, 2025. This comprises $100 million of borrowing capacity from its senior secured revolving credit facility (maturing March 31, 2028) and $25.4 million in cash. This ample liquidity, coupled with a significantly increased pipeline, provides the dry powder necessary to execute on its growth strategy. The company has consistently declared a $0.34 per share quarterly dividend for four consecutive quarters, demonstrating a commitment to shareholder returns, with an expressed intent to grow this component as the platform scales.

Risks and Outlook

Despite its strong positioning, LIEN faces inherent risks. Concentration risk is notable, with three portfolio companies representing 39.5% of the fair value of its portfolio as of June 30, 2025, and the largest accounting for 16.8%. The cannabis industry's federal illegality in the U.S. presents significant regulatory and legal risks, including potential changes in enforcement policies, unenforceability of contracts in federal courts, and difficulties in accessing traditional banking and insurance services. Assets collateralizing cannabis loans also face potential forfeiture.

Credit risk is elevated given LIEN's investments in below-investment-grade securities, which carry higher default and downgrade risks. The potential for illiquidity in thinly traded securities, interest rate fluctuations impacting floating-rate debt, and prepayment risk (where early loan repayments could reduce achievable yields) are also considerations. While LIEN's credit facility provides substantial liquidity, it also subjects a significant portion of assets to security interests, with default potentially leading to foreclosure and forced asset sales.

Looking ahead, LIEN's outlook remains positive. The company expects originations to remain active into year-end 2025, targeting net portfolio growth. Its pipeline has expanded significantly, totaling approximately $780 million in potential debt transactions from 43 unique borrowers as of Q2 2025, a substantial increase from the prior quarter. This includes $649 million in cannabis opportunities and $131 million in non-cannabis investments. Management anticipates deployment activity to continue at a brisk pace, driven by this robust pipeline and ample liquidity. General and administrative expenses are projected to increase in dollar terms with asset growth but decline as a percentage of total assets, indicating improving operational efficiency.

Conclusion

Chicago Atlantic BDC ($LIEN) has carved out a compelling investment thesis by strategically positioning itself at the nexus of high-yield, underserved credit markets. Its unique status as the only BDC actively lending to the cannabis industry, combined with a disciplined expansion into other specialized lending verticals, underpins its ability to generate differentiated risk-adjusted returns. The company's robust financial performance, characterized by superior yields, impeccable asset quality, and a conservative leverage profile, reflects its proprietary underwriting methodology and deep market expertise.

Despite the inherent regulatory complexities and concentration risks within its core cannabis market, LIEN's commitment to underwriting based on the status quo, coupled with its strategic adaptability to emerging opportunities like M&A and ESOP transactions, positions it for continued growth. The prospect of cannabis rescheduling, while uncertain in timing, represents a significant upside catalyst that could further amplify borrower cash flows and market opportunities without immediately intensifying competition. With a strong liquidity position and a burgeoning pipeline, Chicago Atlantic BDC is poised to scale its platform, enhance shareholder returns through consistent and growing dividends, and solidify its leadership in specialized credit markets.