Advanced Flower Capital Inc.

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes and other information included in this Quarterly Report on Form 10-Q (the “Form 10-Q”). This discussion and analysis contains forward-looking statements that involve risks and uncertainties which could cause our actual results to differ materially from those anticipated in these forward-looking statements, including, but not limited to, risks and uncertainties discussed under the heading “Cautionary Note Regarding Forward-Looking Statements,” in this Form 10-Q, and “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025.

Unless the context otherwise requires, the terms “AFC,” “we,” “us” or “our” refer to Advanced Flower Capital Inc.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”), filed by Advanced Flower Capital Inc. (the “Company,” “AFC”, “we,” “us,” and “our”), and the information incorporated by reference herein, or made in other reports, filings with the SEC, and press releases contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend such statements to be covered by the safe harbor provisions contained therein. These forward-looking statements are based on our current intent, belief, expectations and views of future events. The forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results or performance, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “could,” “would,” “will,” “can,” “continuing,” “may,” “aim,” “intend,” “ongoing,” “plan,” “predict,” “potential,” “should,” “seeks,” “likely to” or words or phrases of similar meaning. Specifically, this Quarterly Report includes forward-looking statements regarding (i) the conversion to a business development company (“BDC”) (the “Conversion”) and the other related transactions, as well as the future financial and operating results, plans, objectives, expectations and intentions of the Company, (ii) our portfolio and strategies for the growth of our lending business; (iii) our working capital, liquidity and capital requirements; (iv) potential state and federal legislative and regulatory matters; (v) our expectations and estimates regarding certain tax, legal and accounting matters, including the impact on our financial statements and/or those of our borrowers; (vi) the amount, collectability and timing of cash flows, if any, from our loans; (vii) our expected ranges of originations and repayments; (viii) estimates relating to our ability to make distributions to our shareholders in the future; and (ix) our investment strategy.

These forward-looking statements reflect management’s current views about future events, and are subject to risks, uncertainties and assumptions. Our actual results may differ materially from the future results and events expressed or implied by the forward-looking statements. Key factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:

•our expanded business and investment strategy;

•our ability to maintain our status as a BDC;

•our ability to maintain our status under Subchapter M of the Internal Revenue Code of 1986, as amended, as a regulated investment company (“RIC”) and our qualification for tax treatment as a RIC;

•the ability of our Adviser (as defined below) to locate suitable loan opportunities for us and to monitor and actively manage our portfolio and implement our expanded investment strategy;

•our expectations for origination targets and repayments;

•our ability to obtain our target mix of loan and collateral types with our expected ranges of yields;

•the allocation of loan opportunities to us by our Adviser;

•actual and potential conflicts of interest with our Adviser and its affiliates;

•our projected operating results;

•the state of the U.S. economy generally or in the specific geographic regions in which we operate, including as a result of the impact of natural disasters;

•the impact of a protracted decline in the liquidity of credit markets on our business;

•the amount, collectability and timing of our cash flows, if any, from our loans;

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•our ability to obtain and maintain competitive financing arrangements;

•our ability to achieve expected leverage;

•changes in the value of our loans;

•our being subject to regulations and SEC oversight as a BDC, including limits on affiliated transactions, co-investments, asset diversification requirements, and limits on issuance of debt. If we fail to comply with applicable requirements, it may adversely impact our results relative to companies that are not subject to such regulations;

•losses that may arise due to the concentration of our portfolio in a limited number of loans and borrowers;

•our investment and underwriting process;

•the rates of default or recovery rates on our loans;

•the estimated growth in and evolving market dynamics of private credit, including in the cannabis market;

•changes in general economic conditions, in our industry and in the commercial finance and real estate markets;

•the demand for cannabis cultivation and processing facilities;

•shifts in public opinion and state regulation regarding cannabis;

•actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law and certain state laws;

•the degree to which our hedging strategies may or may not protect us from interest rate volatility;

•the availability of investment opportunities for us within our investment guidelines;

•changes in interest rates and impacts of such changes on our results of operations, cash flows and the market value of our loans;

•interest rate mismatches between our loans and our borrowings used to fund such loans;

•the departure of any of the executive officers or key personnel supporting and assisting us from our Adviser, Administrator (as defined below) and/or their affiliates;

•impact of and changes in governmental regulations, tax law and rates, accounting guidance, tariffs and similar matters;

•estimates relating to our ability to make distributions to our shareholders in the future;

•our understanding of our competition; and

•market trends in our industry, interest rates, real estate values, the securities markets or the general economy.

The above list of factors is not exhaustive or necessarily in order of importance. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, some of those assumptions may be based on the work of third parties and any of those assumptions could prove to be inaccurate; as a result, forward-looking statements based on those assumptions also could prove to be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements.

Please see the section entitled “Risk Factors” located in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, filed with the SEC on March 4, 2026, for further discussion of these and other risks and uncertainties which could affect our future results. These forward-looking statements apply only as of the date of this Quarterly Report and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except to the extent we are legally required to disclose certain matters in SEC filings or otherwise.

Overview

Effective January 1, 2026, we are an externally managed, non-diversified management investment company that haselected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Advanced Flower Capital Inc. is an institutional lender that was founded in July 2020 by a

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veteran team of investment professionals. We are a Maryland corporation and externally managed by AFC Management, LLC (in its capacity as investment adviser, the “Adviser”) pursuant to an investment advisory agreement (the “Advisory Agreement”), and we entered into an administration agreement (the “Administration Agreement”) with AFC Management, LLC (in its capacity as administrator, the “Administrator”). We commenced operations on July 31, 2020 and completed our initial public offering in March 2021.

The Advisory Agreement reflects an expanded investment mandate approved by our Board, including the ability to invest in a broader range of debt and other investments than was permitted under our prior REIT structure. While we continue to pursue lending opportunities within the cannabis industry, such investments are no longer our primary focus and are evaluated alongside opportunities in other industries, including private and publicly held middle-market companies and businesses ancillary to the cannabis industry, subject to the requirements of the 1940 Act as applicable to BDCs.

We primarily originate, structure, underwrite, invest in and manage senior secured loans and other types of loans and debt securities to companies ancillary to the cannabis industry as well as companies outside of the cannabis industry. Businesses ancillary to the cannabis industry may include, but are not limited to, brand developers, business services providers, and equipment and consumables providers.

Our objective is to provide attractive risk-adjusted returns over time through cash distributions and capital appreciation, primarily by sourcing, underwriting, structuring and funding loans to lower middle market companies across a broad range of industries.

AFCG TRS1, LLC (“TRS1”), a wholly-owned subsidiary, began operating in July 2021 and was formerly treated as a taxable REIT subsidiary (a “TRS”) prior to the Conversion. TCGDL LLC (“TCGDL”), a wholly-owned subsidiary, began operating in January 2026. The financial statements of TRS1 and TCGDL are consolidated within our consolidated financial statements.

In January 2026, the Company completed a strategic transition from operating as a REIT to operating as a BDC. As a result of this election, the Company is now subject to the regulatory framework applicable to BDCs, including requirements relating to portfolio composition, asset coverage, affiliate transactions, governance, and compliance. The Company was not regulated as a BDC during the year ended December 31, 2025.

Beginning with our taxable year ending December 31, 2026, we intend to elect to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes. Prior to the Conversion, we elected to be taxed as a REIT under Section 856 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 2020 and ending with our taxable year ended December 31, 2025. During that period, we also operated our business in a manner that permitted us to rely on an exemption from registration under the 1940 Act.

Key Components of Results of Operations

Investments

Our primary investment focus is senior secured lending to lower middle market companies across industries.

Our level of investment activity (both the number of investments and the size of each investment) can and will vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to lower middle market companies, the level of merger and acquisition activity for such companies, the general economic environment, trading prices of loans and other securities and the competitive environment for the types of investments we make.

As a BDC, we may not invest in any assets other than "qualifying assets" specified in the 1940 Act, unless, at the time the investments are made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Pursuant to rules adopted by the SEC, "eligible portfolio companies" include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.

Revenues

We expect to generate revenues in the form of interest income from the debt securities we hold and dividends. We expect to receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we

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may receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. In some cases, our investments may provide for deferred interest payments or PIK interest. The principal amount of loans and any accrued but unpaid interest generally become due at the maturity date.

In addition, we expect to generate revenue from various fees in the ordinary course of business such as in the form of commitment, loan origination, structuring, consent, waiver, amendment, syndication and other miscellaneous fees as well as fees for providing managerial assistance to our portfolio companies.

Expenses

Except as provided for in the Advisory Agreement, investment professionals and staff of the Adviser, when and to the extent engaged in providing investment advisory services to us, and the base compensation, bonus and benefits, and the routine overhead expenses, of such personnel allocable to such services, will be provided and paid for by the Adviser. We bear all other costs and expenses of our operations, administration and transactions, including, but not limited to investment advisory fees to the Adviser pursuant to the Advisory Agreement, consisting of (i) a management fee and (ii) an incentive fee comprised of (A) an income-based incentive fee and (B) a capital gains incentive fee, and our allocable portion of compensation, overhead (including rent, office equipment and utilities) and other expenses incurred by the Administrator in performing its administrative obligations under the Administration Agreement.

From time to time, the Adviser, the Administrator or their affiliates may pay third-party providers of goods or services on our behalf. We will reimburse the Adviser, the Administrator or such affiliates thereof for any such amounts. From time to time, the Adviser or the Administrator may defer or waive fees and/or rights to be reimbursed.

Costs and expenses of the Administrator and the Adviser that are eligible for reimbursement by us will be reasonably allocated on the basis of time spent, assets under management, usage rates, proportionate holdings, a combination thereof or other reasonable methods determined by the Administrator.

Updates to Our Loan Portfolio During the Nine Months Ended September 30, 2026

In January 2026, we were fully repaid on our loan with Bloom Hold Co. at par plus accrued interest. The outstanding principal balance of the senior secured term loan on the date of repayment was approximately $25.1 million. We received exit fees of approximately $1.5 million upon repayment of the loan.

In January 2026, we were fully repaid on our loan with Gron Holdings, Inc. at par plus accrued interest. The outstanding principal balance of the senior secured term loan on the date of repayment was approximately $5.4 million. We received a prepayment premium of approximately $0.2 million upon repayment of the loan.

In January 2026, we entered into a $60.0 million senior secured credit facility with STAT Buyer, LLC which was fully funded at closing. The loan was originated at a discount of 2.0% and matures February 1, 2031. The loan bears interest at a rate of SOFR plus 8.5%, with a rate index floor of 2.75%.

In February 2026, we committed $29.7 million of a $60.0 million senior secured credit facility with BCIS AH Borrower LLC, of which $20.1 million was funded at closing. The loan was originated at a discount of 2.5% and matures February 1, 2030. The loan bears cash interest at a rate of 7.5% and 9.0% interest paid-in kind, with the option for the borrower to elect to pay cash interest at a rate of 5.5% and 13.0% interest paid-in kind until the end of the fiscal quarter following the first anniversary of the initial closing date. In April 2026, we funded the remaining unfunded commitment on our investment with BCIS AH Borrower LLC. We funded approximately $9.6 million of additional principal.

In March 2026, we received approximately $6.2 million in total loan payments from a borrower, Devi Holdings Inc.’s (“Devi”) receipt of certain tax credits, which was applied as a reduction to the amortized cost of the loan with Devi (the “Devi Credit Facility”). Following the payment and as of September 30, 2026, our outstanding principal balance under the Devi Credit Facility was approximately $40.6 million. In July 2026, Devi entered into a binding term sheet, through its court-appointed receiver, to sell its Massachusetts and New Mexico assets to J Brrothers LLC for $12.5 million, of which we expect to be allocated our pro rata portion of the sale proceeds. Devi earned a non-refundable deposit of $2.0 million in connection with entering into the binding term sheet. The transaction remains subject to definitive documentation and court approval. No assurance can be provided that it will be consummated by the terms described herein, or at all. AFC Agent continues to monitor the court-appointed receivership installed to maintain the borrower’s operations and maximize value for the benefit of its creditors. See “—Recent Developments” below.

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In April 2026, we entered into a forbearance agreement with High End Holdings LLC (“High End”), under which the Company agreed to forbear from exercising its rights and remedies with respect to the specified defaults for a defined forbearance period, subject to High End’s compliance with certain payment and other obligations. In May 2026, after failing to meet certain milestones under the forbearance agreement, we entered into a forbearance and modification agreement, which extended the forbearance period through June 8, 2026, subject to High End’s compliance with certain payment, capital raise, and other obligations, and amended certain provisions of the credit facilities, including, but not limited to, adjusted monthly amortization payments and amended the maturity date to December 15, 2027. In June 2026, High End met the capital raise obligations, as required in the forbearance and modification agreement, which resulted in a principal repayment and reduction in commitment of $2.0 million under the credit facilities. High End is current on all interest and amortization obligations under the credit facilities.

In April 2026, we committed $2.5 million to each of the notes with Kristoff Buyer, LLC (“Kristoff Buyer”) and Kristoff Parent, LLC (“Kristoff Parent”), respectively. We committed $2.5 million to a $50.0 million term loan as part of a $80.0 million senior secured credit facility with Kristoff Buyer, with the commitment fully funded at closing. The loan was originated at a discount of 2.0% and matures April 2031. The loan bears cash interest at a rate of SOFR plus an applicable margin, which adjusts quarterly between 5.25% and 5.75%, with a rate index floor of 2.50%. Concurrently, we committed $2.5 million of a $25.0 million senior secured credit facility with Kristoff Parent, which was fully funded at closing. The loan was originated at a discount of 2.25% and matures October 2031. The loan bears cash interest at a rate of 10.0% and 3.0% interest paid-in kind, with the option for the borrower to elect to pay interest at a rate of 15.0% paid-in kind.

In May 2026, our credit facility to Justice Cannabis Company and certain affiliates matured without repayment. We are pursuing all rights and remedies against the borrowers under the credit facility.

In June 2026, we provided Story of Ohio LLC (“Story of Ohio”) a waiver of certain financial covenants simultaneously with an amendment of the credit facility. The amendment included, among other items, an increase in monthly amortization payments, an amended maturity date of November 1, 2027, the addition of borrowers and assets to the collateral pool, and cross collateralization of the facility with Story of Maryland LLC (“Story of Maryland”). All other material terms of the credit agreement remained substantially unchanged.

In June 2026, we provided Story of Maryland a waiver of certain financial covenants and unauthorized restricted payments simultaneously with an amendment of the credit facility. The amendment included, among other items, an increase in monthly amortization payments, a reduction of permitted restricted payments, the addition of a parent guaranty, and cross collateralization of the facility with Story of Ohio. All other material terms of the credit agreement remained substantially unchanged.

In July 2026, we committed $7.0 million of a $25.0 million senior secured credit facility with CM Counsel Management LLC, of which $3.1 million was funded at closing. The loan was originated at a discount of 3.0% and matures July 10, 2030. The loan bears cash interest at a rate of three-month SOFR plus 4.5%, with a rate index floor of 4.0%, and 5.0% interest paid-in kind.

In July 2026, we entered into an amendment with Story of Natures Medicine LLC (“Story of Natures Medicine”) to extend the maturity date from July 31, 2026 to December 31, 2026 in exchange for an amendment fee of 1.5% of the outstanding principal balance and the addition of an exit fee of 1.5% of the outstanding principal balance. Story of Natures Medicine is current on all interest and amortization obligations under the credit facility.

In August 2026, we entered into a forbearance agreement under the existing credit facility with Theratrue, Inc. and its affiliates (“Theratrue”), as borrowers, whereby we agreed to waive certain financial covenants and forbear from exercising certain rights, subject to certain conditions. In exchange, the parties amended certain terms regarding Theratrue’s repayment obligations thereunder and Theratrue paid an amendment fee and will pay an exit fee, totaling approximately $0.4 million in the aggregate. Approximately $8.6 million remains outstanding under the credit facility.

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Portfolio and Investment Activity

Our investment activity is presented below (information presented herein is at amortized cost unless otherwise indicated):

The following table presents certain selected information regarding our investment portfolio as of September 30, 2026:

(1)Yield excludes investments on nonaccrual status. Computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount or premium earned on the relevant accruing investments, divided by (b) the total accruing investments at amortized cost or at fair value, as applicable. Actual yields earned over the life of each investment could differ materially from the yields presented above.

(2)Includes investments on nonaccrual status. Excluding investments on nonaccrual status, 55.9% of performing debt investments bore interest at a floating rate and 44.1% bore interest at a fixed rate as of September 30, 2026. See “Item 3 — Quantitative and Qualitative Disclosures About Market Risk.

(3)As a percentage of total amortized cost of investments. Investments on nonaccrual represented 23.5% of total fair value of investments as of September 30, 2026.

Our investments consisted of the following:

(1)The difference between the amortized cost and the outstanding principal amount of the loans consists of unaccreted original issue discount (“OID”) and loan origination costs.

(2)Refer to Note 5.

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Portfolio Asset Quality

As part of the monitoring process, our Adviser, in its capacity as “valuation designee” under, and in accordance with, Rule 2a-5 under the 1940 Act, also employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Adviser grades the credit risk of all investments on a scale of 1 to 5 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (e.g., at the time of origination or acquisition), although it may also take into account under certain circumstances the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors. The grading system for our investments is as follows:

The risk ratings are primarily based on historical data as well as taking into account future economic conditions.

The following table shows the composition of our debt portfolio on the 1 to 5 rating scale as of September 30, 2026:

As of September 30, 2026, the weighted average grade of the investments in our portfolio at fair value was 3.1.

As of September 30, 2026, we had three loans on nonaccrual status, and nonaccrual investments as a percentage of total debt investments at cost and fair value were 36.0% and 23.5%, respectively.