Core Viewpoint - Advanced Flower Capital Inc. (AFC) is seeking shareholder approval for its conversion from a real estate investment trust (REIT) to a business development company (BDC), with a special meeting scheduled for November 6, 2025 [2][5][10]. Group 1: Shareholder Meeting Details - The special meeting will be conducted virtually on November 6, 2025, at 10:00 a.m. Eastern Time, and shareholders of record as of September 15, 2025, are entitled to vote [3][5]. - Shareholders will receive proxy cards or instructions on how to vote in the coming days [3][7]. Group 2: Proposals for Approval - Two key proposals are being presented for shareholder approval: 1. A new investment advisory agreement compliant with the Investment Company Act of 1940 [6]. 2. The application of a reduced asset coverage ratio as permitted under Section 61(a)(2) of the 1940 Act [6][8]. Group 3: Strategic Rationale - The conversion aims to expand AFC's investment scope beyond real-estate-backed loans, enhancing portfolio diversification and reducing concentration risk [8]. - This strategic shift is expected to better position AFC for long-term sustainable value creation for shareholders [8]. Group 4: Company Background - AFC is a leading commercial mortgage REIT that specializes in originating, structuring, underwriting, and managing senior secured mortgage loans, particularly in the cannabis industry [11]. - The company typically manages loans ranging from $10 million to over $100 million, secured by quality real estate assets and cash flows [11].

Core Points - Advanced Flower Capital Inc. (AFC) declared a quarterly dividend of $0.15 per share for the quarter ending September 30, 2025, payable on October 15, 2025, to stockholders of record on September 30, 2025 [1] - The third quarter dividend remains consistent with the second quarter dividend, with the Board evaluating Distributable Earnings each quarter due to uncertainties regarding loan repayments [2] Company Overview - Advanced Flower Capital Inc. is a commercial mortgage real estate investment trust (REIT) that specializes in originating, structuring, underwriting, and managing senior secured mortgage loans, particularly for the cannabis industry in legalized states [3] - The company manages loans ranging from $10 million to over $100 million, secured by quality real estate assets and cash flows [3] Distributable Earnings - Distributable Earnings is a non-GAAP financial measure used by the company to evaluate performance, excluding certain transactions and GAAP adjustments [4][6] - The calculation of Distributable Earnings is similar to Core Earnings but includes Incentive Compensation earned during the period [5] - Distributable Earnings is defined as net income excluding stock-based compensation, depreciation, unrealized gains/losses, expected credit losses, and one-time events [6][7] - The company aims to distribute at least 90% of its annual REIT taxable income, with Distributable Earnings serving as a factor in determining dividend levels [7][8]

Financial Data and Key Metrics Changes - For Q2 2025, the company generated distributable earnings of $0.15 per basic weighted average share of common stock and declared a second quarter dividend of $0.15 per share [5][6][18] - The company reported a GAAP net loss of $13.2 million, or a loss of $0.60 per basic weighted average common share [18] - As of June 30, 2025, total assets were $290.6 million, total shareholder equity was $184.7 million, and book value per share was $8.18 [19] Business Line Data and Key Metrics Changes - The company exited an equipment loan to a Nevada cultivator, impacting earnings but not book value as the loan was fully reserved [6][7] - The weighted average portfolio yield to maturity was approximately 17% as of August 1, 2025 [19] - The CECL reserve was $44 million, approximately 14.6% of loans at carrying value, with total unrealized losses of $21.5 million for loans held at fair value [19] Market Data and Key Metrics Changes - The cannabis industry remains challenging with limited capital entering the market, impacting the company's ability to invest in size [12] - The company noted that about two-thirds of cannabis opportunities do not have real estate coverage, limiting the current investment pipeline [28] Company Strategy and Development Direction - The company announced its intention to convert from a REIT to a BDC, which would allow it to invest in a broader array of opportunities, including non-real estate covered assets [13][14] - The conversion is seen as a positive step to capitalize on the cannabis sector's growth potential, especially if federal rescheduling occurs [14][16] Management's Comments on Operating Environment and Future Outlook - Management highlighted the ongoing uncertainty and volatility in the cannabis industry, which has tightened underwriting standards and reduced the investment pipeline [29] - The potential rescheduling of cannabis is expected to attract more capital into the industry, improving asset valuations and supporting the company's troubled loans [31][32] Other Important Information - The company expanded its senior secured revolving credit facility from $30 million to $50 million [19] - The proposed conversion to a BDC is subject to shareholder approval and is anticipated to occur in 2026 [16][17] Q&A Session Summary Question: Why convert to BDC versus mortgage REIT? - Management explained that many thriving cannabis operators do not own real estate, limiting investment opportunities as a REIT. The conversion to a BDC is seen as the best path for long-term value [22][24] Question: How much will the BDC conversion broaden the pipeline? - Management indicated that approximately two-thirds of cannabis opportunities do not have real estate coverage, suggesting significant potential for pipeline expansion post-conversion [28] Question: Update on problem loans with Private Company A and K? - Management provided updates on asset sales under receivership for Private Company A and clarified the accounting treatment for loans held at fair value versus carrying value [37][39] Question: What is the target debt leverage ratio? - The company targets a leverage ratio between 1.0 and 1.2 times and does not foresee issuing equity given current stock trading levels [41][42] Question: Market sentiment on mortgage REIT sector? - Management noted that mortgage REITs have traded better recently, with interest rates impacting trading and investment opportunities [45] Question: Impact of rescheduling on borrower interest? - Management stated that the rescheduling conversation is still new, and many are in a holding pattern awaiting concrete developments [49][50] Question: CECL reserves increase due to portfolio fundamentals or macro aspects? - Management indicated that while macro factors play a role, the increase in CECL reserves is primarily driven by individual loan evaluations [51][52] Question: Will BDC conversion open new credit facilities? - Management noted that while the current credit line is similar to BDC financing, it is uncertain if the structure will attract more banks to participate in cannabis lending [54][55]

Company Overview - Advanced Flower Capital (AFCG) aims to provide attractive risk-adjusted returns through investments with significant collateral, targeting an average portfolio gross yield of 12%-20%[14,15] - The company's management and investment team have collectively structured over $15 billion in loan transactions and taken four companies public[14,54] - AFC's loan portfolio includes 15 loans to borrowers with operations and/or collateral across 16 states[22] Market Opportunity - The U S legal cannabis market is expected to reach $63 billion by 2030, with a total economic impact surpassing $200 billion[28] - Cannabis growth is expected to continue, potentially cutting into alcohol purchases, with alcohol sales in legal cannabis states underperforming by 1-1 5% over the past 5 years[33] - Cannabis is a $35 billion legal market projected to grow to $63 billion by 2030[37] Financial Performance & Portfolio - The company's total commitments since inception are $917 million[58] - The outstanding principal balance is $358 million, with current commitments of $370 million[25,58] - Deal selectivity is 3 9%, representing the ratio of closed deals to deals sourced/reviewed since January 1, 2020[58] - The weighted average yield-to-maturity (YTM) of the portfolio loans is approximately 17% as of August 1, 2025[49,64]

Company Performance - AFC Gamma Inc. reported quarterly earnings of $0.15 per share, missing the Zacks Consensus Estimate of $0.24 per share, and down from $0.56 per share a year ago, representing an earnings surprise of -37.50% [1] - The company posted revenues of $6.2 million for the quarter ended June 2025, missing the Zacks Consensus Estimate by 18.17%, and down from $19.96 million year-over-year [2] - Over the last four quarters, AFC Gamma has surpassed consensus EPS estimates only once and has not beaten consensus revenue estimates [2] Stock Performance - AFC Gamma shares have declined approximately 45.3% since the beginning of the year, contrasting with the S&P 500's gain of 10% [3] - The current Zacks Rank for AFC Gamma is 3 (Hold), indicating that shares are expected to perform in line with the market in the near future [6] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $0.24 on revenues of $8.18 million, and for the current fiscal year, it is $0.93 on revenues of $31.62 million [7] - The trend of estimate revisions for AFC Gamma was mixed ahead of the earnings release, which could change following the recent report [6] Industry Context - The REIT and Equity Trust industry, to which AFC Gamma belongs, is currently in the bottom 19% of over 250 Zacks industries, indicating potential challenges for stock performance [8] - Empirical research suggests a strong correlation between near-term stock movements and trends in earnings estimate revisions, which could impact investor sentiment [5]

[Second Quarter 2025 Financial Highlights and Strategic Announcements](index=1&type=section&id=Q2_2025_Financial_Highlights_Strategic_Announcements) AFC reported a GAAP net loss of $(13.2) million and Distributable Earnings of $3.4 million, also announcing an expanded investment mandate and proposed BDC conversion [Summary of Q2 2025 Results](index=1&type=section&id=Summary_Q2_2025_Results) AFC reported a GAAP net loss of $(13.2) million and Distributable Earnings of $3.4 million for Q2 2025, with per-share figures of $(0.60) and $0.15 respectively Q2 2025 Key Financial Highlights | Metric | Amount | | :------------------------------------ | :------------- | | GAAP Net Loss | $(13.2) million | | GAAP Net Loss per Share | $(0.60) | | Distributable Earnings | $3.4 million | | Distributable Earnings per Share | $0.15 | [Key Strategic Initiatives](index=1&type=section&id=Key_Strategic_Initiatives) AFC plans to expand its investment mandate to include secured loans for ancillary cannabis and middle-market companies, and proposes converting to a BDC, pending shareholder approval - **Expansion of Investment Mandate**: Approved an amendment to include secured loans to ancillary cannabis businesses and public/private middle-market companies operating outside the cannabis industry[4](index=4&type=chunk) - **Proposed Conversion to BDC**: Intention to convert from a commercial mortgage REIT to a BDC, subject to shareholder approval, to pursue a broader array of investment opportunities[5](index=5&type=chunk) [Management Commentary](index=1&type=section&id=Management_Commentary) CEO Dan Neville emphasized resolving non-accrual credits and evaluating cannabis opportunities, highlighting the BDC conversion as a milestone to expand the investable universe beyond mortgage REIT limitations [CEO Statement](index=1&type=section&id=CEO_Statement) CEO Dan Neville highlighted the company's focus on resolving non-accrual credits and selectively evaluating opportunities with established cannabis operators, emphasizing that the proposed BDC conversion is a significant milestone, enabling the company to overcome limitations of its mortgage REIT structure in the capital-intensive cannabis industry and expand its investable universe to include non-real estate covered and ancillary businesses - **Operational Focus**: Focused on working through non-accrual credits and selectively evaluating opportunities with established operators of scale in attractive cannabis markets[3](index=3&type=chunk) - **Rationale for BDC Conversion**: The conversion would significantly expand the investable universe, allowing lending to ancillary cannabis businesses and non-real estate covered, vertically integrated operators, addressing limitations of the mortgage REIT structure in the capital-intensive cannabis industry[6](index=6&type=chunk) [Company Profile](index=2&type=section&id=Company_Profile) Advanced Flower Capital Inc. (AFCG) is a commercial mortgage REIT specializing in senior secured mortgage loans and other debt securities for cannabis industry operators in legalized states [About Advanced Flower Capital](index=2&type=section&id=About_Advanced_Flower_Capital) Advanced Flower Capital Inc. (AFCG) is a commercial mortgage real estate investment trust (REIT) primarily originating, structuring, underwriting, investing in, and managing senior secured mortgage loans and other debt securities, with a specialization in loans to cannabis industry operators in states that have legalized medical and/or adult-use cannabis - **Business Model**: Operates as a commercial mortgage REIT, primarily originating, structuring, underwriting, investing in, and managing senior secured mortgage loans and other debt securities[13](index=13&type=chunk) - **Investment Focus**: Specializes in loans to cannabis industry operators in legalized states, with loans typically secured by quality real estate assets, license value, and cash flows, ranging from **$10 million to over $100 million**[13](index=13&type=chunk) [Detailed Second Quarter 2025 Financial Performance](index=1&type=section&id=Detailed_Q2_2025_Financial_Performance) AFC reported a GAAP net loss of $(13.2) million and Distributable Earnings of $3.4 million for Q2 2025, with a detailed reconciliation of these figures and a declared common stock dividend [GAAP Net Loss and Distributable Earnings](index=1&type=section&id=GAAP_Net_Loss_Distributable_Earnings) AFC reported a GAAP net loss of $(13.2) million and Distributable Earnings of $3.4 million for Q2 2025, with per-share figures of $(0.60) and $0.15 respectively Q2 2025 Financial Results (Three Months Ended June 30, 2025) | Metric | Amount | | :------------------------------------ | :------------- | | Net (loss) income | $(13,164,651) | | Distributable earnings | $3,384,328 | | Basic weighted average shares outstanding | 22,114,341 | | Distributable earnings per basic weighted average share | $0.15 | [Reconciliation of GAAP Net Income (Loss) to Distributable Earnings](index=4&type=section&id=Reconciliation_GAAP_Net_Income_to_Distributable_Earnings) The reconciliation table details adjustments made to GAAP Net income (loss) to arrive at Distributable Earnings, showing a $14.1 million provision for current expected credit losses for Q2 2025 Reconciliation of GAAP Net Income (Loss) to Distributable Earnings (Three Months Ended June 30, 2025 vs. 2024) | Metric | June 30, 2025 | June 30, 2024 | | :------------------------------------------ | :------------- | :------------- | | Net (loss) income | $(13,164,651) | $16,446,121 | | Stock-based compensation expense | $484,502 | $369,343 | | Unrealized losses (gains) or other non-cash items | $1,055,970 | $1,420,001 | | Provision for (reversal of) current expected credit losses | $14,074,320 | $(6,190,240) | | TRS loss (income), net of dividends | $934,187 | $(624,235) | | **Distributable earnings** | **$3,384,328** | **$11,420,990** | | Basic weighted average shares outstanding | 22,114,341 | 20,400,004 | | Distributable earnings per basic weighted average share | $0.15 | $0.56 | [Common Stock Dividend](index=2&type=section&id=Common_Stock_Dividend) On July 15, 2025, Advanced Flower Capital paid a regular cash dividend of $0.15 per common share for the second quarter of 2025 to shareholders of record as of June 30, 2025 Q2 2025 Common Stock Dividend | Metric | Value | | :-------------------- | :---- | | Dividend per share | $0.15 | | Payment Date | July 15, 2025 | | Record Date | June 30, 2025 | [Strategic Business Developments](index=1&type=section&id=Strategic_Business_Developments) AFC is expanding its investment mandate to include secured loans to ancillary cannabis and middle-market companies, alongside a proposed conversion to a BDC to broaden investment opportunities [Expansion of Investment Mandate](index=1&type=section&id=Expansion_Investment_Mandate) AFC's Board approved expanding its investment mandate to include secured loans for ancillary cannabis businesses and public/private middle-market companies outside the cannabis industry, adhering to REIT obligations - **New Investment Areas**: Expanded mandate to include secured loans to ancillary cannabis businesses and public/private middle-market companies operating outside the cannabis industry[4](index=4&type=chunk) [Proposed Conversion to Business Development Company (BDC)](index=1&type=section&id=Proposed_Conversion_to_BDC) AFC announced its intention to convert from a commercial mortgage REIT to a BDC, pending shareholder approval, to significantly expand the investable universe, allowing lending to ancillary cannabis businesses and non-real estate covered operators - **Conversion Rationale**: The current mortgage REIT structure limits lending opportunities in the capital-intensive cannabis industry due to many operators not owning real estate[6](index=6&type=chunk) - **Expanded Investable Universe**: Conversion to a BDC would allow lending to ancillary cannabis businesses with high growth potential and non-real estate covered, vertically integrated operators, as well as direct lending opportunities in other private and public middle-market companies[6](index=6&type=chunk)[7](index=7&type=chunk) - **Approval Requirement**: The proposed conversion is subject to shareholder approval of a new investment advisory agreement with its Manager that complies with the Investment Company Act of 1940[8](index=8&type=chunk) [Non-GAAP Financial Measures](index=3&type=section&id=Non_GAAP_Financial_Measures) Distributable Earnings is a non-GAAP financial measure used by AFC to evaluate performance by excluding certain non-cash and GAAP adjustments not indicative of current loan activity, serving as a factor in dividend authorization [Definition and Rationale for Distributable Earnings](index=3&type=section&id=Definition_Rationale_Distributable_Earnings) Distributable Earnings is a non-GAAP financial measure used by AFC to evaluate performance by excluding certain non-cash and GAAP adjustments not indicative of current loan activity, defined as GAAP net income (loss) adjusted for specific items, and serves as a factor in dividend authorization - **Definition**: Distributable Earnings is GAAP net income (loss) excluding stock-based compensation, depreciation/amortization, unrealized gains/losses, provision for current expected credit losses, TRS (income) loss, and certain one-time non-cash charges[16](index=16&type=chunk) - **Purpose**: Used to evaluate performance by excluding effects of certain transactions and GAAP adjustments not necessarily indicative of current loan activity and operations, and is a factor considered by the Board of Directors in authorizing dividends[14](index=14&type=chunk)[17](index=17&type=chunk) - **Limitations**: It is a non-GAAP measure and should not be considered a substitute for GAAP net income; methodology may differ from other REITs, impacting comparability[18](index=18&type=chunk) [Investor Information](index=2&type=section&id=Investor_Information) Advanced Flower Capital provides investors with access to its Q2 2025 earnings presentation and Form 10-Q filing, and will host a conference call on August 14, 2025, to discuss quarterly financial results [Investor Resources and Conference Call](index=2&type=section&id=Investor_Resources_Conference_Call) Advanced Flower Capital provides investors with access to its 'Second Quarter 2025 Earnings Presentation' and its Form 10-Q filing via its website, and will host a conference call on August 14, 2025, at 10:00 am ET to discuss quarterly financial results, with options for live audio webcast and telephone participation - **Available Resources**: Q2 2025 Earnings Presentation and Quarterly Report on Form 10-Q are available on advancedflowercapital.com under the Investor Relations section[10](index=10&type=chunk)[11](index=11&type=chunk) - **Conference Call**: Scheduled for August 14, 2025, at 10:00 am ET, with live audio webcast and telephone registration available; the complete webcast will be archived for 90 days[12](index=12&type=chunk) [Forward-Looking Statements](index=4&type=section&id=Forward_Looking_Statements) This section contains a standard disclaimer regarding forward-looking statements, indicating they reflect current views and projections but are subject to inherent uncertainties and risks, with no obligation to publicly update or revise them unless required by law [Disclaimer Regarding Forward-Looking Statements](index=4&type=section&id=Disclaimer_Forward_Looking_Statements) This section contains a standard disclaimer regarding forward-looking statements, indicating they reflect current views and projections but are subject to inherent uncertainties and risks, advising that actual results may differ materially due to factors such as the Manager's ability to locate loan opportunities, market demand, and credit losses, and disclaiming any obligation to publicly update or revise these statements unless required by law - **Nature of Statements**: Reflects current views and projections regarding future events and financial performance, identified by words such as 'believes,' 'expects,' 'will,' 'intends,' etc[20](index=20&type=chunk) - **Risk Factors**: Subject to inherent uncertainties, including the Manager's ability to locate suitable loan opportunities, demand for cannabis cultivation and processing facilities, and management's current estimate of expected credit losses, which could cause actual results to differ materially[20](index=20&type=chunk) - **No Obligation to Update**: The company does not undertake any obligation to publicly update or revise any forward-looking statements, except as required by law[20](index=20&type=chunk) [Contact Information](index=5&type=section&id=Contact_Information) Contact details for investor relations and media inquiries are provided for Advanced Flower Capital Inc [Investor and Media Contacts](index=5&type=section&id=Investor_Media_Contacts) Contact details for investor relations and media inquiries are provided for Advanced Flower Capital Inc - **Investor Relations Contact**: Robyn Tannenbaum, **(561) 510-2293**, ir@advancedflowercapital.com[22](index=22&type=chunk) - **Media Contact**: Collected Strategies, Jim Golden / Jack Kelleher, AFCG-CS@collectedstrategies.com[22](index=22&type=chunk)

Core Insights - Advanced Flower Capital Inc. reported a GAAP net loss of $(13.2) million or $(0.60) per basic weighted average common share for Q2 2025, alongside Distributable Earnings of $3.4 million or $0.15 per basic weighted average common share [1][2] Financial Performance - The company experienced a net loss of $(13.2) million for the quarter ended June 30, 2025, compared to a net income of $16.4 million for the same period in 2024 [19] - Distributable Earnings for the quarter were $3.4 million, down from $11.4 million in the same quarter of the previous year [19] Strategic Developments - The company announced its intention to convert from a Mortgage REIT to a Business Development Company (BDC), which would allow it to pursue a wider range of investment opportunities beyond real estate [5][6] - The Board of Directors approved an amendment to the management agreement, expanding the investment mandate to include secured loans to ancillary cannabis companies and middle-market companies outside the cannabis sector [4][6] Market Context - The CEO highlighted a lack of capital entering the cannabis market and the need to selectively evaluate opportunities with established operators in attractive markets [3] - The conversion to a BDC is seen as a significant milestone, enabling the company to lend to ancillary cannabis businesses and diversify its investment portfolio [6][7] Dividend Information - The company paid a regular cash dividend of $0.15 per common share for Q2 2025 to shareholders of record as of June 30, 2025 [8]

PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of Advanced Flower Capital Inc. for the periods ended June 30, 2025, and December 31, 2024, including balance sheets, statements of operations, shareholders' equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, loan portfolio, debt, equity, and other financial disclosures [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets%20as%20of%20June%2030%2C%202025%20%28unaudited%29%20and%20December%2031%2C%202024) This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Consolidated Balance Sheet Highlights | Metric | June 30, 2025 ($) | December 31, 2024 ($) | Change ($) | % Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $290,589,955 | $402,057,313 | $(111,467,358) | -27.7% | | Cash and cash equivalents | $3,410,065 | $103,610,460 | $(100,200,395) | -96.7% | | Loans held for investment at fair value | $26,847,222 | $30,510,804 | $(3,663,582) | -12.0% | | Loans held for investment at carrying value, net | $300,946,208 | $293,262,374 | $7,683,834 | 2.6% | | Total Liabilities | $105,858,881 | $200,681,175 | $(94,822,294) | -47.2% | | Line of credit payable | $10,400,000 | $60,000,000 | $(49,600,000) | -82.7% | | Total Shareholders' Equity | $184,731,074 | $201,376,138 | $(16,645,064) | -8.3% | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202025%20and%202024) This section outlines the company's financial performance, including revenues, expenses, and net income (loss) over specified periods Consolidated Statements of Operations Highlights | Metric | Three months ended June 30, 2025 ($) | Three months ended June 30, 2024 ($) | Six months ended June 30, 2025 ($) | Six months ended June 30, 2024 ($) | | :--- | :--- | :--- | :--- | :--- | | Interest income | $8,061,509 | $17,977,945 | $16,519,757 | $32,312,699 | | Net interest income | $6,203,335 | $16,404,670 | $12,846,312 | $29,136,261 | | Total expenses | $2,598,494 | $5,754,564 | $5,075,326 | $11,259,433 | | (Provision for) reversal of current expected credit losses | $(15,851,566) | $6,262,094 | $(15,152,142) | $1,330,420 | | Net (loss) income from continuing operations | $(13,164,651) | $15,206,224 | $(9,096,966) | $13,635,881 | | Net (loss) income | $(13,164,651) | $16,446,121 | $(9,096,966) | $16,392,005 | | Basic earnings per common share (Continuing operations) | $(0.60) | $0.74 | $(0.42) | $0.66 | | Total basic earnings per common share | $(0.60) | $0.80 | $(0.42) | $0.79 | [Consolidated Statements of Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202025%20and%202024) This section details changes in the company's equity accounts, reflecting transactions with owners and comprehensive income (loss) Shareholders' Equity Changes (Six months ended June 30, 2025) | Item | Amount ($) | | :--- | :--- | | Balance at December 31, 2024 | $201,376,138 | | Stock-based compensation, net of forfeitures | $1,038,251 | | Dividends declared on common shares | $(8,586,349) | | Net loss | $(9,096,966) | | Balance at June 30, 2025 | $184,731,074 | - **Total shareholders' equity** decreased by **$16,645,064** from December 31, 2024, to June 30, 2025, primarily due to **net loss** and **dividends declared**[16](index=16&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20six%20months%20ended%20June%2030%2C%202025%20and%202024) This section reports the cash inflows and outflows from operating, investing, and financing activities over specified periods Consolidated Statements of Cash Flows Highlights (Six months ended June 30) | Activity | 2025 ($) | 2024 ($) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,681,365 | $16,692,097 | | Net cash (used in) provided by investing activities | $(3,547,884) | $59,076,900 | | Net cash (used in) provided by financing activities | $(102,333,876) | $(27,097,400) | | Net (decrease) increase in cash and cash equivalents | $(100,200,395) | $48,671,597 | | Cash and cash equivalents, end of period | $3,410,065 | $170,298,050 | - **Net cash provided by operating activities** decreased by **$11,010,732** (**66.0%**) **YoY** for the six months ended June 30, 2025[18](index=18&type=chunk) - **Net cash used in financing activities** increased by **$75,236,476** **YoY** for the six months ended June 30, 2025, primarily due to increased **repayments on revolving credit facilities**[18](index=18&type=chunk) [1. ORGANIZATION](index=10&type=section&id=1.%20ORGANIZATION) This section describes the company's business, its spin-off of the CRE portfolio, and its strategic shift towards BDC conversion and expanded investment mandate - **Advanced Flower Capital Inc.** (AFC) is an **institutional lender** specializing in **senior secured mortgage loans** to **cannabis industry operators**[21](index=21&type=chunk) - The company completed the **spin-off** of its **commercial real estate (CRE) loan portfolio** into Sunrise Realty Trust, Inc. (SUNS) in July 2024, with SUNS' operating results reported as **discontinued operations**[23](index=23&type=chunk) - The Board approved an **expanded investment strategy** in August 2025 to include **ancillary cannabis businesses** and companies outside the cannabis industry, and is pursuing a conversion to a **Business Development Company (BDC)** under the 1940 Act, subject to shareholder approval[25](index=25&type=chunk)[27](index=27&type=chunk) [2. SIGNIFICANT ACCOUNTING POLICIES](index=11&type=section&id=2.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section details the accounting principles used in preparing the financial statements, including estimates and compliance with GAAP - The financial statements are prepared in conformity with **GAAP** and **SEC rules** applicable to **interim financial information**[30](index=30&type=chunk) - Significant estimates include the **valuation of loans held for investment at fair value** and the **current expected credit losses (CECL) reserve**[33](index=33&type=chunk) - As an '**emerging growth company**,' AFC has elected to take advantage of the **extended transition period** for complying with new or revised financial accounting standards[34](index=34&type=chunk) [3. LOANS HELD FOR INVESTMENT AT FAIR VALUE](index=12&type=section&id=3.%20LOANS%20HELD%20FOR%20INVESTMENT%20AT%20FAIR%20VALUE) This section provides details on loans measured at fair value, including their valuation and changes in unrealized gains or losses Loans Held for Investment at Fair Value | Date | Fair Value ($) | Carrying Value ($) | Outstanding Principal ($) | | :--- | :--- | :--- | :--- | | June 30, 2025 | $26,847,222 | $48,318,884 | $51,186,315 | | December 31, 2024 | $30,510,804 | $50,241,018 | $53,108,449 | - The single loan held at **fair value** (Private Company A) was placed on **nonaccrual status** effective March 1, 2024, and its **maturity date passed without repayment**[40](index=40&type=chunk)[39](index=39&type=chunk) - For the six months ended June 30, 2025, the change in **unrealized losses on loans at fair value**, net, was **$(1,741,448)**[40](index=40&type=chunk) [4. LOANS HELD FOR INVESTMENT AT CARRYING VALUE](index=13&type=section&id=4.%20LOANS%20HELD%20FOR%20INVESTMENT%20AT%20CARRYING%20VALUE) This section presents information on loans held at carrying value, including new fundings, repayments, and nonaccrual status Loans Held for Investment at Carrying Value | Date | Carrying Value ($) | Outstanding Principal ($) | Weighted Average Remaining Life (Years) | | :--- | :--- | :--- | :--- | | June 30, 2025 | $300,946,208 | $308,405,751 | 1.6 | | December 31, 2024 | $293,262,374 | $301,755,791 | 1.9 | - During the six months ended June 30, 2025, the company funded approximately **$30.0 million** of **new loans** and had **$23.6 million** of **principal repayments**[42](index=42&type=chunk) - As of June 30, 2025, three loans (Private Company P, Subsidiary of Private Company G, Private Company K) were on **nonaccrual status**, with a total **amortized cost** of approximately **$104.2 million**[45](index=45&type=chunk)[46](index=46&type=chunk)[47](index=47&type=chunk) [5. LOAN RECEIVABLE HELD AT CARRYING VALUE](index=16&type=section&id=5.%20LOAN%20RECEIVABLE%20HELD%20AT%20CARRYING%20VALUE) This section details the status of a specific loan receivable held at carrying value, including its write-off Loan Receivable Held at Carrying Value | Date | Carrying Value ($) | Outstanding Principal ($) | | :--- | :--- | :--- | | June 30, 2025 | $0 | $0 | | December 31, 2024 | $1,895,638 | $1,897,324 | - The Public Company A equipment loan receivable, with an outstanding principal balance of approximately **$1.8 million**, was **written off** in June 2025 as **uncollectible**[51](index=51&type=chunk) [6. CURRENT EXPECTED CREDIT LOSSES](index=16&type=section&id=6.%20CURRENT%20EXPECTED%20CREDIT%20LOSSES) This section outlines the company's reserve for current expected credit losses (CECL), including changes and write-offs CECL Reserve for Loans Held at Carrying Value and Loan Receivable | Date | Total CECL Reserve ($) | % of Total Loans (%) | | :--- | :--- | :--- | | June 30, 2025 | $43,961,275 | 14.61% | | December 31, 2024 | $30,586,379 | 10.36% | - The **provision for current expected credit losses** for the six months ended June 30, 2025, was **$15,152,142**, reflecting changes in **macroeconomic factors**, **loan portfolio adjustments**, and **borrower payment status**[54](index=54&type=chunk) - A loan receivable of **$1.8 million**, previously rated '5' (Impaired/Loss Likely) and **fully reserved for**, was **written off** in Q2 2025[56](index=56&type=chunk) [7. INTEREST RECEIVABLE](index=18&type=section&id=7.%20INTEREST%20RECEIVABLE) This section reports the total interest receivable and its changes over the reporting period Total Interest Receivable | Date | Amount ($) | | :--- | :--- | | June 30, 2025 | $1,577,587 | | December 31, 2024 | $1,982,897 | - **Total interest receivable decreased by $405,310** (**20.4%**) from December 31, 2024, to June 30, 2025[57](index=57&type=chunk) [8. DEBT](index=18&type=section&id=8.%20DEBT) This section details the company's debt instruments, including revolving credit facilities and senior notes, and their terms - The **Revolving Credit Facility's maturity date was extended** to April 29, 2028, and its **interest rate floor increased** from **4.00%** to **7.00%** in April 2025[63](index=63&type=chunk) - The **total aggregate commitment** under the **Revolving Credit Facility increased by $20.0 million** to **$50.0 million** in June 2025[64](index=64&type=chunk) - The **AFCF Credit Facility**, an unsecured revolving credit agreement with an affiliate, was **terminated** in April 2025, with **no outstanding borrowings**[68](index=68&type=chunk)[69](index=69&type=chunk) - The **2027 Senior Notes** have **$90.0 million** in **principal outstanding** as of June 30, 2025, **accruing interest** at **5.75%** per annum and **maturing** on May 1, 2027[74](index=74&type=chunk)[70](index=70&type=chunk)[75](index=75&type=chunk) [9. COMMITMENTS AND CONTINGENCIES](index=22&type=section&id=9.%20COMMITMENTS%20AND%20CONTINGENCIES) This section outlines the company's unfunded commitments, legal proceedings, and specific risks associated with cannabis industry lending Total Undrawn Commitments | Date | Amount ($) | | :--- | :--- | | June 30, 2025 | $10,136,715 | | December 31, 2024 | $10,334,599 | - The company is **not subject to any material pending legal proceedings** as of June 30, 2025[77](index=77&type=chunk) - **Lending to the cannabis industry involves significant risks**, including **federal illegality**, **borrowers' inability to maintain licenses**, and **potential lack of liquidity for loans**[78](index=78&type=chunk) [10. SHAREHOLDERS' EQUITY](index=22&type=section&id=10.%20SHAREHOLDERS'%20EQUITY) This section provides details on the company's equity structure, including common stock, preferred stock, and share-based compensation plans - All **125 outstanding shares of Series A Preferred Stock were redeemed** in June 2024[85](index=85&type=chunk) Common Stock Issued and Outstanding | Date | Shares (Shares) | | :--- | :--- | | June 30, 2025 | 22,595,111 | | December 31, 2024 | 22,332,927 | - A **new shelf registration statement (Form S-3)** for up to **$1.0 billion** of securities was declared **effective** on April 25, 2025, replacing the expired prior statement[89](index=89&type=chunk) - The **At-the-Market (ATM) Offering Program** and related Sales Agreement expired in April 2025; **no shares were sold** under it during the three and six months ended June 30, 2025[90](index=90&type=chunk)[91](index=91&type=chunk) - During the six months ended June 30, 2025, **271,497 shares of restricted stock were granted** under the 2020 Plan[93](index=93&type=chunk) [11. EARNINGS PER SHARE](index=28&type=section&id=11.%20EARNINGS%20PER%20SHARE) This section presents the basic and diluted earnings per common share from continuing operations for the reported periods Basic Earnings Per Common Share (Continuing Operations) | Period | June 30, 2025 ($) | June 30, 2024 ($) | | :--- | :--- | :--- | | Three months ended | $(0.60) | $0.74 | | Six months ended | $(0.42) | $0.66 | Diluted Earnings Per Common Share (Continuing Operations) | Period | June 30, 2025 ($) | June 30, 2024 ($) | | :--- | :--- | :--- | | Three months ended | $(0.60) | $0.74 | | Six months ended | $(0.42) | $0.66 | - **Diluted EPS** for the three and six months ended June 30, 2025, **excluded 2,571,834 and 2,480,235 weighted average shares of unvested restricted stock and stock options**, respectively, due to their **anti-dilutive effect**[109](index=109&type=chunk) [12. INCOME TAX](index=28&type=section&id=12.%20INCOME%20TAX) This section details the company's income tax benefit or expense, including excise tax and deferred tax assets Total Income Tax (Benefit) Expense, including excise tax | Period | June 30, 2025 ($) | June 30, 2024 ($) | | :--- | :--- | :--- | | Three months ended | $(138,044) | $285,975 | | Six months ended | $(25,638) | $444,335 | - The company received a **partial refund of previously paid excise tax** relating to the 2023 tax year in the second quarter of 2025[112](index=112&type=chunk) - **Deferred tax assets** were **$0.7 million** as of June 30, 2025, and December 31, 2024, with management believing they are **more likely than not to be realized**[115](index=115&type=chunk) [13. FAIR VALUE](index=29&type=section&id=13.%20FAIR%20VALUE) This section describes the methodologies and inputs used to determine the fair value of the company's financial instruments, particularly loans - The company's loans are typically valued using a **yield analysis**, with alternative methodologies including **market, income, or recovery analysis**, primarily utilizing **Level 3 unobservable inputs**[117](index=117&type=chunk)[124](index=124&type=chunk) Fair Value of Loans Held at Fair Value (Level 3) | Date | Fair Value ($) | | :--- | :--- | | June 30, 2025 | $26,847,222 | | December 31, 2024 | $30,510,804 | - The **change in unrealized losses on loans at fair value (Level 3)** for the six months ended June 30, 2025, was **$(1,741,448)**[118](index=118&type=chunk) [14. RELATED PARTY TRANSACTIONS](index=32&type=section&id=14.%20RELATED%20PARTY%20TRANSACTIONS) This section discloses transactions with related parties, including management and incentive fees, and credit facilities Management and Incentive Fees, Net | Period | June 30, 2025 ($) | June 30, 2024 ($) | | :--- | :--- | :--- | | Base management fees (3 months) | $680,358 | $1,129,781 | | Base management fees (6 months) | $1,496,548 | $2,101,116 | | Incentive fees earned (3 months) | $0 | $2,855,247 | | Incentive fees earned (6 months) | $0 | $5,346,674 | - The **decrease in management fees** was driven by **lower equity attributable to the Spin-Off of SUNS**[205](index=205&type=chunk) - The **AFCF Credit Facility**, an unsecured revolving credit agreement with an affiliate, was **terminated** in April 2025[134](index=134&type=chunk) [15. DIVIDENDS AND DISTRIBUTIONS](index=34&type=section&id=15.%20DIVIDENDS%20AND%20DISTRIBUTIONS) This section reports the dividends declared on common shares and their changes over the reporting periods Dividends Declared on Common Shares | Period | Amount per Share ($) | Total Amount ($) | | :--- | :--- | :--- | | Six months ended June 30, 2025 | $0.38 | $8,586,349 | | Six months ended June 30, 2024 | $1.11 | $22,940,474 | - **Total cash dividends declared** for the six months ended June 30, 2025, **decreased by $14,354,125** (**62.5%**) compared to the prior year[135](index=135&type=chunk) [16. DISCONTINUED OPERATIONS](index=34&type=section&id=16.%20DISCONTINUED%20OPERATIONS) This section details the financial impact of the spin-off of the commercial real estate portfolio into Sunrise Realty Trust, Inc - The company completed the **spin-off of its commercial real estate (CRE) portfolio** into Sunrise Realty Trust, Inc. (SUNS) on July 9, 2024[136](index=136&type=chunk) - The **operating results of the SUNS business** through the spin-off date are reported as **net income from discontinued operations**, net of tax[138](index=138&type=chunk) Net Income from Discontinued Operations, Net of Tax | Period | June 30, 2025 ($) | June 30, 2024 ($) | | :--- | :--- | :--- | | Three months ended | $0 | $1,239,897 | | Six months ended | $0 | $2,756,124 | - There were **no assets or liabilities classified as discontinued operations** as of June 30, 2025, or December 31, 2024[141](index=141&type=chunk) [17. REPORTABLE SEGMENTS](index=35&type=section&id=17.%20REPORTABLE%20SEGMENTS) This section identifies the company's single reportable segment and highlights the concentration of interest income among borrowers - The company operates as **one reportable segment**, focusing on **institutional lending to state law-compliant cannabis operators** in the United States[143](index=143&type=chunk) - **Performance is assessed and resources are allocated on a consolidated basis**, based on net income from continuing operations[144](index=144&type=chunk) - **Interest income is highly concentrated**, with **five borrowers comprising 71% of consolidated interest income** for the six months ended June 30, 2025[146](index=146&type=chunk) [18. SUBSEQUENT EVENTS](index=35&type=section&id=18.%20SUBSEQUENT%20EVENTS) This section discloses significant events occurring after the reporting period, including loan defaults, new investments, and strategic changes - In July 2025, AFC Agent delivered a **notice of default and acceleration** to Private Company P and is actively pursuing judicial and non-judicial remedies[148](index=148&type=chunk) - In August 2025, the company agreed to **purchase a $10.0 million senior secured term loan** to Subsidiary of Public Company S at a **4.0% discount**, while an existing **$10.0 million loan** to the same entity was repaid[149](index=149&type=chunk) - The **Board approved an expanded investment strategy** and a **new Investment Advisory Agreement** in August 2025, subject to shareholder approval, to enable the company to operate as a **Business Development Company (BDC)**[150](index=150&type=chunk) - The **BDC conversion would allow the company to invest in a broader universe of assets**, including **non-real estate related assets** and ancillary cannabis businesses, which are currently limited by its **mortgage REIT status**[151](index=151&type=chunk)[153](index=153&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting key developments, financial measures, and factors impacting performance. It details the loan portfolio, liquidity, capital resources, and accounting policies, emphasizing the strategic shift towards BDC conversion and expanded investment mandate [Overview](index=38&type=section&id=Overview) This section provides a high-level summary of the company's business, strategic direction, and recent corporate developments - **Advanced Flower Capital Inc.** is an **institutional lender** specializing in **senior secured loans** to **cannabis industry operators**, with an **expanded investment strategy** to include **ancillary cannabis businesses** and companies outside the cannabis industry[160](index=160&type=chunk)[165](index=165&type=chunk) - The company is pursuing a conversion to a **Business Development Company (BDC)** under the 1940 Act, subject to shareholder approval, to broaden its investment opportunities beyond real estate-related assets, which are currently limited by its mortgage REIT status[169](index=169&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) - The **spin-off of the commercial real estate (CRE) portfolio** into SUNS was completed on July 9, 2024, with SUNS' operating results reported as **discontinued operations**[174](index=174&type=chunk) [Developments During the Second Quarter June 30, 2025](index=40&type=section&id=Developments%20During%20the%20Second%20Quarter%20June%2030%2C%202025) This section highlights key operational and financial events that occurred during the second quarter ended June 30, 2025 - Received a **$2.0 million** voluntary prepayment from Private Company L and fully repaid loans from Private Company T (**$7.7 million**) and Subsidiary of Public Company M (**$2.8 million**) during Q2 2025[176](index=176&type=chunk)[178](index=178&type=chunk) - Funded a new **$14.0 million** senior secured credit facility with Subsidiaries of Private Company V in April 2025[177](index=177&type=chunk) - **Wrote off a $1.8 million equipment loan receivable** with Public Company A in June 2025, as it was deemed uncollectible[179](index=179&type=chunk) - Commenced legal actions against Subsidiary of Private Company G and its shareholders due to payment defaults, with a preliminary injunction granted against AFC parties in one case, which is being appealed[180](index=180&type=chunk)[181](index=181&type=chunk) - The **At-the-Market (ATM) Offering Program** and related Sales Agreement expired in April 2025[185](index=185&type=chunk) [Key Financial Measures and Indicators](index=42&type=section&id=Key%20Financial%20Measures%20and%20Indicators) This section discusses the primary financial metrics and non-GAAP measures used by management to assess company performance - The company uses **Distributable Earnings** (a non-GAAP measure) and **book value per share** to evaluate its performance[191](index=191&type=chunk)[193](index=193&type=chunk) Book Value Per Share | Date | Amount ($) | | :--- | :--- | | June 30, 2025 | $8.18 | | December 31, 2024 | $9.02 | Distributable Earnings (Non-GAAP) | Period | June 30, 2025 ($) | June 30, 2024 ($) | | :--- | :--- | :--- | | Three months ended | $3,384,328 | $11,420,990 | | Six months ended | $7,928,234 | $21,386,696 | - **Distributable Earnings for the six months ended June 30, 2025, decreased by $13,458,462** (**62.9%**) **YoY**[197](index=197&type=chunk) [Results of Operations for the three and six months ended June 30, 2025 and 2024](index=44&type=section&id=Results%20of%20Operations%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202025%20and%202024) This section analyzes the company's financial performance, including revenue, expenses, and net income (loss) for the reported periods Net (Loss) Income from Continuing Operations | Period | June 30, 2025 ($) | June 30, 2024 ($) | | :--- | :--- | :--- | | Three months ended | $(13,164,651) | $15,206,224 | | Six months ended | $(9,096,966) | $13,635,881 | - **Interest income decreased by 55.2%** for the three months and **48.9%** for the six months ended June 30, 2025, primarily due to fewer loan exits and related non-recurring fees in the prior period[201](index=201&type=chunk)[202](index=202&type=chunk) - The **provision for current expected credit losses increased significantly by $22.1 million** (**353.1%**) for the three months and **$16.5 million** (**1238.9%**) for the six months ended June 30, 2025[213](index=213&type=chunk) - **Management and incentive fees decreased due to lower equity from the SUNS spin-off and lower Core Earnings**, with **no incentive fee incurred** in the current periods[205](index=205&type=chunk)[206](index=206&type=chunk) [Loan Portfolio](index=46&type=section&id=Loan%20Portfolio) This section provides a detailed overview of the company's loan portfolio, including outstanding principal, nonaccrual status, and valuation - As of June 30, 2025, the company's **loan portfolio consisted of 15 loans** with an aggregate outstanding principal of approximately **$359.6 million** and a weighted-average estimated YTM of **18%**[214](index=214&type=chunk) - **Four loans were on nonaccrual status** as of June 30, 2025, including one **loan held at fair value** (**$51.2 million** outstanding principal) and three **loans held at carrying value** (**$104.2 million** carrying value)[215](index=215&type=chunk) Loans Held for Investment at Fair Value | Date | Fair Value ($) | Outstanding Principal ($) | | :--- | :--- | :--- | | June 30, 2025 | $26,847,222 | $51,186,315 | | December 31, 2024 | $30,510,804 | $53,108,449 | Loans Held for Investment at Carrying Value | Date | Carrying Value ($) | Outstanding Principal ($) | | :--- | :--- | :--- | | June 30, 2025 | $300,946,208 | $308,405,751 | | December 31, 2024 | $293,262,374 | $301,755,791 | - The **loan receivable held at carrying value was zero** as of June 30, 2025, following a **$1.8 million write-off of the Public Company A equipment loan**[226](index=226&type=chunk) [Liquidity and Capital Resources](index=51&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's cash position, funding sources, and strategies for managing liquidity and capital needs Cash and Cash Equivalents | Date | Amount ($) | | :--- | :--- | | June 30, 2025 | $3,410,065 | | December 31, 2024 | $103,610,460 | - **Net cash provided by operating activities** for the six months ended June 30, 2025, was approximately **$5.7 million**, which was less than the **$8.6 million** in dividends declared during the same period[233](index=233&type=chunk) - A **new Shelf Registration Statement**, effective April 25, 2025, allows for the sale of up to **$1.0 billion** of securities to fund future investments[235](index=235&type=chunk) - The company expects to need to **raise additional equity and/or debt funds** in the near future to support its **expanded investment focus and growth**[237](index=237&type=chunk) - The **Revolving Credit Facility's total aggregate commitment increased** to **$50.0 million**, with **$39.6 million** available for borrowing as of June 30, 2025[241](index=241&type=chunk)[66](index=66&type=chunk) [Contractual Obligations, Other Commitments, and Off-Balance Sheet Arrangements](index=54&type=section&id=Contractual%20Obligations%2C%20Other%20Commitments%2C%20and%20Off-Balance%20Sheet%20Arrangements) This section details the company's future payment obligations, unfunded commitments, and off-balance sheet arrangements Unfunded Commitments (as of June 30, 2025) | Period | Amount ($) | | :--- | :--- | | Less than 1 year | $5,209,223 | | 1-3 years | $4,927,492 | | Total | $10,136,715 | 2027 Senior Notes Contractual Obligations (as of June 30, 2025) | Period | Amount ($) | | :--- | :--- | | Less than 1 year | $5,175,000 | | 1-3 years | $95,175,000 | | Total | $100,350,000 | - **Off-balance sheet commitments consist of unfunded commitments on delayed draw loans**[262](index=262&type=chunk) [Leverage Policies](index=56&type=section&id=Leverage%20Policies) This section outlines the company's approach to managing debt and maintaining its leverage targets - The company currently intends to **maintain leverage of no more than one times equity**[264](index=264&type=chunk) - **Debt is used to provide additional funds for loan acquisition, refinancing existing debt, or general corporate purposes**, while complying with the **2027 Senior Notes Indenture**[264](index=264&type=chunk) [Dividends](index=56&type=section&id=Dividends) This section explains the company's dividend policy as a REIT and the implications of distribution requirements - As a REIT, the company intends to annually **distribute at least 90% of its REIT taxable income to shareholders**[265](index=265&type=chunk) - **Failure to meet distribution requirements can result in corporate income tax and a 4% non-deductible excise tax** on any shortfall[265](index=265&type=chunk) - If cash available for distribution is insufficient, the company may **fund distributions from working capital, equity/debt financings, asset sales, or taxable stock distributions**[266](index=266&type=chunk) [Critical Accounting Policies and Estimates](index=56&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section confirms the consistency of critical accounting policies and estimates with prior annual reports - There were **no significant changes in critical accounting policies or estimates** from those presented in the Annual Report on Form 10-K as of June 30, 2025[267](index=267&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=56&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section outlines the company's exposure to market risks, primarily interest rate and credit risks, and the strategies employed to manage them. It details how fair value of assets is determined and the potential impact of changes in interest rates on net interest income and profitability [Risk Management](index=56&type=section&id=Risk%20Management) This section describes the company's strategies for identifying, assessing, and mitigating various market risks - The company **manages risk exposure by closely monitoring its portfolio and actively managing financing, interest rate, credit, prepayment, and convexity risks**[268](index=268&type=chunk) - Strategies include **investing in a mix of floating- and fixed-rate loans to mitigate interest rate risk** and **employing a comprehensive review and selection process for credit risk**[268](index=268&type=chunk)[275](index=275&type=chunk) [Changes in Fair Value of Our Assets](index=57&type=section&id=Changes%20in%20Fair%20Value%20of%20Our%20Assets) This section explains how the fair value of the company's assets, particularly loans, is determined and influenced by market factors - Loans are evaluated quarterly, with **fair value determined by the Board through its independent Audit and Valuation Committee**, using input from an independent third-party valuation firm[270](index=270&type=chunk) - **Valuation methodologies include yield, market, income, or recovery analysis**, primarily using **Level 3 unobservable inputs**[271](index=271&type=chunk) - **Changes in market yields, recovery rates, and revenue multiples may change the fair value of loans**, with an **increase in market yields generally decreasing fair value**[271](index=271&type=chunk) [Changes in Market Interest Rates and Effect on Net Interest Income](index=57&type=section&id=Changes%20in%20Market%20Interest%20Rates%20and%20Effect%20on%20Net%20Interest%20Income) This section analyzes the impact of fluctuating market interest rates on the company's net interest income and profitability - **Operating results are largely dependent on the net interest margin**, the difference between income earned on assets and the cost of borrowing[274](index=274&type=chunk) - **Rising interest rates could increase borrowing costs faster than asset yields**, potentially leading to a **decline in net interest spread and net income**, especially for fixed-rate assets[274](index=274&type=chunk) - A **hypothetical 100 basis points increase** in the floating benchmark rate would result in an approximate **$1.1 million increase in annual interest income**, while a **100 basis points decrease would result in an approximate $(0.4) million decrease**[276](index=276&type=chunk) [Interest Rate Cap Risk](index=58&type=section&id=Interest%20Rate%20Cap%20Risk) This section discusses the risks associated with interest rate caps on floating-rate loans and their potential impact on yields - **Floating-rate loans may be subject to periodic and lifetime interest rate caps**, limiting yield increases during periods of rising interest rates[277](index=277&type=chunk) - **Borrowing costs may not have similar restrictions**, leading to a **potential mismatch** where borrowing costs increase without a corresponding increase in asset yields, **negatively impacting net interest income**[277](index=277&type=chunk) [Interest Rate Mismatch Risk](index=58&type=section&id=Interest%20Rate%20Mismatch%20Risk) This section addresses the risk arising from funding loans with borrowings based on different interest rate benchmarks - The company faces **interest rate mismatch risk when funding loans with borrowings based on different benchmarks** (fixed vs. floating)[278](index=278&type=chunk) - An **increase in an index rate would generally increase borrowing costs without a corresponding increase in fixed-rate interest earnings**, **adversely affecting profitability and shareholder distributions**[278](index=278&type=chunk) [Credit Risk](index=58&type=section&id=Credit%20Risk) This section details the credit risks inherent in the company's loan portfolio, including concentration and industry-specific challenges - The company is **subject to varying degrees of credit risk on its loans and interest receivable**, which is **mitigated through comprehensive credit analysis and proactive monitoring**[280](index=280&type=chunk) - The **loan portfolio is concentrated**, with the **top three borrowers representing approximately 46.3% of the aggregate outstanding principal balances** as of June 30, 2025[284](index=284&type=chunk) - The **largest credit facility**, with Subsidiary of Private Company G (**21.9% of portfolio**), is on **nonaccrual status**, with **full recovery of principal and accrued interest deemed doubtful**[285](index=285&type=chunk) - **Lending to cannabis operators involves significant risks**, including **federal illegality**, **inability to maintain licenses**, and **potential inability to take possession of collateral in default scenarios**[286](index=286&type=chunk) [Item 4. Controls and Procedures](index=59&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=59&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section reports on the effectiveness of the company's disclosure controls and procedures as assessed by management - The **CEO and CFO concluded that the company's disclosure controls and procedures were effective** as of June 30, 2025[289](index=289&type=chunk) - These controls ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within specified time periods[289](index=289&type=chunk) [Changes in Internal Control over Financial Reporting](index=60&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section confirms whether any material changes occurred in the company's internal control over financial reporting during the quarter - There were **no material changes in the company's internal control over financial reporting** during the quarter ended June 30, 2025[291](index=291&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=60&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the company was not subject to any material pending legal proceedings as of June 30, 2025, that could significantly impact its business, financial condition, or results of operations - As of June 30, 2025, the company was **not subject to any material pending legal proceedings**[292](index=292&type=chunk) [Item 1A. Risk Factors](index=60&type=section&id=Item%201A.%20Risk%20Factors) This section confirms no material changes to previously disclosed risk factors, but provides additional details on risks related to commercial mortgages, volatility of real property, borrower bankruptcies, non-recourse loans, and the higher risks associated with lending to small and medium-sized, privately owned businesses - **No material changes to previously disclosed risk factors**, with additional details provided on commercial mortgages and related risks[293](index=293&type=chunk) - The **volatility of real property** and reductions in net operating income (NOI) can **materially adversely affect the company's business, financial position, and results of operations**[293](index=293&type=chunk)[294](index=294&type=chunk) - **Borrower bankruptcies may create a risk of loss** due to stays of legal proceedings and enforcement against collateral, potentially leading to a **loss of the entire investment**[296](index=296&type=chunk) - Most commercial mortgage loans are **non-recourse**, limiting recourse to the underlying collateral, which may be insufficient to cover losses in case of default[297](index=297&type=chunk) - **Lending to small and medium-sized, privately owned businesses entails higher risks** due to their limited access to capital and weaker financial positions[295](index=295&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=61&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports that there were no recent sales of unregistered equity securities and no issuer purchases of equity securities during the period - **No recent sales of unregistered securities were reported**[298](index=298&type=chunk) - **No issuer purchases of equity securities were reported**[300](index=300&type=chunk) [Item 3. Defaults Upon Senior Securities](index=62&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section confirms that the company did not experience any defaults upon senior securities during the reporting period - **No defaults upon senior securities were reported**[301](index=301&type=chunk) [Item 4. Mine Safety Disclosures](index=62&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - **This item is not applicable**[302](index=302&type=chunk) [Item 5. Other Information](index=62&type=section&id=Item%205.%20Other%20Information) This section states that no directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangements during the fiscal quarter ended June 30, 2025 - **None of the directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangements** during the fiscal quarter ended June 30, 2025[303](index=303&type=chunk) [Item 6. Exhibits](index=63&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including various agreements, articles of amendment, bylaws, indenture, certifications, and XBRL documents, providing supporting documentation for the report - The **exhibits include the Sixth Amendment to Amended and Restated Management Agreement, Amendment Number Four and Five to Loan and Security Agreement, and certifications from the Chief Executive Officer and Chief Financial Officer**[304](index=304&type=chunk) [Signatures](index=64&type=section&id=Signatures) This section contains the signatures of the company's Chief Executive Officer and Chief Financial Officer, certifying the report on behalf of Advanced Flower Capital Inc - The report was **signed by Daniel Neville, Chief Executive Officer, and Brandon Hetzel, Chief Financial Officer and Treasurer**, on August 14, 2025[307](index=307&type=chunk)

Company Overview - Advanced Flower Capital Inc. (AFC) is a leading commercial mortgage REIT that provides institutional loans to state law compliant cannabis operators in the U.S. [3] - The company originates, structures, and underwrites loans ranging from $10 million to over $100 million, typically secured by quality real estate assets, license value, and cash flows [3]. - AFC is based in West Palm Beach, Florida [3]. Financial Results Announcement - AFC will release its financial results for the second quarter ending June 30, 2025, on Thursday, August 14, 2025, before market open [1]. - Management will review the financial results at 10:00 am ET via a webcast available on the Investor Relations section of AFC's website [1]. - A replay of the event will be available one hour after the live presentation [1]. Investor Relations - AFC distributes its earnings releases via its website and email lists, and interested parties can sign up for updates [2]. - The Investor Relations contact for AFC is Robyn Tannenbaum, who can be reached at 561-510-2293 or via email [4]. - Media inquiries can be directed to Collected Strategies, with contacts Jim Golden and Jack Kelleher available [4].

Core Points - Advanced Flower Capital Inc. declared a quarterly dividend of $0.15 per share for the quarter ending June 30, 2025, payable on July 15, 2025 [1] - The second quarter dividend was affected by a realized loss related to a loan to Public Company A [2] Company Overview - Advanced Flower Capital Inc. is a commercial mortgage real estate investment trust (REIT) that provides loans to state law compliant cannabis operators in the U.S., with loans ranging from $10 million to over $100 million [3] - The company is based in West Palm Beach, Florida, and leverages a deep network and significant expertise in credit and cannabis to manage its loan portfolio [3] Financial Metrics - The company uses "Distributable Earnings" as a non-GAAP financial measure to evaluate performance, which excludes certain transactions and GAAP adjustments [4][6] - Distributable Earnings is defined as net income excluding stock-based compensation, depreciation, unrealized gains/losses, and other non-cash items [6] - The determination of Distributable Earnings is similar to Core Earnings but includes Incentive Compensation earned during the period [5] Dividend Policy - As a REIT, the company is required to distribute at least 90% of its annual taxable income, which influences its dividend payments [7] - Distributable Earnings is one of the factors considered by the Board of Directors when authorizing dividends, although it is not a direct measure of net taxable income [8]