Advanced Flower Capital Inc 10-Q for FY2021 Q3

Advanced Flower Capital Inc. (AFCG)

10-Q 2021-11-04 For: 2021-09-30

Added on April 07, 2026

About this 10-Q

Advanced Flower Capital Inc filed this 10-Q on November 4, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).

Headline figures

Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $10.62M
Net income: $7.93M
Diluted EPS: $0.47

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Maryland		85-1807125
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	AFCG	The Nasdaq Stock Market LLC

Class	Outstanding at November 4, 2021
Common stock, $0.01 par value	16,442,812

Part I.	Financial Information
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2021 (unaudited) and from July 31, 2020 (date of commencement of operations) to September 30, 2020	2
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 (unaudited) and from July 31, 2020 (date of commencement of operations) to September 30, 2020	3
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 (unaudited) and from July 31, 2020 (date of commencement of operations) to September 30, 2020	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	41
Part II.	Other Information	41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54

	As of
	September 30, 2021			December 31, 2020
	(unaudited)
Assets
Loans held for investment at fair value (cost of $73,934,116 and $46,994,711 at September 30, 2021 and December 31, 2020, respectively, net)	$	76,293,824		$	48,558,051

Loans held for investment at carrying value		153,161,781			31,837,031
Loan receivable at carrying value		2,774,455			3,348,263
Current expected credit loss reserve		(1,145,629	)		(404,860	)
Loans held for investment at carrying value and loan receivable at carrying value, net of current expected credit loss reserve		154,790,607			34,780,434

Cash and cash equivalents		69,974,391			9,623,820
Interest receivable		2,434,719			927,292
Prepaid expenses and other assets		391,235			72,095
Total assets	$	303,884,776		$	93,961,692

Liabilities
Interest reserve	$	8,254,295		$	1,325,750
Due to affiliate		9,550,625			-
Dividends payable		7,070,409			-
Current expected credit loss reserve		692,266			60,537
Accrued management and incentive fees		2,542,935			222,127
Accrued direct administrative expenses		846,711			550,671
Accounts payable and other liabilities		520,591			154,895
Total liabilities		29,477,832			2,313,980
Commitments and contingencies (Note 10)
Stockholders’ Equity
Preferred stock, par value $0.01 per share, 10,000 shares authorized at September 30, 2021 and December 31, 2020 and 125 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		1			1
Common stock, par value $0.01 per share, 25,000,000 and 15,000,000 shares authorized at September 30, 2021 and December 31, 2020, respectively, and 16,442,812 and 6,179,392 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		163,866			61,794
Additional paid-in-capital		274,148,323			91,068,197
Accumulated earnings		94,754			517,720
Total stockholders’ equity		274,406,944			91,647,712

Total liabilities and stockholders’ equity	$	303,884,776		$	93,961,692

	For the three months ended September 30, 2021			Period from July 31, 2020 to September 30, 2020		For the nine months ended September 30, 2021			Period from July 31, 2020 to September 30, 2020
	(unaudited)					(unaudited)
Revenue
Interest income	$	10,616,538		$	1,594,769	$	24,050,062		$	1,594,769
Total revenue		10,616,538			1,594,769		24,050,062			1,594,769
Expenses
Management and incentive fees, net (less rebate of $256,989, $84,167, $677,439 and $84,167, respectively)		2,542,936			142,067		5,498,469			142,067
General and administrative expenses		858,663			204,262		2,028,046			204,262
Organizational expenses		-			616,190		-			616,190
Stock-based compensation		51,429			-		1,662,001			-
Professional fees		396,147			89,800		726,194			89,800
Total expenses		3,849,175			1,052,319		9,914,710			1,052,319
Provision for current expected credit losses		(660,612	)		-		(1,372,498	)		-
Realized gains / (losses) on loans at fair value, net		400,000			-		400,000			-
Change in unrealized gains / (losses) on loans at fair value, net		1,423,929			1,563,800		796,368			1,563,800
Net income before income taxes		7,930,680			2,106,250		13,959,222			2,106,250
Income tax expense		-			-		-			-
Net income	$	7,930,680		$	2,106,250	$	13,959,222		$	2,106,250

Earnings per common share:
Basic earnings per common share (in dollars per share)	$	0.48		$	0.39	$	1.13		$	0.39
Diluted earnings per common share (in dollars per share)	$	0.47		$	0.39	$	1.10		$	0.39

Weighted average number of common shares outstanding:
Basic weighted average shares of common stock outstanding (in shares)		16,402,984			5,376,411		12,368,977			5,376,411
Diluted weighted average shares of common stock outstanding (in shares)		16,776,648			5,376,411		12,742,641			5,376,411

Three months ended September 30, 2021
	Preferred		Common Stock				Additional Paid-In		Accumulated Earnings			Total Stockholders’
	Stock		Shares		Amount		Capital		(Deficit)			Equity
Balance at June 30, 2021	$	1		16,116,877	$	161,169	$	269,061,069	$	(765,517	)	$	268,456,722
Issuance of common stock, net of offering cost		-		269,650		2,697		5,035,825		-			5,038,522
Stock-based compensation		-		56,285		-		51,429		-			51,429
Dividends declared on common shares ($0.43 per share)		-		-		-		-		(7,070,409	)		(7,070,409	)
Dividends declared on preferred shares ($60 per share)		-		-		-		-		-			-
Net income		-		-		-		-		7,930,680			7,930,680
Balance at September 30, 2021	$	1		16,442,812	$	163,866	$	274,148,323	$	94,754		$	274,406,944

Period from July 31, 2020 (date of commencement of operations) to September 30, 2020
	Preferred		Common Stock				Additional Paid-In		Accumulated Earnings		Total Stockholders’
	Stock		Shares		Amount		Capital		(Deficit)		Equity
Balance at July 31, 2020	$	-		-	$	-	$	-	$	-	$	-
Issuance of common stock		-		5,376,411		53,764		78,695,168		-		78,748,932
Net income		-		-		-		-		2,106,250		2,106,250
Balance at September 30, 2020	$	-		5,376,411	$	53,764	$	78,695,168	$	2,106,250	$	80,855,182

Nine months ended September 30, 2021
	Preferred		Common Stock				Additional Paid-In		Accumulated Earnings			Total Stockholders’
	Stock		Shares		Amount		Capital		(Deficit)			Equity
Balance at December 31, 2020	$	1		6,179,392	$	61,794	$	91,068,197	$	517,720		$	91,647,712
Issuance of common stock, net of offering cost		-		10,263,420		102,072		181,418,125		-			181,520,197
Stock-based compensation		-		-		-		1,662,001		-			1,662,001
Dividends declared on common shares ($1.17 per share)		-		-		-		-		(14,374,688	)		(14,374,688	)
Dividends declared on preferred shares ($60 per share)		-		-		-		-		(7,500	)		(7,500	)
Net income		-		-		-		-		13,959,222			13,959,222
Balance at September 30, 2021	$	1		16,442,812	$	163,866	$	274,148,323	$	94,754		$	274,406,944

	For the nine months ended September 30, 2021			Period from July 31, 2020 to September 30, 2020
Operating activities:	(unaudited)
Net income	$	13,959,222		$	2,106,250
Adjustments to reconcile net income to net cash provided by / (used in) operating activities:
Provision for current expected credit losses		1,372,498			-
Realized gain on sale of loans		(400,000	)		-
Change in unrealized (gains) / losses on loans at fair value, net		(796,368	)		(1,563,800	)
Accretion of deferred loan original issue discount and other discounts		(4,038,816	)		(173,110	)
Stock-based compensation		1,662,001			-
PIK interest		(2,787,847	)		(79,707	)
Changes in operating assets and liabilities
Interest reserve		(2,521,923	)		-
Interest receivable		(1,507,427	)		(783,673	)
Prepaid expenses and other assets		(319,140	)		(25,029	)
Accrued management and incentive fees, net		2,320,808			142,067
Accrued direct administrative expenses		296,040			202,534
Accounts payable and other liabilities		366,696			118,040
Net cash provided by / (used in) operating activities		7,605,744			(56,428	)

Cash flows from investing activities:
Issuance of and fundings on loans		(156,345,116	)		(780,000	)
Proceeds from sales of Assigned Rights		2,313,130			-
Proceeds from sales of loans		10,400,000			-
Principal repayment of loans		22,168,395			137,340
Net cash used in investing activities		(121,463,591	)		(642,660	)

Cash flows from financing activities:
Proceeds from sale of common stock		185,501,295			31,946,092
Payment of offering costs		(3,981,098	)		-
Dividends paid		(7,311,779	)		-
Net cash provided by financing activities		174,208,418			31,946,092

Change in cash, cash equivalents and restricted cash		60,350,571			31,247,004
Cash, cash equivalents and restricted cash, beginning of period		9,623,820			-
Cash, cash equivalents and restricted cash, end of period	$	69,974,391		$	31,247,004

Supplemental disclosure of non-cash financing and investing activity
Loans acquired for issuance of shares of common stock	$	-		$	46,802,840
Interest reserve withheld from funding of loans	$	9,450,468		$	1,400,000
OID withheld from funding of loans	$	12,391,624		$	320,000
Loans funded from amounts due to affiliate	$	9,549,625		$	-

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

	As of September 30, 2021
	Fair Value ⁽²⁾		Carrying Value ⁽¹⁾		Outstanding Principal ⁽¹⁾		Weighted Average Remaining Life (Years)⁽³⁾

Senior Term Loans	$	76,293,824	$	73,934,116	$	76,995,548		2.5
Total loans held at fair value	$	76,293,824	$	73,934,116	$	76,995,548		2.5

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

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

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

Total loans held at fair value at December 31, 2020	$	50,831,235		$	(3,836,524	)	$	1,563,340	$	48,558,051
Change in unrealized gains / (losses) on loans at fair value, net		-			-			796,368		796,368
New fundings		37,701,104			(1,130,623	)		-		36,570,481
Loan repayments		(12,000,000	)		-			-		(12,000,000	)
Loan amortization payments		(1,093,659	)		-			-		(1,093,659	)
Accretion of original issue discount		-			1,905,715			-		1,905,715
PIK interest		1,556,868			-			-		1,556,868
Total loans held at fair value at September 30, 2021	$	76,995,548		$	(3,061,432	)	$	2,359,708	$	76,293,824

	Collateral Location	Collateral Type ⁽⁸⁾		Fair Value ⁽²⁾		Carrying Value ⁽¹⁾		Outstanding Principal ⁽¹⁾		Interest Rate				Maturity Date ⁽³⁾	Payment Terms ⁽⁴⁾

Private Co. A	AZ, MI, MD, MA		C , D	$	62,853,367	$	60,857,429	$	63,391,847		16.4	%	⁽⁵⁾	5/8/2024		P/I
Private Co. B	MI		C		10,535,737		10,171,757		10,663,701		17.0	%	⁽⁶⁾	9/1/2023		P/I
Public Co. A	NV		C		2,904,720		2,904,930		2,940,000		14.0	%	⁽⁷⁾	1/26/2023		I/O
Total loans held at fair value				$	76,293,824	$	73,934,116	$	76,995,548

	As of September 30, 2021
	Outstanding Principal ⁽¹⁾		Original Issue Discount			Carrying Value ⁽¹⁾		Weighted Average Remaining Life (Years)⁽²⁾

Senior Term Loans	$	164,361,340	$	(11,199,559	)	$	153,161,781		4.0
Total loans held at carrying value	$	164,361,340	$	(11,199,559	)	$	153,161,781		4.0

	Collateral Location	Collateral Type ⁽⁴⁾		Outstanding Principal ⁽¹⁾		Original Issue Discount			Carrying Value ⁽¹⁾		Interest Rate				Maturity Date ⁽²⁾	Payment Terms ⁽³⁾

Private Co. C	PA		C , D	$	19,333,872	$	(721,311	)	$	18,612,561		17.0	%	⁽⁵⁾	12/1/2025		P/I
Sub. of Public Co. D	PA		C		10,000,000		(149,235	)		9,850,765		12.9	%	⁽⁶⁾	12/18/2024		I/O
Private Co. D	OH, AR		D		12,169,041		(877,891	)		11,291,150		15.0	%	⁽⁷⁾	1/1/2026		P/I
Private Co. E	OH		C , D		14,220,552		(2,782,310	)		11,438,242		17.0	%	⁽⁸⁾	4/1/2026		P/I
Private Co. F	MO		C , D		9,799,658		(1,816,803	)		7,982,855		17.0	%	⁽⁹⁾	5/1/2026		P/I
Public Co. E	MI		C		5,000,000		(307,143	)		4,692,857		13.0	%	⁽¹⁰⁾	4/29/2025		P/I
Sub. of Private Co. G	NJ		C , D		42,945,657		(2,498,443	)		40,447,214		14.3	%	⁽¹¹⁾	5/1/2026		P/I
Public Co. F	IL, FL, NV, OH, MA, MI, MD,AR, NV, AZ		C , D		10,000,000		(160,000	)		9,840,000		9.8	%	⁽¹²⁾	5/30/2023		I/O
Sub. of Private Co. H	IL		C		5,781,250		(126,790	)		5,654,460		15.0	%	⁽¹³⁾	5/11/2023		I/O
Private Co. K	MA		C , D		7,000,000		(763,667	)		6,236,333		13.0	%	⁽¹⁴⁾	08/03/2026		P/I
Private Co. I	MD		C , D		10,109,310		(225,184	)		9,884,126		15.5	%	⁽¹⁵⁾	8/1/2026		P/I
Private Co. J	MO		C		18,002,000		(770,782	)		17,231,218		15.0	%	⁽¹⁶⁾	09/01/2025		P/I
Total loans held at carrying value				$	164,361,340	$	(11,199,559	)	$	153,161,781

	Principal			Original Issue Discount			Carrying Value

Total loans held at carrying value at December 31, 2020	$	33,907,763		$	(2,070,732	)	$	31,837,031
New fundings		139,222,598			(11,261,001	)		127,961,597
Accretion of original issue discount		-			2,132,174			2,132,174
Realized gain on sale of loans		400,000			-			400,000
Sale of loans		(10,400,000	)		-			(10,400,000	)
PIK interest		1,230,979			-			1,230,979
Total loans held at carrying value at September 30, 2021	$	164,361,340		$	(11,199,559	)	$	153,161,781

	Principal			Original Issue Discount			Carrying Value

Total loans receivable at carrying value at December 31, 2020	$	3,352,176		$	(3,913	)	$	3,348,263
Principal repayment of loans		(574,735	)		-			(574,735	)
Accretion of original issue discount		-			927			927
Total loans receivable at carrying value at September 30, 2021	$	2,777,441		$	(2,986	)	$	2,774,455

	Outstanding ⁽¹⁾		Unfunded ⁽²⁾		Total
Balance at June 30, 2021	$	701,143	$	476,140	$	1,177,283
Provision for current expected credit losses		444,486		216,126		660,612
Write-offs		-		-		-
Recoveries		-		-		-
Balance at September 30, 2021	$	1,145,629	$	692,266	$	1,837,895

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

Risk Rating:	2021		2020		Total
1	$	-	$	-	$	-
2		14,532,857		-		14,532,857
3		88,990,322		42,528,931		131,519,253
4		9,884,126		-		9,884,126
5		-		-		-
Total	$	113,407,305	$	42,528,931	$	155,936,236

	As of September 30, 2021		As of December 31, 2020

Interest receivable	$	1,838,494	$	675,795
PIK receivable		522,933		177,183
Unused fees receivable		73,292		74,314
Total interest receivable	$	2,434,719	$	927,292

	For the three months ended September 30, 2021			Period from July 31, 2020 to September 30, 2020		For the nine months ended September 30, 2021			Period from July 31, 2020 to September 30, 2020
Beginning reserves	$	5,547,863		$	-	$	1,325,750		$	-
New reserves		4,525,468			1,400,000		9,450,468			1,400,000
Reserves disbursed		(1,819,036	)		-		(2,521,923	)		-
Ending reserves	$	8,254,295		$	1,400,000	$	8,254,295		$	1,400,000

	As of September 30, 2021			As of December 31, 2020

Total original loan commitments	$	296,946,250		$	107,292,176
Less: drawn commitments		(243,038,584	)		(87,467,057	)
Total undrawn commitments	$	53,907,666		$	19,825,119

	As of September 30, 2021			As of December 31, 2020
Non-vested		183,114			142,814
Vested		1,449,518			800,618
Forfeited		(28,396	)		(16,534	)
Balance		1,604,236			926,898

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

	Three months ended September 30, 2021			Weighted-Average Grant Date Fair Value Per Option
Balance as of June 30, 2021		1,613,098		$	1.08
Granted		-			-
Exercised		-			-
Forfeited		(8,862	)		0.90
Balance as of September 30, 2021		1,604,236		$	1.08

	Period from July 31, 2020 to September 30, 2020		Weighted-Average Grant Date Fair Value Per Option
Balance as of July 31, 2020	-		$	-
Granted		806,456		0.90
Exercised		-		-
Forfeited		-		-
Balance as of September 30, 2020		806,456	$	0.90

	Nine months ended September 30, 2021			Weighted-Average Grant Date Fair Value Per Option
Balance as of December 31, 2020		926,898		$	0.91
Granted		689,200			1.31
Exercised		-			-
Forfeited		(11,862	)		1.01
Balance as of September 30, 2021		1,604,236		$	1.08

	As of September 30, 2021
				Unobservable Input
	Fair Value		Primary Valuation Techniques	Input	Estimated Range			Weighted Average
Senior Term Loans	$	76,293,824	Yield analysis	Market Yield		17.62% - 20.68	%		17.82	%
Total Investments	$	76,293,824

	Fair Value Measurement Using as of September 30, 2021
	Total		Level 1		Level 2		Level 3
Loans held at fair value	$	76,293,824	$	-	$	-	$	76,293,824
Total	$	76,293,824	$	-	$	-	$	76,293,824

	Fair Value Measurement Using as of December 31, 2020
	Total		Level 1		Level 2		Level 3
Loans held at fair value	$	48,558,051	$	-	$	-	$	48,558,051
Total	$	48,558,051	$	-	$	-	$	48,558,051

	For the nine months ended September 30, 2021
Total loans using Level 3 inputs at December 31, 2020	$	48,558,051
Change in unrealized gains / (losses) on loans at fair value, net		796,368
Additional funding		37,701,104
Original issue discount and other discounts, net of costs		(1,130,623	)
Loan repayments		(12,000,000	)
Loan amortization payments		(1,093,659	)
Accretion of original issue discount		1,905,715
PIK interest		1,556,868
Total loans using Level 3 inputs at September 30, 2021	$	76,293,824

	Record Date	Payment Date	Common Share Distribution Amount		Taxable Ordinary Income		Return of Capital		Section 199A Dividends

Regular cash dividend	3/15/2021	3/31/2021	$	0.36	$	0.36	$	-	$	0.36
Regular cash dividend	6/15/2021	6/30/2021	$	0.38	$	0.38	$	-	$	0.38
Regular cash dividend	9/30/2021	10/15/2021	$	0.43	$	0.43	$	-	$	0.43
Total cash dividend			$	1.17	$	1.17	$	-	$	1.17

Loan Names	Status	Original Funding Date⁽¹⁾	Loan Maturity	AFCG Loan, net of Syndication		% of Total AFCG			Principal Balance as of 9/30/2021		Cash Interest Rate			PIK⁽⁷⁾			Fixed/ Floating	Amortization During Term	YTM ⁽²⁾⁽³⁾
Public Co. A - Real Estate Loan	Funded	7/3/2019	1/26/2023	$	2,940,000		1.0	%	$	2,940,000		12.0	%		2.0	%	Fixed	No		19	%
Public Co. A - Equipment Loans	Funded	8/5/2019	3/5/2024		4,000,000		1.3	%		2,777,441		12.0	%		N/A		Fixed	Yes		19	%
Private Co. A	Funded	5/8/2020	5/8/2024		62,500,000		21.1	%		63,391,847		13.0	%		3.4	%	Fixed	Yes		22	%
Private Co. B	Funded	9/10/2020	9/1/2023		10,500,000		3.5	%		10,663,701		13.0	%		4.0	%	Fixed	Yes		26	%
Private Co. C	Funded	11/5/2020	12/1/2025		22,000,000		7.4	%		19,333,872		13.0	%		4.0	%	Floating	Yes		22	%
Sub. of Public Co. D⁽⁴⁾	Funded	12/18/2020	12/18/2024		10,000,000		3.4	%		10,000,000		12.9	%		N/A		Fixed	No		14	%
Private Co. D	Funded	12/23/2020	1/1/2026		12,000,000		4.0	%		12,169,041		13.0	%		2.0	%	Fixed	Yes		20	%
Private Co. E	Funded	3/30/2021	4/1/2026		21,000,000		7.1	%		14,220,552		13.0	%		4.0	%	Floating	Yes		26	%
Private Co. F	Funded	4/27/2021	5/1/2026		13,000,000		4.4	%		9,799,658		13.0	%		4.0	%	Fixed	Yes		28	%
Public Co. E⁽⁴⁾⁽⁵⁾	Funded	4/29/2021	4/29/2025		5,000,000		1.7	%		5,000,000		13.0	%		N/A		Fixed	Yes		17	%
Sub of Private Co. G	Funded	4/30/2021	5/1/2026		65,400,000		22.0	%		42,945,657		12.5	%		1.8	%	Floating	Yes		20	%
Sub of Private Co. H⁽⁶⁾	Funded	5/11/2021	5/11/2023		5,781,250		1.9	%		5,781,250		15.0	%		N/A		Fixed	No		20	%
Public Co. F	Funded	5/21/2021	5/30/2023		10,000,000		3.4	%		10,000,000		9.8	%		N/A		Fixed	No		12	%
Private Co. I	Funded	7/14/2021	8/1/2026		10,075,000		3.4	%		10,109,310		13.0	%		2.5	%	Floating	Yes		18	%
Private Co. K	Funded	8/20/2021	8/3/2026		19,750,000		6.7	%		7,000,000		13.0	%		-		Floating	Yes		17	%
Private Co. J	Funded	8/30/2021	9/1/2025		23,000,000		7.7	%		18,002,000		13.0	%		2.0	%	Floating	Yes		19	%
SubTotal				$	296,946,250		100.0	%	$	244,134,329		12.8	%		2.4	%				21	%
																			Wtd Average

	As of September 30, 2021
		Less than 1 year	1-3 years	3-5 years	More than 5 years		Total
Unfunded Commitments	$	53,907,666	-	-	-	$	53,907,666
Total	$	53,907,666	-	-	-	$	53,907,666