Advanced Flower Capital Inc

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.

Overview

Advanced Flower Capital Inc. is an institutional lender that was founded in July 2020 by a veteran team of investment professionals. We primarily originate, structure, underwrite, invest in and manage senior secured loans and other types of mortgage loans and debt securities, with a specialization in loans to cannabis industry operators in states that have legalized medical and/or adult-use cannabis. Our investment guidelines primarily relate to deploying capital in attractive lending opportunities to state law-compliant cannabis operators, typically secured by real estate, equipment, cash flows and license value.

Our objective is to provide attractive risk-adjusted returns over time through cash distributions and capital appreciation primarily by providing loans to state law compliant cannabis companies. The loans we originate are primarily structured as senior loans typically secured by real estate, equipment, cash flows and the value associated with licenses (where applicable) and/or other assets of the loan parties to the extent permitted by applicable laws and the regulations governing such loan parties. Some of our cannabis-related borrowers have their equity securities listed for public trading on the Canadian Securities Exchange (“CSE”) in Canada and/or over-the-counter (“OTC”) in the United States.

Index

As states continue to legalize cannabis for medical and adult-use, an increasing number of companies operating in the cannabis industry need financing. Due to the current capital constrained cannabis market, which does not typically have access to traditional bank financing, we believe we continue to be well positioned to act as a prudent financing source to cannabis industry operators given our stringent underwriting criteria, size and scale of operations and institutional infrastructure.

We are a Maryland corporation and externally managed by AFC Management, LLC, a Delaware limited liability company (our “Manager”), pursuant to the terms of the Amended and Restated Management Agreement, dated January 14, 2021, by and between the Company and AFC Management, LLC (as amended from time to time, the “Management Agreement”). We commenced operations on July 31, 2020 and completed our initial public offering (“IPO”) in March 2021.

We have elected to be taxed as a REIT under Section 856 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2020. We believe that we have qualified as a REIT and that our current and proposed method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us continuing to satisfy numerous asset, income and distribution tests, which in turn depends, in part, on our operating results and ability to obtain financing. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940.

Our wholly-owned subsidiary, AFCG TRS1, LLC (“TRS1”), operates as a taxable REIT subsidiary (a “TRS”). TRS1 began operating in July 2021. The financial statements of TRS1 are consolidated within our consolidated financial statements.

Spin-Off

On February 22, 2024, we announced a plan to separate into two independent, publicly traded companies. Prior to the Spin-Off, Sunrise Realty Trust, Inc. (“SUNS”) held our commercial real estate (“CRE”) portfolio as our wholly-owned subsidiary. On July 9, 2024, we completed the separation of our CRE portfolio through the spin-off of SUNS into an independent, publicly traded REIT (the “Spin-Off”) through a pro-rata distribution of all of the outstanding shares of SUNS common stock to our shareholders of record as of the close of business on July 8, 2024 (the “Record Date”). Our shareholders of record as of the Record Date received one share of SUNS common stock for every three shares of our common stock held as of the Record Date. We retained no ownership interest in SUNS following the Spin-Off. In connection with the Spin-Off, the operating results of the SUNS business through the date of the Spin-Off are reported in net income from discontinued operations, net of tax in the consolidated statements of operations for all periods presented. The related assets and liabilities are reported as assets and liabilities of discontinued operations on the consolidated balance sheets. Cash flows from the Company’s discontinued operations are presented as such in the consolidated statements of cash flows for all periods presented.

Unless otherwise noted, all amounts, percentages and discussion below reflect only the results of operations and financial condition from our continuing operations.

Developments During the First Quarter March 31, 2025:

Updates to Our Loan Portfolio During the First Quarter March 31, 2025

In January 2025, AFC Agent placed Private Company K in a consensual receivership to operate the collateral assets for the benefit of the Company, as a secured lender, and all other stakeholders.

In February 2025, we entered into a $15.0 million senior secured credit facility with Private Company U, which was fully funded at closing. The loan was originated at a discount of 2.5% and matures March 1, 2028. The loan bears interest at 14.0%.

In February 2025, AFC Agent, on behalf of the Company and the other lenders, initiated a mortgage foreclosure proceeding in connection with the forbearance agreement entered into by the Company and Subsidiary of Private Company G in March 2024 (the “2024 Subsidiary of Private Company G Forbearance Agreement”) over a cultivation facility owned by Subsidiary of Private Company G. The Company also delivered a reservation of rights letter to Subsidiary of Private Company G concerning the occurrence of events of default and forbearance defaults under the credit agreement and the 2024 Subsidiary of Private Company G Forbearance Agreement, respectively, including unpermitted payments, the failure to maintain and preserve one of Subsidiary of Private Company G’s cannabis licenses and its cultivation facility and its failure to cooperate with us in the foreclosure proceeding. We believe these defaults have had a material adverse impact on

Index

Subsidiary of Private Company G’s ability to operate its business and make payments under the credit agreement. AFC Agent is also therefore pursuing a payment guarantee from the parent company and the beneficial shareholders of Subsidiary of Private Company G that guaranteed the loan. See below under “Recent Developments—Subsidiary of Private Company G Updates”.

At-the-Market Offering Program

In April 2022, we filed a shelf registration statement on Form S-3 with the SEC, registering the offer and sale of up to $1.0 billion of securities (the “Prior Shelf Registration Statement”). The Prior Shelf Registration Statement enabled us to issue shares of common stock, preferred stock, debt securities, warrants, rights, as well as units that include one or more of such securities. On April 17, 2025, we filed a new shelf registration statement on Form S-3 (File No. 333-286604) (the “Shelf Registration Statement”) to replace the Prior Shelf Registration Statement, which was declared effective on April 25, 2025.

The Prior Shelf Registration Statement also included a prospectus for the ATM Program to sell up to an aggregate of $75.0 million of shares of our common stock that may be issued and sold from time to time under the Sales Agreement, dated April 5, 2022 (the “Sales Agreement”), with Jefferies LLC and Citizens JMP Securities LLC, as Sales Agents. Under the terms of the Sales Agreement, we have agreed to pay the Sales Agents a commission of up to 3.0% of the gross proceeds from each sale of common stock under the Sales Agreement.

During the three months ended March 31, 2025, the Company did not sell any shares of the Company’s common stock under the Sales Agreement. As of March 31, 2025, the Company’s remaining authorization under the Sales Agreement was approximately $47.4 million.

The ATM Program and related Sales Agreement expired in April 2025, in connection with the expiration of our Prior Shelf Registration Statement. We do not currently have an ATM program, but may enter into a new ATM program and related sales agreement in the future pursuant to which sales may be made under the Shelf Registration Statement.

Dividends Declared Per Share

For the three months ended March 31, 2025, we declared the following cash dividend:

Recent Developments

In April 2025, we receiveda voluntary prepayment from Private Company L of approximately $2.0 million, which was applied to our outstanding principal balance, recognizing $48.8 thousand in exit fees.

In April 2025, we entered into a $14.0 million senior secured credit facility with Subsidiaries of Private Company V. The loan was originated at a discount of 3.0% and matures April 1, 2029. The loan bears cash interest at 12.5% and 1.5% interest paid-in kind. As of the date of this Quarterly Report on Form 10-Q, approximately $10.5 million was drawn and the remainder is available to be drawn within one year of closing. Due to the timing of closing, the cash funding of approximately $10.1 million, net of OID, for our loan with Subsidiaries of Private Company V was held by the title agent and not yet complete as of March 31, 2025 and was recorded within prepaid expenses and other assets on these consolidated financial statements. The loan with Subsidiaries of Private Company V closed subsequent to the first quarter 2025.

In May 2025, we were fully repaid on our loan with Private Company T at par plus accrued interest. The outstanding principal of the senior secured term loan on the date of repayment was approximately $7.7 million.

On April 10, 2025, we and AFC Agent (collectively, “AFC Parties”) commenced an action in the United States District Court for the Southern District of New York captioned Advanced Flower Capital Inc. et al. v. Kanovitz et al., Case No. 1:25 cv-02996-PKC, against two Subsidiary of Private Company G shareholders (the “Guarantors”). The complaint asserts claims for violations of the Racketeer Influenced and Corrupt Organizations Act, breach of a shareholder guaranty, tortious interference with contract, fraud, aiding and abetting fraud, and conversion. The Company alleges that the Guarantors, as co-owners and managers of certain Subsidiary of Private Company G entities who are borrowers of the Company, engaged

Index

in a pattern of fraudulent conduct, including misrepresentations, improper transfers of funds, and concealment of defaults and assets, in connection with loans provided by the Company to finance the operations of non-borrower Subsidiary of Private Company G entities for their personal benefit.

On April 17, 2025, two Subsidiary of Private Company G-affiliated cannabis companies that are borrowers under a September 30, 2021 credit agreement (the “Plaintiffs”), commenced an action in the United States District Court for the District of New Jersey captioned Hayden Gateway LLC, et al. v. Advanced Flower Capital Inc., et al., Case No. 3:25-cv-02789-ZNQ-JBD, against the AFC Parties. The complaint alleges, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of the New York Uniform Commercial Code in connection with the Company’s termination of a forbearance agreement between the parties. Plaintiffs seek declaratory and injunctive relief, as well as compensatory and other damages, alleging that the Company wrongfully declared defaults, seized funds from Plaintiffs’ operating accounts, and sought to foreclose on certain collateral. On May 9, 2025, this court granted Plaintiffs’ request for a preliminary injunction, enjoining the Company from seizing any of Plaintiffs’ assets or cash or seeking any remedy for Subsidiary of Private Company G’s failure to (a) cooperate in the foreclosure proceeding on the Pennsylvania property; (b) provide annual audited financial statements for fiscal years 2023 and 2024; (c) obtain a certificate of occupancy for the New Jersey facility by May 15, 2024. The Court did not consider Subsidiary of Private Company G’s failure to maintain and preserve one of its subsidiary cannabis licenses or its unpermitted payments. The credit facility to Subsidiary of Private Company G matures on May 1, 2026.

On April 28, 2025, AFC Agent commenced an action in the Supreme Court of the State of New York, County of New York, captioned AFC Agent LLC v. JG HoldCo LLC, Index No. 652644/2025, against JG HoldCo LLC, the parent of Subsidiary of Private Company G. The complaint asserts a claim for breach of contract arising from JG HoldCo LLC’s failure to satisfy its obligations under a guaranty agreement related to a credit agreement between the Company and certain subsidiaries of Subsidiary of Private Company G.

Because each of these actions are in their early stages, no reasonable estimate of possible outcomes resulting from these legal actions, if any, can be made at this time.

Key Financial Measures and Indicators

As a commercial real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, book value per share and dividends declared per share.

Non-GAAP Metrics

Distributable Earnings

In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations. Distributable Earnings is a measure that is not prepared in accordance with GAAP. We use these non-GAAP financial measures both to explain our results to shareholders and the investment community and in the internal evaluation and management of our businesses. Our management believes that these non-GAAP financial measures and the information they provide are useful to investors since these measures permit investors and shareholders to assess the overall performance of our business using the same tools that our management uses to evaluate our past performance and prospects for future performance. The determination of Distributable Earnings is substantially similar to the determination of Core Earnings under our Management Agreement, provided that Core Earnings is a component of the calculation of any Incentive Compensation earned under the Management Agreement for the applicable time period, and thus Core Earnings is calculated without giving effect to Incentive Compensation expense, while the calculation of Distributable Earnings accounts for any Incentive Compensation earned for such time period.

We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) stock-based compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for (reversal of) current expected credit losses, (v) TRS (income) loss, net of any dividends received from TRS and (vi) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors.

Index

We believe providing Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to shareholders in assessing the overall performance of our business. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that shareholders invest in our common stock, we generally intend to attempt to pay dividends to our shareholders in an amount at least equal to such REIT taxable income, if and to the extent authorized by our Board. Distributable Earnings is one of many factors considered by our Board in authorizing dividends and, while not a direct measure of net taxable income, over time, the measure can be considered a useful indicator of our dividends.

Distributable Earnings is a non-GAAP financial measure and should not be considered as a substitute for GAAP net income. We caution readers that our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings may not be comparable to similar measures presented by other REITs.

The following table provides a reconciliation of GAAP net income to distributable earnings:

Book Value Per Share

We believe that book value per share is helpful to shareholders in evaluating our growth as we scale our equity capital base and continue to invest in our target investments. The book value per share of our common stock as of March 31, 2025 and December 31, 2024 was approximately $8.89 and $9.02, respectively.

Factors Impacting our Operating Results

The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest margin, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace. Our net interest margin, which includes the accretion and amortization of OID, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by our borrowers.