AFC Gamma(AFCG) - 2025 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements 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 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 | $(16,645,064) | -8.3% | Consolidated Statements of Operations This section outlines the company's financial performance, including revenues, expenses, and net income (loss) over specified periods Consolidated Statements of Operations Highlights | Metric | Three months ended June 30, 2025 ($) | 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) | $0.79 | Consolidated Statements of Shareholders' Equity This section details changes in the company's equity accounts, reflecting transactions with owners and comprehensive income (loss) Shareholders' Equity Changes (Six months ended June 30, 2025) | Item | Amount ($) | | :--- | :--- | | 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 $16,645,064 from December 31, 2024, to June 30, 2025, primarily due to net loss and dividends declared[16] Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities over specified periods Consolidated Statements of Cash Flows Highlights (Six months ended June 30) | Activity | 2025 ($) | 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] - Net cash used in financing activities increased by $75,236,476 YoY for the six months ended June 30, 2025, primarily due to increased repayments on revolving credit facilities[18] 1. ORGANIZATION This section describes the company's business, its spin-off of the CRE portfolio, and its strategic shift towards BDC conversion and expanded investment mandate - Advanced Flower Capital Inc. (AFC) is an institutional lender specializing in senior secured mortgage loans to cannabis industry operators[21] - The company completed the spin-off of its commercial real estate (CRE) loan portfolio into Sunrise Realty Trust, Inc. (SUNS) in July 2024, with SUNS' operating results reported as discontinued operations[23] - The Board approved an expanded investment strategy in August 2025 to include ancillary cannabis businesses and companies outside the cannabis industry, and is pursuing a conversion to a Business Development Company (BDC) under the 1940 Act, subject to shareholder approval[25][27] 2. SIGNIFICANT ACCOUNTING POLICIES This section details the accounting principles used in preparing the financial statements, including estimates and compliance with GAAP - The financial statements are prepared in conformity with GAAP and SEC rules applicable to interim financial information[30] - Significant estimates include the valuation of loans held for investment at fair value and the current expected credit losses (CECL) reserve[33] - As an 'emerging growth company,' AFC has elected to take advantage of the extended transition period for complying with new or revised financial accounting standards[34] 3. LOANS HELD FOR INVESTMENT AT FAIR VALUE This section provides details on loans measured at fair value, including their valuation and changes in unrealized gains or losses Loans Held for Investment at Fair Value | Date | Fair Value ($) | 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][39] - For the six months ended June 30, 2025, the change in unrealized losses on loans at fair value, net, was $(1,741,448)[40] 4. LOANS HELD FOR INVESTMENT AT CARRYING VALUE This section presents information on loans held at carrying value, including new fundings, repayments, and nonaccrual status Loans Held for Investment at Carrying Value | Date | Carrying Value ($) | 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] - 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 $104.2 million[45][46][47] 5. LOAN RECEIVABLE HELD AT CARRYING VALUE This section details the status of a specific loan receivable held at carrying value, including its write-off Loan Receivable Held at Carrying Value | Date | Carrying Value ($) | 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 $1.8 million, was written off in June 2025 as uncollectible[51] 6. CURRENT EXPECTED CREDIT LOSSES This section outlines the company's reserve for current expected credit losses (CECL), including changes and write-offs CECL Reserve for Loans Held at Carrying Value and Loan Receivable | Date | Total CECL Reserve ($) | % 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] - A loan receivable of $1.8 million, previously rated '5' (Impaired/Loss Likely) and fully reserved for, was written off in Q2 2025[56] 7. INTEREST RECEIVABLE This section reports the total interest receivable and its changes over the reporting period Total Interest Receivable | Date | Amount ($) | | :--- | :--- | | 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] 8. DEBT 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] - The total aggregate commitment under the Revolving Credit Facility increased by $20.0 million to $50.0 million in June 2025[64] - The AFCF Credit Facility, an unsecured revolving credit agreement with an affiliate, was terminated in April 2025, with no outstanding borrowings[68][69] - The 2027 Senior Notes have $90.0 million in principal outstanding as of June 30, 2025, accruing interest at 5.75% per annum and maturing on May 1, 2027[74][70][75] 9. COMMITMENTS AND CONTINGENCIES This section outlines the company's unfunded commitments, legal proceedings, and specific risks associated with cannabis industry lending Total Undrawn Commitments | Date | Amount ($) | | :--- | :--- | | 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] - Lending to the cannabis industry involves significant risks, including federal illegality, borrowers' inability to maintain licenses, and potential lack of liquidity for loans[78] 10. SHAREHOLDERS' EQUITY 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] 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 $1.0 billion of securities was declared effective on April 25, 2025, replacing the expired prior statement[89] - The At-the-Market (ATM) Offering Program and related Sales Agreement expired in April 2025; no shares were sold under it during the three and six months ended June 30, 2025[90][91] - During the six months ended June 30, 2025, 271,497 shares of restricted stock were granted under the 2020 Plan[93] 11. EARNINGS PER SHARE This section presents the basic and diluted earnings per common share from continuing operations for the reported periods Basic Earnings Per Common Share (Continuing Operations) | Period | June 30, 2025 ($) | 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) | $0.66 | - Diluted EPS for the three and six months ended June 30, 2025, excluded 2,571,834 and 2,480,235 weighted average shares of unvested restricted stock and stock options, respectively, due to their anti-dilutive effect[109] 12. INCOME TAX This section details the company's income tax benefit or expense, including excise tax and deferred tax assets Total Income Tax (Benefit) Expense, including excise tax | Period | June 30, 2025 ($) | 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] - Deferred tax assets were $0.7 million as of June 30, 2025, and December 31, 2024, with management believing they are more likely than not to be realized[115] 13. FAIR VALUE This section describes the methodologies and inputs used to determine the fair value of the company's financial instruments, particularly loans - The company's loans are typically valued using a yield analysis, with alternative methodologies including market, income, or recovery analysis, primarily utilizing Level 3 unobservable inputs[117][124] Fair Value of Loans Held at Fair Value (Level 3) | Date | Fair Value ($) | | :--- | :--- | | 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 $(1,741,448)[118] 14. RELATED PARTY TRANSACTIONS This section discloses transactions with related parties, including management and incentive fees, and credit facilities Management and Incentive Fees, Net | Period | June 30, 2025 ($) | 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 | $5,346,674 | - The decrease in management fees was driven by lower equity attributable to the Spin-Off of SUNS[205] - The AFCF Credit Facility, an unsecured revolving credit agreement with an affiliate, was terminated in April 2025[134] 15. DIVIDENDS AND DISTRIBUTIONS This section reports the dividends declared on common shares and their changes over the reporting periods Dividends Declared on Common Shares | Period | Amount per Share ($) | 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 $14,354,125 (62.5%) compared to the prior year[135] 16. DISCONTINUED OPERATIONS This section details the financial impact of the spin-off of the commercial real estate portfolio into Sunrise Realty Trust, Inc - The company completed the spin-off of its commercial real estate (CRE) portfolio into Sunrise Realty Trust, Inc. (SUNS) on July 9, 2024[136] - The operating results of the SUNS business through the spin-off date are reported as net income from discontinued operations, net of tax[138] Net Income from Discontinued Operations, Net of Tax | Period | June 30, 2025 ($) | 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] 17. REPORTABLE SEGMENTS 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] - Performance is assessed and resources are allocated on a consolidated basis, based on net income from continuing operations[144] - Interest income is highly concentrated, with five borrowers comprising 71% of consolidated interest income for the six months ended June 30, 2025[146] 18. SUBSEQUENT EVENTS 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] - 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] - 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] - 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][153] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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][165] - 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][170][171][172][173] - 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] Developments During the Second Quarter June 30, 2025 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][178] - Funded a new $14.0 million senior secured credit facility with Subsidiaries of Private Company V in April 2025[177] - Wrote off a $1.8 million equipment loan receivable with Public Company A in June 2025, as it was deemed uncollectible[179] - Commenced legal actions against Subsidiary of Private Company G and its shareholders due to payment defaults, with a preliminary injunction granted against AFC parties in one case, which is being appealed[180][181] - The At-the-Market (ATM) Offering Program and related Sales Agreement expired in April 2025[185] Key Financial Measures and Indicators This section discusses the primary financial metrics and non-GAAP measures used by management to assess company performance - The company uses Distributable Earnings (a non-GAAP measure) and book value per share to evaluate its performance[191][193] Book Value Per Share | Date | Amount ($) | | :--- | :--- | | 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 $13,458,462 (62.9%) YoY[197] Results of Operations for the three and six months ended June 30, 2025 and 2024 This section analyzes the company's financial performance, including revenue, expenses, and net income (loss) for the reported periods Net (Loss) Income from Continuing Operations | Period | June 30, 2025 ($) | 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][202] - 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] - 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][206] Loan Portfolio 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] - 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 ($104.2 million carrying value)[215] Loans Held for Investment at Fair Value | Date | Fair Value ($) | 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 $1.8 million write-off of the Public Company A equipment loan[226] Liquidity and Capital Resources This section discusses the company's cash position, funding sources, and strategies for managing liquidity and capital needs Cash and Cash Equivalents | Date | Amount ($) | | :--- | :--- | | 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] - 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] - 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] - The Revolving Credit Facility's total aggregate commitment increased to $50.0 million, with $39.6 million available for borrowing as of June 30, 2025[241][66] Contractual Obligations, Other Commitments, and Off-Balance Sheet Arrangements This section details the company's future payment obligations, unfunded commitments, and off-balance sheet arrangements Unfunded Commitments (as of June 30, 2025) | Period | Amount ($) | | :--- | :--- | | 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] Leverage Policies 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] - 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] 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] - Failure to meet distribution requirements can result in corporate income tax and a 4% non-deductible excise tax on any shortfall[265] - 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] Critical Accounting Policies and Estimates 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 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] - 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][275] Changes in Fair Value of Our Assets 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] - Valuation methodologies include yield, market, income, or recovery analysis, primarily using Level 3 unobservable inputs[271] - 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] Changes in Market Interest Rates and Effect on Net Interest Income 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] - 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] - 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] Interest Rate Cap Risk 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] - 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] Interest Rate Mismatch Risk 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] - 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] Credit Risk 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] - 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] - 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] - 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] Item 4. Controls and Procedures 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 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] - These controls ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within specified time periods[289] Changes in Internal Control over Financial Reporting 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] PART II – OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] - 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][294] - 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] - 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] - Lending to small and medium-sized, privately owned businesses entails higher risks due to their limited access to capital and weaker financial positions[295] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - No issuer purchases of equity securities were reported[300] Item 3. Defaults Upon Senior Securities 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] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[302] Item 5. Other Information 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] Item 6. Exhibits 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] 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]