SHF Holdings, Inc.: Form 10-K for the period ended Dec 31, 2023

Filed with the SEC on Apr 1, 2024 and accepted by EDGAR at Apr 1, 2024, 16:06 ET.

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Business

As filed, 83,074 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

Overview

We provide services to a variety of cannabis-industry participants in 41 states, including financial institutions desiring to provide business banking, private banking and commercial banking services to their customers, particularly those customers conducting business in or adjacent to the cannabis industry. Our services include, among other things:

regulatory compliance consulting and software for maintaining “Know Your Customer” (“KYC”) and Bank Secrecy Act (“BSA”) compliance to financial institutions, principally conducted vis-à-vis our proprietary financial services platform;
the origination, onboarding, verification, and servicing of cannabis-related deposit business for and on behalf of our partner financial institutions; and
sourcing, underwriting, servicing, and administering loans issued to cannabis businesses and related entities, which are often also our customers, as well as being customers of our partner financial institutions.

Financial Services Platform

The Company has developed and commercialized a fully compliant financial services platform for financial institutions providing banking services to cannabis-related businesses (“CRBs”) to access and maintain reliable financial services as long as both the financial institution client and the CRB meet regulatory requirements. Our platform has been streamlined and finetuned for the past nine years which enables the Company’s staff to efficiently guide financial institution clients and the CRBs desiring banking services through the onboarding, validation and monitoring process. Our automated platform provides for an efficient and effective management tool allowing our employees to provide continuity of service while enabling compliance staff to monitor BSA activities.

Through the Company’s platform, our financial institution clients have the ability to provide CRBs with access to traditional financial services including wires, debit, ACH, remote deposit capture, business checking and savings accounts, courier and vaulting services, cash management accounts and commercial lending. We believe our services have been implemented consistent with applicable law and regulations, ensuring our financial institution clients will be able to provide CRBs with reliable access to these services. We feel our history of developing processes that satisfy regulatory standards has resulted in a solid reputation with related authorities and solidifies our ability to continue to grow existing services and reduces barriers in expanding into new service offerings.

CRB Deposits

The Company maintains relationships with Partner Colorado Credit Union (“PCCU”) and other financial institutions in which the CRB funds are deposited and monetary transactions are performed. The Company’s agreements with the financial institution allow the Company’s platform to interface with the financial institution’s core banking systems and extract data necessary to monitor the deposit accounts onboarded by the Company’s transactions, such as funds transmissions to or from the accounts, occur through PCCU’s and other financial institution client’s infrastructure.

When a CRB or ancillary service provider approaches PCCU or other financial institution for which the Company provides its onboarding services, an initial onboarding fee is assessed based on the type and complexity of the business. Onboarding is an important part of the KYC requirements set forth in federal guidance. The onboarding process can require a great deal of time depending on the business complexity and the fee we assess is based upon the complexity and required time to complete the process. Additionally, the Company assesses monthly deposit and activity fees, which have historically been the majority of our revenue. These fees are also based on business type and size. Monitoring and validating deposit activity is paramount to the success of the Company’s platform. We believe our compliance-first focus reassures regulators and law enforcement that the Company continues to focus on the safety and soundness of the financial system.

Investment income is also generated when PCCU or other financial institution clients invest CRB deposits. Under our Commercial Alliance Agreement with PCCU, the Company pays 25% of the investment income as a hosting fee to PCCU based on this income. Through its relationship with PCCU, depository amounts invested are typically restricted to low-risk assets with high liquidity and low returns. The investment income is significantly influenced by the levels of CRB deposits and the prevailing interest rate environment for cash and similar assets. We believe that fees based on deposits that we onboard and interest on the daily balance less cash used to collateralize our loan portfolios maintained with financial institutions will represent a significant portion of our revenue by 2024.

Commercial Lending Program

The level of CRB deposits onboarded by the Company and held at PCCU allows for robust lending capacity. During 2020, the Company implemented a commercial lending program, which will be a strong pillar for future revenue and profit growth. The focus will primarily include senior secured lending with smaller loans considered for unsecured lending. Collateral types would include real estate, equipment, and other business assets. The Company’s commercial lending program is built on:

stringent collateral package requirements with ample loan to value coverage;
strong underwriting of collateral and creditworthiness of borrower; and
a deep knowledge and understanding of the industry, borrowers’ operations and the cannabis industry business cycle.

Currently, lending is primarily funded through PCCU using the funds from CRB deposit accounts onboarded by the Company. The Company is currently seeking relationships with additional financial institutions that would fund the Company’s loans and other sources of working capital with which the Company could fund the loans directly. The Company has created a lending program tailored specifically to the unique needs of CRBs while also achieving strong returns on quality loans. While third parties are presently used to provide loan underwriting and servicing, the Company plans on building out a full-service internal lending function to improve the efficiency of our lending process and to increase future profitability.

We feel we have taken a creative and methodical approach in building the Company’s platform, which has allowed us to nationally scale our business. The platform’s policies, training, monitoring and other processes are well established with talented and expert level knowledge. We also plan to further expand the officer level suite with talent that we believe will further our success. We anticipate this combination will provide a competitive advantage for us as we focus on continued growth.

Our Mission

Our mission is to become the United States cannabis industry’s leading financial services provider, by creating a one-stop financial service center upon which cannabis businesses can rely.

We intend to support our mission by providing unparalleled customer service while offering a unique array of innovative technology-based products and services. We believe that our unique banking relationships, reputation of reliability in the cannabis industry, as well as our deep expertise and experience in the industry will position us to serve a broad range of cannabis industry participants, including cannabis cultivators, cannabis processors, dispensaries, multi-state operators, as well as the financial institutions that wish to bank cannabis industry participants. Since 2015, we have facilitated more than $21.5 billion in deposit activity across a footprint of 41 states.

Through a combination of organic growth, increased commercial lending, and further development of our fintech platform, we believe we are all well-positioned to service the cannabis industry, including through the industry’s recent spate of large-scale consolidations.

Industry Overview

The Company provides a variety of onboarding, compliance, and monitoring services to financial institutions and other financial services providers to the large and quickly expanding U.S. cannabis industry. The cannabis industry is one of the fastest emerging consumer end markets in the U.S. According to the 2023 MjBizDaily Research the industry is expected to grow from a $33.6 billion in 2023 to $56.9 billion in 2028 Presently, 38 states plus the District of Columbia and Puerto Rico have legalized medical cannabis, and 24 states plus the District of Columbia, the Virgin Islands, Guam and the Northern Mariana Islands have legalized adult-use cannabis.

The Company’s management is well positioned to assist growing markets; having created a reliable reputation and network over the past nine years. The team is often called upon to work with state and federal officials, regulators, law enforcement and financial service providers to share experience and knowledge on navigating access to financial services. We believe this expertise will allow us to enter new markets with greater ease.

We believe there is currently a small subset of the financial services industry willing to provide a full suite of financial services to CRBs and these providers are extremely fragmented. The Company has been a front runner in assisting financial institutions that desire to provide reliable financial services to the cannabis industry and is well known amongst the leaders in the cannabis financial services arena. Going forward, we feel this positions the Company well to further optimize market position and become the leading provider of access to financial services focused on the cannabis industry.

Business Strategy

We believe that stable long-term growth and profitability are the result of developing comprehensive, strong relationships with our customers by offering a wide range of products and services, delivering unparalleled customer service, maintaining disciplined credit evaluation standards. and building out service components with other single service providers now serving the cannabis industry with similar reliability.

The Company’s strategy is to be a first-mover in future new legal markets through its platform offering CRBs in multiple states access to financial services, through financial institutions that already offer their services to such CRBs. We are primarily focused on providing onboarding, monitoring and compliance services to financial institutions through our fintech platform. Secondarily, we aim to achieve significant growth in domestic onboarded deposits, which we believe will also lead to increases our loan-related activity. Finally, we intend to expand our customer base, both domestically and internationally. We believe that this approach will assist us in gaining greater market share in terms of users of our fintech platform, growing our partner loan portfolio responsibly, and managing our deposit sources to appropriately fund growth in our earning assets, maintaining favorable asset quality compared to industry averages, all of which we intend to sustain our reliable profitability.

As we are not an insured depository institution, nor are we subject to regulation by any state or federal banking regulator, we rely on our partner financial institutions to carry out a significant portion of our operating activities. As such, we enter into a Commercial Alliance Agreement (“CAA”) with each partner financial institution that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and each partner financial institution with regard to the CRB deposit accounts.

For example, we entered into a Commercial Alliance Agreement with PCCU, which sets forth the application, underwriting and approval process for loans from PCCU to their CRB customers, as well as the loan servicing and monitoring responsibilities provided by both PCCU and us. For the loans subject to our CAA with PCCU, we perform a significant portion of the underwriting activities for each loan, including all compliance analysis, credit analysis of the potential borrower, due diligence, and all administration, including hiring and incurring the costs of all related personnel or third-party vendors necessary to perform these services. We receive all interest income on such loans, minus a monthly fee at an annual rate of 0.25% of the then-outstanding principal balance of each loan (0.35% for loans funded and serviced by PCCU). Under the CAA, we agree to indemnify PCCU from all claims related to default-related credit losses as defined in the CAA. The CAA is presently set to expire on March 29, 2025, which may automatically be renewed for additional one-year terms unless a party provides 120 days’ notice of non-renewal or there is a termination for cause, provided that a notice of non-renewal is not provided until 30 months following the signing date.

Our key strategic initiatives include:

Compliance First Philosophy: Due to the fact that we are providing services to financial institutions that desire to provide banking services to CRBs, thereby allowing funds derived from cannabis-related businesses to flow through the financial system, we must ensure the system is protected from illicit activities by monitoring and validating funds along with “knowing our customer.” Our close partnerships with financial institutions demand that we understand the regulatory pressure they face with high risk, cash intensive businesses.
Other Products and Services. We offer products and services to financial institutions that we believe are attractively priced with a focus on convenience and accessibility to the financial institutions’ customers. We offer to our financial institutions clients a means to offer their CRB customers a full suite of online banking services, including access to account balances, statements and other documents, online transfers, online bill payment and electronic delivery of customer statements, as well as automated teller machines (“ATMs”), and banking by mobile devices, telephone and mail. We continuously look for ways of improving our products, services and delivery channels; we accomplish this by upgrading our offerings and technology as the market expands and demands more sophisticated products and services. We have built the present business over the past nine years listening to the needs of the cannabis industry and rising to the occasion to expand our business model with their needs in mind. We will continue to evolve with the industry and lead on this level.
Deposits A Primary Focus upon which to grow relationships. Our focus on growing deposits is twofold on a strategic level. First, we must KYC in order to assist with facilitating the movement of their funds into the financial system with safe and sound practices. We have the benefit of knowing every operational dollar moving in and out of the accounts; this secures a great understanding of the business, operations, cashflow, and continuity. The second most strategic factor of growing deposits is that it is critical to our near and long-term success on our lending strategy. Utilizing our deposit balances on which to lend will allow us to reduce our use of alternative funding sources and the use of core deposits to fund our growth; this, in turn, will improve our mix of deposits and enable us to achieve a lower cost of funds.
Lending to solidify a long-term relationship: The loans issued by our partner financial institutions provides us not only increased profit margins over the long term, but a solid long-term relationship with the client; this ensures reduced client attrition. This is the relationship we will strive for from the KYC competitive advantage we presently hold, with over 720 accounts from which to select the most credit worthy opportunities and understand the business to whom our partner financial institutions lend.
Internal Lending Function: To optimize control of the lending process, facilitate servicing, and grow a participation network of financial institutions interested in securing portions of larger loans. This has enabled us to speed up our processes and scale the lending portfolio in line with our depository growth.
Financial Institution Relationships to scale: It will be important to have the right financial institutions partnering with the Company as we scale our business nationally. So often, financial institutions wish to enter the market only to exit due to the complexities of serving the cannabis industry. We seek out financial institutions that can provide reliable access to additional functionality and balance sheet access for growth. We narrow our partnerships to those providing optimal financial positioning for both our clients and the Company; willing to build as we build.
A Superior Customer Experience to Make Banking with Us Easy. We have already taken steps to better target and attract core deposits and accelerate our digital transformation by making investments in technology and developing fintech partnerships. We have been focused on evaluating digital solutions in a number of areas. This includes investments made to automate our process for opening accounts, small business lending, and the ability to offer our wealth management customers a leading digital platform. Furthermore, our business model allows us to cultivate close relationships between service representatives and clients; this ensures that we know their needs while increasing our knowledge of their operations.
Rationalize Existing and Evaluate New Lines of Businesses. Our strategy and expectations for growth also includes rationalizing existing and evaluating new lines of businesses, to further grow our revenue streams and fee income opportunities. Our plan includes the expansion of our treasury management and wealth management functions, as well as to build our private banking and specialty finance capabilities. This initiative will incorporate a merger and acquisition strategy that allows us to expand more rapidly than new entrants into the market trying to compete.
Significantly Improve Operational Efficiency. Our goal is to improve our efficiency. While we believe there are opportunities to reduce our costs, we also need to identify and automate manual processes that are currently being performed. The additional technology expertise resulting from our acquisition of Rockview Digital Solutions, Inc., a Delaware corporation, d/b/a Abaca will enable us to assess and automate faster.

Improve Brand Awareness. Building brand awareness in the communities we serve will be key for both growing our presence in these markets as well as laying a strong foundation for future expansion. Recently we have placed a significant focus on marketing and business development as we work toward building a greater national brand awareness. Many initiatives are underway including improved signage and promotions, evaluating affinity relationships, and greater community involvement. We will continue to work with state officials, regulators, and legislators to familiarize them with the manner financial services can be available in a safe and sound way for their state; this will ensure their community safety. This multi-prong approach utilizing internal expertise and networks forged over the past nine years will allow us to dominate the financial arena moving forward.
Attract, Retain, Develop and Reward the Best Team Members to Execute our Strategy. We believe that one of our primary differentiator is our culture and the quality of our people delivering our products and services in such a manner that customers receive the best knowledge, expertise, advice, and service when and where they need it. We will continue to attract, retain, develop, and reward the best team members to execute our strategy. In doing so, we will implement development programs that enable employees to pursue career aspirations, expand their depth of knowledge and improve their skill set.

Recent Updates

Satisfaction and Release of EF Hutton Note

On November 2, 2022, EF Hutton, division of Benchmark Investments, LLC (“EF Hutton”), notified the Company that it was in default on a promissory note in the total amount of $2,166,250 executed on September 28, 2022. On March 10, 2023, the Company and EF Hutton agreed to fully resolve the balance due, as well as all obligations set forth in the promissory note, for the total sum of $550,000, which was paid on March 10, 2023. On March 13, 2023, the Company was provided with a fully executed Satisfaction and Release of Promissory Note.

Nasdaq Bid Price Compliance

On March 16, 2023, the Company received a letter from the listing qualifications department staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that for a period 30 consecutive business days, the Company did not maintain a minimum closing bid price of $1 per share for its common stock, as required by Nasdaq listing rule 5550(a)(2). The compliance deadline was extended by Nasdaq on September 13, 2023 for an additional 180-day period, expiring on March 11, 2024. On January 5, 2024, prior to the expiration, Nasdaq notified the Company that it has regained compliance with Listing Rule 5550(a)(2) and closed the matter. As of March 28th, 2024, the Company’s closing bid price was $0.96. If the Company does not maintain a minimum closing bid price above $1 per share for its Common Stock for a period of 30 consecutive business days, Nasdaq may re-open this matter.

PCCU Note and Commercial Alliance Agreement

On March 29, 2023, the Company and PCCU entered into a definitive transaction to settle and restructure the deferred obligations stemming from the September 28, 2022 business combination, including $56,949,800 into a five-year Senior Secured Promissory Note in the principal amount of $14,500,000 bearing interest at the rate of 4.25% (the “Note”); a Security Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all of the assets of the Company; and a Securities Issuance Agreement, pursuant to which the Company will issue 11,200,000 shares of the Company’s Class A Common Stock to PCCU. The Company and PCCU also entered into the CAA that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU.

Central Bank Agreement Termination

On July 20, 2023, we agreed to terminate the Master Services and Revenue Sharing Agreement with Central Bank. Under the agreement, Company provided expertise and intellectual property that allowed Company and Central Bank to jointly serve the deposit banking needs of cannabis related businesses primarily located in Arkansas. The agreement was originally executed by Rockview Digital Solutions, LLC, which was acquired by the Company in October 2022. The termination was effective as of October 1, 2023, allowing for an orderly transition and reduced impact on customer operations. The agreement, originally executed in 2018, was renewable on an annual basis and did not include any material early termination penalties.

Second Amendment to Agreement and Plan of Merger

On October 26, 2023, we entered into: (1) a Second Amendment to Agreement and Plan of Merger (the “Second Amendment”) with SHF Merger Sub I, a Delaware corporation and a direct wholly-owned subsidiary of Parent (“Merger Sub I”), SHF Merger Sub II, LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Parent (“Merger Sub II” and, together with Merger Sub I, the “Merger Subs”), Rockview Digital Solutions, Inc., a Delaware corporation, d/b/a Abaca ( “Abaca”), and Dan Roda, solely in such individual’s capacity as the representative of the Company Securityholders (the “Abaca Stockholders’ Representative”), and (2) a Warrant Agreement with Continental Stock Transfer & Trust Company (solely as warrant agent to the Warrant Agreement).

The First Amendment modified, among other things, the First Anniversary Parent Shares to be issued as consideration so that the First Anniversary Parent Shares equal $12,600,000 minus the note balance of $500,000, plus accrued interest, divided by the 10-day VWAP of the Parent Common Stock for the 10 days immediately preceding the first anniversary of the Closing Date. The Second Amendment modified, among other things, the First Anniversary Parent Shares to be issued as consideration so that the First Anniversary Parent Shares equal $12,600,000 less the Closing Note Balance and Working Capital Adjustment, collectively in the amount of $928,356.16, divided by $2.00 per share. As a result, 5,835,822 shares of Parent Common Stock will be issued as the First Anniversary Parent Shares. The Second Amendment also added a Third Anniversary Consideration Payment of $1,500,000 which will be payable in cash, stock, or a combination of both at the Company’s discretion. If the Company decides to pay with shares, their value will be determined by the 10-day NASDAQ average before the anniversary, with prices ranging between $2.00 and $4.36. Shares given purely for payment won’t be restricted by the Lock-Up Agreement. However, if the Lock-Up Agreement is in effect, the payment will be split into $750,000 cash and an equivalent $750,000 in shares. The lock-up duration for any shares will adhere to the legal minimum. In the event of a company stock consolidation or similar activity, the number of shares to be issued for the payment will be adjusted to reflect the decreased total of outstanding shares. No changes were made to the cash payments of $3,000,000 payable at each of the one-year and two-year anniversaries of the original closing. The Company has also granted the Abaca Stockholders’ Representative the right to nominate three qualified candidates for the Company’s Board of Directors to the Company’s Nominating and Corporate Governance Committee (“NCG Committee”) of which the NCG Committee shall select and recommend one candidate for service on the Company’s Board of Directors in the Company’s 2024 annual proxy statement.

In addition, pursuant to the Warrant Agreement the Company agreed to deliver the Company Securityholders warrants to purchase up to an aggregate of 5,000,000 shares of Parent Common Stock at an initial exercise price of $2.00 per share.

On February 27, 2024, The Company and the Abaca Stockholders’ Representative entered into the First Amendment to Second Amendment to Agreement and Plan of Merger Warrant Agreement and Lock-up Agreement, revising the Second Amendment to their Merger Agreement. This revision modifies the Common Stock’s registration requirements and timelines, updates the warrant agreement by changing warrant durations and eliminating the redemption clause, and adjusts the Lock-Up Agreement to shorten the lock-up period to match the amendment’s effective date. These modifications were mutually agreed upon to ensure both compliance and clarity in the ongoing agreements.

Our Board has unanimously determined that the Second Amendment, First Amendment to Second Amendment and Warrant Agreement are advisable and in the best interests of the Company’s Stockholders. The Board has approved the Second Amendment and Warrant Agreement on the terms and subject to the conditions set forth therein. The foregoing description of the Second Amendment, First Amendment to Second Amendment and the Warrant Agreement, along with the supporting documents, and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Second Amendment, First Amendment to Second Amendment and the Warrant Agreement, copies of which are attached hereto as (Exhibits 2.1 and 2.2) and are incorporated herein by reference.

Sales and Marketing

In 2023, we formally produced our first marketing plan and will be focusing on the following activities to ensure greater exposure and brand awareness:

utilization of a well-known public relations and investor relations firm,
new website to optimize search engine optimization,
referral relationships and success fees,
multiple conference participation and speaking engagements,
customer retention promotions, and
email and e-blast campaigns along with more traditional direct mail marketing activities.

Competition

The banking and financial services industry is highly competitive, and we compete with a wide range of lenders and other financial institutions entering the cannabis market, mostly composed of local and regional banks or credit unions. However, a number of our competitors are much larger financial institutions that have greater financial resources than we do and compete aggressively for market share. These competitors attempt to gain market share through their financial product mix, pricing strategies, and larger banking center networks. However, due to the high-risk nature of providing cannabis services, they find they must create specialized compliance programs to meet the expectations of their regulators, which puts the entire financial institution at risk for enforcement actions. They are realizing that a specialized external program that separates and monitors cannabis activities is a much safer approach; providing the Company another opportunity to work side by side with larger banks.

We also have limited competition with brokerage firms, trust service providers, consumer finance companies, mutual funds, securities firms, insurance companies, third-party payment processors, and other financial intermediaries on various elements of our products and services. While many initially enter the market with rigor, they find themselves exiting the market due to the complexity and demands of serving the cannabis industry. Some of our competitors are not subject to the regulatory restrictions and the level of regulatory supervision applicable to us. Interest rates on loans and deposits, as well as prices on fee-based services, are typically significant competitive factors within the banking and financial services industry.

While we seek to remain competitive with respect to fees charged, interest rates, and pricing, we believe that our broad and sophisticated suite of services relating to commercial banking, our high-quality customer service culture, our positive reputation, and long-standing community relationships enable us to compete successfully within our markets and enhance our ability to attract and retain customers.

Intellectual Property

As we do not have any registered intellectual property, we currently rely on confidentiality, and non-disclosure agreements with our employees and others to protect our proprietary rights. Despite these efforts to protect ourselves from infringement or misappropriation of our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual property in violation of our rights. In the event of a successful claim of infringement against us, or our failure or inability to develop non-infringing intellectual property or license the infringed or similar intellectual property on a timely basis, our business could be harmed.

Seasonality

Most loan production, generally, is subject to seasonality, with the lowest volume typically in the first quarter of each year. This does not necessarily apply to us as we serve the cannabis industry with demand for access to capital at reasonable rates. We expect, based upon our pipeline of demand, a methodical and consistent growth in the lending portfolio.

Loans are extended to cannabis related businesses, including both cannabis licensed and unlicensed ancillary service providers to the cannabis industry. While credit markets are generally tightening due to market conditions, the cannabis industry continues to grow and expand at a rapid pace in light of on-going opening of legalized cannabis markets at the state level. This provides an opportunity for lending, unlike the normal commercial market.

Due to the federally illegal status of cannabis, most cannabis-related businesses, licensed or unlicensed, have faced years of inability to access capital at reasonable rates; these circumstances force them to purchase properties and fund their businesses from personal investment of operational cash, potentially limiting their own growth. This provides for a robust opportunity to lend to established entities with real estate assets free of debt. Businesses are taking the opportunity to leverage such assets to expand and grow their operations while we build a senior secured portfolio ostensibly collateralized with a real estate base.

Furthermore, the industry has been subject to ‘hard money’ lending with annual rates available between 18-36%. This is yet another opportunity for us to offer refinancing of real estate debts at more favorable interest rates; since the depository relationship is necessary as part of the compliance monitoring for credit, we benefit from servicing, monitoring, and validating compliance of depository relationships, earning fees on deposits. This results in a lower cost of capital when considering that we earn on both the depository and lending relationships.

Investments

Our investment policy requires that investment decisions be made based on, but not limited to, the following four principles: investment quality, liquidity requirements, interest-rate risk sensitivity and estimated return on investment. These characteristics are pillars of our investment decision-making process, which seeks to minimize exposure to risks while providing a reasonable yield and liquidity.

Regulations and Legislation

The Company has capitalized on the opportunity to do what financial institutions would not do directly – provide access to financial services to the underserved cannabis industry. Among the factors preventing most financial institutions from providing similar services are:

conflicting state and federal laws regarding legalization;
the high-risk nature of cannabis due to its black-market history and undocumented, illegally earned legacy funds;
the high risk of an existing black-market operating among legal entities; creating additional compliance pressures;
FinCEN guidance issued in 2014 (the “2014 FinCen Guidance”) explaining how financial institutions might serve the cannabis industry, creating potential for differing interpretations and inconsistent standards;
under-the-radar operations of CRBs and the complex nature of the corporate structures created to separate and protect assets, which creates steep learning curves necessitating the specialized cannabis sector training, onboarding, monitoring and funds validation;
BSA obligations to which few financial institutions are willing to dedicate the significant necessary resources, and fear of non-compliance, which can result in millions of dollars in fines assessed against the financial institution.
the lack of a “safe harbor” regulatory provision that would protect officers and directors from prosecution for providing financial services to companies that produce and sell cannabis products provides the business opportunity that we have sought to fulfill.

During April 2021, the United States House of Representatives passed the SAFE Banking Act of 2021 (the “SAFE Act”). The SAFE Act would prohibit federal regulators from fining and penalizing financial institutions and their management/executive team who service legitimate businesses including those in the cannabis industry (i.e. those legal operating in states that have approved cannabis for medicinal and/or adult use). More recently, the SAFER Banking Act updates the Secure and Fair Enforcement (SAFE) Banking Act and has successfully passed the Senate Banking Committee as of September 2023. Neither Act has been brought to or passed by the Senate and therefore is not law. Even with the passage of the SAFE Act, we do not believe the above barriers to entry would be significantly reduced. We feel due to the high cash nature of the business, which we believe will persist in the near and mid-term, and the illicit history of cannabis, many potential competitors will remain hesitant to serve the industry, resulting in an outsized opportunity for the Company.

Additional significant changes involve the Department of Health and Human Services recommendation to reschedule cannabis from a ‘schedule 1’ drug to a ‘schedule 3’ drug classification. This recommendation has been provided to the Drug Enforcement Administration (the “DEA”) and is pending further comment or action from the DEA, if any. The rescheduling of cannabis could impact 280E IRS Tax code presently applied to cannabis licensees; increasing the potential for greater cash flow, increase deposit activity and balances, and ability to service debt.

Since inception (including as a wholly owned subsidiary asset of PCCU), the Company has onboarded over $21.5 billion in cannabis related funds into the financial system with what we believe to be the highest level of monitoring and validation. In conjunction with its financial institution clients, the Company has successfully completed 16 state and federal exams without interruption resulting in reliable financial services. The Company’s onboarded deposits currently consist of over 720 accounts that were onboarded and validated in a methodical manner to ensure continuity of service while under significant regulatory scrutiny. The Company’s services started with only 10 test CRBs resulting in current onboarded accounts representing approximately 70 times growth since the Company began operations. The Company has successfully grown its onboarded deposits at a rapid pace, with a compound annual growth rate (“CAGR”) of 53% from 2015 to 2023. Onboarded deposits processed in 2022 were approximately $3.6 billion and grew to approximately $4.2 billion in 2023.

The Company’s onboarding process for CRBs desiring banking services through PCCU or another financial institution is a multi-step process that is designed to fulfill the financial institution’s “know your customer” requirements and the diligence expectations set forth in the 2014 FinCEN Guidance related to providing services to CRBs, particularly developing an understanding of the normal and expected activity for the business.

The account opening process begins with an application and supporting documentation provided by the CRB, which are uploaded and logged so that, following a quality control review, open items and questions are flagged for follow up. All account-related documentation is stored in a secure database that allows the Company’s oversight, audit and exam functions to have access to all of the CRB’s documents.
As part of the Company’s diligence process, background checks are performed on all business owners, with the need for additional background checks of indirect owners or investors determined in the application review stage.
Other diligence includes, among other things, as applicable, confirmation of licensure, on-site visits and regular audits to review business processes and inspect business locations, verification of sources of funds, review of business and inventory records, and review of other information necessary for a full understanding of the prospective customer’s business and historical operations.
The account opening process is completed with the assistance of a financial institution staff member.

Currently, substantially all deposits are maintained at PCCU, and all transmissions of funds to or from these deposit accounts are handled directly by PCCU. We have expanded, and intend to continue to expand, our relationships with other financial institutions that similarly hold the CRB deposit accounts and handle transmissions of funds to and from the accounts. Although we do not directly hold the deposit accounts, we believe that account retention is a measure of our ability to efficiently and compliantly onboard, validate and monitor CRB accounts. The largest 10 CRB accounts held at PCCU for the period ended December 31, 2023 represented less than 5% of fee income from onboarded deposits, which is currently our largest source of revenue. Building upon the existing foundation, we believe the Company has the ability to continue to grow the financial institution clients for which it onboards deposits and related fee income at a strong pace. In addition, we plan to add access to additional financial services to the Company’s platform, such as merchant processing, custodial relationships, insurance products, broker/dealer services, payment processing services and investment services, although in each case these services would be provided by a third party holding necessary licenses.

The Company had one loan on its balance sheet as of December 31, 2023. The Company also indemnified twenty loans as of December 31, 2023; of which three of these indemnified loans were in excess of 10% of the total balance.

Key Regulatory Challenges

Legal Environment

Cannabis remains a controlled substance under the CSA. The conflict between federal and state laws allows for prosecution at the federal level, assets remain subject to seizure, and there are potential punitive actions by third parties (including regulated) against financial institutions and financial services providers for entering the business. The uncertainty of the legal landscape has increased with the previous Attorney General’s January 2018 rescission of the Cole Memorandum, which was guidance issued in August 2013 from then Deputy Attorney General James M. Cole to federal prosecutors that de-prioritized the enforcement of federal marijuana prohibitions. Although, in our opinion, the authority to prosecute cannabis related violations appears to remain vested in each state’s Attorney General, we believe that the 2014 FinCEN Guidance provide an important framework for compliance to parties providing services to CRBs. We also believe that the successful completion of 16 regulatory examinations of PCCU, our largest financial institutional client, for which we provide onboarding services demonstrates that it is possible to structure onboarding, validation and monitoring services in a compliant manner.

Pending Legislation

Legislation pending at the federal level such as the SAFER Banking Act described above will provide limited protection to financial institutions banking the industry and other financial services providers in as much as the companies and their officers will not be prosecuted or fined simply for servicing the cannabis industry. However, legislation will not protect financial institutions from breaches of BSA regulations, which may lead to significant penalties, often resulting in substantial fines assessed by FinCEN. Given inherent risks associated with the cannabis industry such as the remaining illicit market and illegal past, the need to bank the industry at an elevated level of compliance will not change if the legislation passes at the federal level unless BSA changes, which is unlikely.

Complexity of Business

The nature of the cannabis business is such that businesses utilize sophisticated business structures for asset protection and to create ways to maximize tax efficiencies. This makes for very complex business structures with some companies having many related entities that financial institutions must monitor for adherence to anti-money laundering (“AML”)/BSA regulations. This understanding, diligence and underwriting is labor-intensive work requiring significant hands-on resources.

Regulatory Uncertainty

Due to the divergence between cannabis-related state and federal law, we believe venturing into providing access to banking and financial services for CRBs remains “cutting edge.” We feel that the scrutiny and pressure under which financial institutions and financial services providers must operate to maintain compliant while servicing CRBs, coupled with the pending status of further federal legislation, causes most financial institutions and financial services providers to shy away from the industry. We, however, view this as an opportunity. While the Company is not regulated as a subsidiary of a regulated financial institution, our agreements with our financial institution partners and the nature of our services typically require we provide these services in a compliant manner. This primarily relates to offering services that are compliant with the 2014 FinCEN Guidance and the BSA. In addition, given our history working with credit unions, our services historically have been subject to regulatory oversight from the National Credit Union Administration (“NCUA”). The Company will nevertheless continue to be subject to a range of laws, rules, and regulations, including those applicable to the Company that is an SEC registrant. In order to ensure we provide our services in an appropriate manner, we maintain policies and procedures we believe to be aligned with the requirements of 2014 FinCEN Guidance and the BSA. These policies and procedures are continuously assessed by management and formally reviewed at least annually. All employees are provided ongoing and annual training to ensure our services are delivered in an appropriate manner. An external audit firm is engaged to audit our compliance with certain policies on a quarterly and annual basis.

BSA/AML Regulations and Ramifications

BSA penalties for non-compliance are significant. For example, during March 2022, FinCEN issued a consent order issuing a $140 million civil penalty to a financial institution for failing to address previously identified AML program issues and other BSA compliance issues. This fine was unrelated to CRBs, which we believe provides a higher risk industry. We believe that most institutions cannot withstand such a penalty and will not take that risk. BSA experienced talent, particularly experience with cannabis businesses, is difficult to find and delegating such legal risk to BSA staff takes a great deal of trust, training, and additional resources to monitor activities and protect the financial institution. We believe our history and experience of providing compliant financial services and in conjunction with our financial institution clients successfully completing regulatory examinations reduces our risk in this area and provides us with a competitive advantage. We are committed to providing services in a compliance first fashion.

Cannabis Focused Fintech Competition

Financial regulators have created a real or perceived barrier to entry for most financial institutions. This has created the utilization of fintech models to provided financial services to the cannabis industry. Unregulated fintechs, i.e., those not formally regulated by federal agencies, are not subject to the same restrictions as chartered financial institutions (i.e., concentration limits on the percentage of balance sheet composed of higher risk cannabis deposits). Fintechs may enjoy this less restricted environment for a period of time, but we anticipate these companies will become subject to increasing regulatory requirements. We believe competition at the fintech level remains limited, as the emerging cannabis market requires the creation of sustainable fintech models that understand the regulatory environment, combining technology and regulation. While not fully regulated, fintech models are responsible for moving funds through the financial system via banking partners and must therefore be aware of regulations surrounding the movement of funds and implement BSA programs themselves.

How the Company Addresses Regulatory Challenges

The Company’s solutions are designed to address the key challenges faced by financial institutions desiring to provide banking services to CRBs. Today’s industry participants lack sufficient and reliable access to traditional financial services. We believe our solutions offer valuable services making communities safer, drive growth in local economies and foster long term partnerships.

The Company serves financial institutions desiring to provide banking services to the regulated cannabis industry and maintains a high standard of accountability, transparency, monitoring, reporting and risk mitigation measures while meeting BSA obligations in-line with the 2014 FinCEN Guidance relating to CRBs. BSA obligations vary depending on the growth and complexity of the CRB banking customers’ business, resulting in financial service providers constantly adjusting activities to meet expectations as well as the size of the cannabis portfolio maintained. The Company’s program has actual “hands-on” experience in the market since January 2015. We have increased BSA activities every year to manage emerging market risks and growth of the portfolio. This experience has allowed for the formulation of best practices and standardized processes that provide for a better understanding of these risks in order to mitigate them. We believe that the Company’s brand has been optimized on a national level to include sound and recognized exposure with financial institutions, legislators, governing officials, attorneys’ generals, regulators and the overall cannabis industry.

We have developed proprietary software built specifically for the cannabis industry from input gathered from our experience handling the onboarding of CRB accounts for PCCU. Our software enables our financial institution clients to manage the customer onboarding process, including applications and intake, “know your customer” diligence, and ongoing compliance monitoring, coupled with financial services relationship monitoring. Our software is continuously improved based on our experience and is updated to include new options and functions associated with the emerging cannabis market. Our software is able to run on multiple core banking systems, so as a result we are able to offer this software to financial institution clients who desire to use our software for diligence and monitoring purposes for their own CRB customers without our assistance. Ultimately, we believe that our software can be updated to accommodate new industries and to enhance existing processes for increased efficiencies.

Financial institutions continue to shy away from banking the cannabis market due to cannabis remaining a Schedule 1 drug, thus illegal under federal law. Because there is no “safe harbor” for financial institutions seeking to provide banking services to CRBs, it provides us the opportunity to capitalize on our knowledge and position as a market leader. We believe most financial institutions will not enter the market until federal legalization occurs — especially the large, multi-state financial institutions. Even then, the industry will still be considered a higher-risk banking sector needing strong experience and vetted programs. The 2014 FinCEN Guidance issued in February 2014 detailed the regulatory agency’s compliance and monitoring expectations for financial institutions servicing the cannabis industry. In our opinion, this created a window of opportunity allowing for the ability to serve the cannabis industry. We believe this window of opportunity, along with our proven track record, reduces the risk of negative consequences as a result of servicing the cannabis industry.

It is our opinion that many competitors will attempt to enter the financial services market without understanding the complexity or regulatory demands and we believe many will quit once they assess required resources to maintain a compliant program. We have seen several financial institutions divest their balance sheet of cannabis risk in the last year due to regulatory pressures and demands on BSA dedicated resources.

Banking, or the lack of banking provided to the cannabis industry, remains a national issue due to the conflict in federal and state laws, reputational risk, and AML/BSA regulatory requirements. CRBs have been unbanked or even banked secretly. Many financial institutions start serving the industry only to quickly close down their cannabis focused operations due to i) lack of industry knowledge, ii) regulatory pressure, iii) cash management volume, and iv) the labor-intensive monitoring and reporting requirements.

Traditional fintech operations typically have difficulty obtaining banking relationships in which to conduct business as the financial institution still remains liable for BSA obligations and yet the fintech retains control of all safety and soundness processes - a high and potentially expensive financial institution risk without direct control. The Company, under the umbrella of our partner financial institution, PCCU, methodically built its platform in a regulated manner under the supervision of financial regulators. This allows the Company to continue to operate with attention and activities based upon required regulations and provide financial institution partners with whom we work confidence in our ability to manage the higher-risk cannabis industry. Going forward, the Company will continue to operate in a manner to ensure a smooth transition once regulations are standardized for businesses providing financial services under a fintech model.

Future Legislative Developments

Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in their states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although any change could impact the regulatory structure under which we or our competitors operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to our business strategy, and limit our ability to pursue business opportunities in an efficient manner. It could also affect our competitors differently than us, including in a manner that would make them more competitive. A change in statutes, regulations or regulatory policies applicable to us or any of our affiliates could have a material, adverse effect on our business, financial condition and results of operations.

Employees

As of December 31, 2023, we had forty three full time employees, and two part time employees. None of our employees are represented by a union or parties to a Collective Bargaining Agreement.

Human Capital Management

The Company’s key human capital management objectives are to attract, retain and develop the highest quality talent. To support these objectives, the Company’s human resources programs are designed to continuously develop talent; reward and support our team members through competitive pay and benefits; enhance the Company’s culture through efforts aimed at making the workplace more engaging and inclusive; and engage team members as brand ambassadors of our products and experiences.

Our corporate culture and core values (focus on the customer, innovative and forward thinking, sound financial management, doing what is right, collaborative thinking, developing our people and strengthening our communities) reflect our commitments to our customers, investors, team members, and the communities in which we do business. These values serve as guiding principles to provide a safe and positive work environment for our team members and delivering on our goals to our customers, investors, stakeholders and communities we serve. We believe we have a strong workforce, with a good mix of professional credentials, experience, tenure and diversity, that coupled with their commitment to uncompromising values, provide the foundation for our Company’s success.

The Company’s Human Capital Management includes the following areas of focus:

Experience. Due to the high risk and complex nature of serving cannabis businesses, we strive to build a workforce with experience with the cannabis industry. We can more easily train compliance and financial services, but cannabis expertise is difficult to train.

Talent. Attracting, developing, and retaining the best talent with the right skills is central to our long-term strategy to drive our success.

Our workforce composition is aligned with our business needs. Management trusts it has adequate human capital to operate its business successfully. The Company had 43 full-time equivalent employees, or FTEs, at the end of 2023. Approximately 70% of our workforce is in Colorado and another 16% in Arkansas, with an expanding remote workforce to cultivate new and existing cannabis relationships in multiple states. The others are spread around to six other states.

Talent acquisition efforts focused on sales, business development and income generator roles. Our talent acquisition team uses internal and external resources to recruit highly skilled and talented workers, and we encourage and reward employee referrals for open positions. We hire the best person for the job without regard to gender, ethnicity or other protected traits and it is our policy to comply fully with all federal and state laws relating to discrimination in the workplace.

Fair and Consistent Practices. Employees want to know that if they are working hard and dedicated to the company, the person next to them should be as well. All of our communications, evaluations, assessments, and monitoring ensure that our employees are treated with respect and are able to trust that the company will ensure fair and consistent treatment. Performance evaluations done on a quarterly and annual basis provide for competitive pay increases and access to the equity incentive plan. We work to make them feel part of the team no matter what role they fill. Evaluations are used to build staff expertise, efficiencies and competencies; utilizing objective criteria on which to base rewards.

Learning and Development. Our team members are inspired to achieve their full potential through learning and development opportunities, recognition, and motivation. We invest in creating opportunities to help them grow and build their careers, through a multitude of learning and development programs. These include online instructor-led, cannabis industry focused conferences, and on-the-job learning assignments. Understanding that all employees learn differently, we offer a variety of learning options including traditional classroom learning, virtual learning, any time learning, mobile learning, and social collaboration.

Leadership Development and Succession Planning. We focus on growing leadership internally and ensuring the continuity of business at all levels. We do this with mentoring programs, delegating to train employees to the next level, and specific leadership training programs to encourage staff to reach hire levels. Promoting from within is a solid strategy for long term success and loyalty.

Employee engagement. To assess and improve employee retention and engagement, the Company regularly conducts anonymous surveys to seek feedback from our employees on a variety of topics, including but not limited to, confidence in company leadership, competitiveness of our compensation and benefits package, career growth opportunities, and improvements on how we could make our company an employer of choice. The Company closely monitors the implementation of these surveys and results are shared with our employees and reviewed by senior leadership, who analyze areas of progress or deterioration and prioritize actions and activities to drive meaningful improvements in employee engagement. Management believes that the Company’s employee relations are favorable.

We also hold regular strategic update meetings to review corporate strategies and financial successes to ensure they understand the underlying reason for assigned tasks and goals. We establish regular functional area meetings at which employees are encouraged to provide client and operational feedback, ensuring they contribute and demonstrate future potential talent. Cross functional meetings are also scheduled regularly to ensure cross functional teamwork.

Health and Safety. Consistent with our operating principles, the health and safety of our employees is of top priority. Hazards in the workplace are actively identified and management tracks incidents so remedial actions can be taken to improve workplace safety. The COVID-19 pandemic has underscored for us the importance of keeping our employees safe and healthy. In response to the pandemic, the Company has continued taking actions aligned with the World Health Organization and the Centers for Disease Control and Prevention to protect its workforce so they can more safely and effectively perform their work. We implemented remote work options that have granted employees a combination of working at the office or from home. We ensure further safety by encouraging any employee that might not feel well or have family members that might be ill to work from home in order to protect the office environment.

Diversity and Inclusion. Our diversity and inclusion goals are to build teams that reflect the communities we serve while hiring and supporting a diverse array of talent. Over 45% of our workforce is female with over 45% of management also comprised of female employees. Likewise, we have over 25% of the workforce represented as Latino, Hispanic or African American.

Our diversity and inclusion pillars are also reflected in our employee learning programs, particularly with respect to our policies against harassment and the elimination of bias in the workplace. Annual harassment training is done by all employees to ensure a workplace free of any type of harassment. Any and all complaints are dealt with in the most professional and expedited manner, creating a level of trust between management and staff.

Total Rewards (Compensation and Benefits). As part of our compensation philosophy, we believe in a competitive, total rewards program aligned with our business objectives and the interests of our stakeholders. We remain committed to delivering a compensation program with the fundamental principles of fairness, transparency, efficiency, and compliance with laws and regulations. Based on specific job position and market conditions, our total rewards program combines fixed and variable compensation: base salary, short-term incentive, equity-based long-term incentive, and a broad range of benefits. This compensation approach plays a significant role in our ability to attract, retain and motivate the quality of talent necessary to achieve our strategic business goals and drive sustained performance. Our compensation model engages employees to contribute towards the achievement of shared corporate objectives, while differentiating pay on performance based on individual contributions.

Wellness. The Company takes pride in providing excellent health and wellness benefits to our employees and their families. The benefits package offered includes comprehensive medical, dental, vision, as well as supplemental short and long-term life and out of pocket costs insurance. Along with these benefits, we also offer and fund a portion of employee Health Savings Accounts (HSA) monthly.

Medical Plans. Our nationwide healthcare plans allow full-time and part time employees to select from multiple health plan options. The company provides competitive medical premiums. The Company contributes a percentage of the employee premium depending upon tenure, with those employed longest receiving full payment of premium for employee coverage. The Company also contributes monthly towards the HSA accounts.

Dental, Vision and Legal Plans. Employees are eligible to participate in our dental, vision, and legal plan offerings. The Company contributes up to 100% depending on the plan and chosen tier and provides access to numerous providers across the country. Employees can also choose to purchase out-of-pocket insurance policies providing income protection and cash for services with different plans from accident, short-term disability, long term disability, additional life insurance, and more.

401K Retirement Plan. In addition to health insurance benefits, the Company also offers to all employees a tax-qualified retirement contribution plan, with the Company’s 100% matching contribution up to 4% of a participant’s eligible compensation, and a non-tax qualified retirement contribution plan to certain eligible highly-compensated employees. Our total benefits package supports our employees’ well-being to achieve a healthy and financial lifestyle goal.

PTO Plan. Employees enjoy a solid paid time off (“PTO”) plan that allows for four weeks of personal time off their first year. Employees are also allowed to sell back PTO weeks based upon their tenure, allowing for a benefit many take advantage of to fund vacations, family situations, and even holiday shopping. They are allowed to carry over 80 hours into a new year and excess hours are paid to the employee at that time.

Corporate History

The Company was founded in 2015 as a solution to a major problem that plagued the nascent legalized cannabis industry in Colorado - access to reliable and compliant financial services. Cannabis related funds were already finding their way into the financial system, including via hidden, misrepresented accounts and unlawful banking practices. Based upon our research, we determined that the appropriate step was to protect the financial system from criminal activity and provide legitimacy to the legal state CRBs. From decades of regulatory and banking experience, we created a detailed compliance program to assist financial institutions desiring to provide safe and sound financial services that would accomplish industry accountability and protect the financial system. The compliance program provides onboarding, validation and monitoring services to financial institutions desiring to provide traditional banking services to all types of marijuana, hemp, and CBD businesses, and to ancillary businesses that provide services to the cannabis industry. These ancillary businesses include payroll companies, payment processors, and professionals providing services to and receiving payment from CRBs. As the lawful cannabis industry grew beyond Colorado, the Company evolved its business practices to build a national footprint and currently provides services to financial institutions that provide banking services in 41 states where cannabis is either legal medicinally or for full adult use.

The Company originated as business operations conducted through Partner Colorado Credit Union (“PCCU”), which were transferred to SHF LLC (“SHF”), then an indirect wholly owned subsidiary of PCCU.

SHF Holdings, Inc. (the “Company”), formerly known as Northern Lights Acquisition Corp. (“NLIT”), acquired all of the outstanding membership interests of SHF in a transaction that closed on September 28, 2022 (the “Business Combination”). The Business Combination was consummated pursuant to a Unit Purchase Agreement dated February 11, 2022 (the “Business Combination Agreement”) among SHF, SHF Holding Co., LLC (the direct parent of SHF and a wholly owned subsidiary of PCCU), PCCU, NLIT, a special purpose acquisition company, and its sponsor, 5AK, LLC. Subsequent to the completion of the Business Combination, NLIT changed its name to “SHF Holdings, Inc.” In this Annual Report on Form 10-K (the “Form 10-K”), we use the terms “we,” “us,” “our,” “Safe Harbor” and the “Company” to refer to the business and operations of SHF Holdings, Inc. following the closing of the Business Combination. (Refer to Note 3 to the Consolidated Financial Statements included elsewhere in this Form 10-K for more information regarding the Business Combination.)

SHF was formed by PCCU following the approval of the contribution of certain assets and operating activities associated with operations from both certain branches and Safe Harbor Services, a wholly-owned subsidiary of PCCU, to SHF Holding, Co., LLC. SHF Holding, Co., LLC then contributed the same assets and related operations to SHF, with PCCU’s investment in SHF maintained at the SHF Holding, Co., LLC level (collectively the “Pre-Public Company”). The reorganization effectively occurred July 1, 2021. In conjunction with the reorganization, all of the employees engaged in the operations and certain PCCU employees were terminated from PCCU and hired as SHF employees. The relevant operations of the PCCU branches, and SHF, represent the “Carved-Out Operations.” After the reorganization, the entirety of the Carved-Out Operations were owned by SHF and the Pre-Public Company was dissolved. In addition, effective July 1, 2021, SHF entered into an Account Servicing Agreement and Support Services Agreement with PCCU, which memorialized the operational relationship between SHF and PCCU and which were subsequently amended and restated and are discussed in Note 10 to the Consolidated Financial Statements included elsewhere in this Form 10-K.

On September 28, 2022, the parties consummated the Business Combination, resulting in NLIT acquiring all of the issued and outstanding membership interests of SHF upon exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares of the Company’s Class A Common Stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash, $56,949,801 of which will be paid on a deferred basis. At the closing, 1,831,683 shares of the Class A Common Stock (the “Escrow Shares”) were deposited with an escrow agent to be held in escrow for a period of 12 months following the closing date to satisfy potential indemnification claims of the parties. On December 31, 2023, the 12-month period has expired, and the Company is in discussion with the escrow agent for the release of the Escrow Shares. For more information about the Business Combination, refer to Note 3 to the Consolidated Financial Statements included elsewhere in this Form 10-K. As a result of the Business Combination, PCCU is the Company’s largest stockholder, owning 39.62% of the Company’s outstanding Class A Common Stock as of December 31, 2023.

The Business Combination Agreement was amended to provide for the deferral of a portion of the cash due to PCCU at the closing of the Business Combination. The purpose of this deferral was to provide the Company with additional cash to support its post-closing activities. Furthermore, PCCU also agreed to defer $3,143,388, representing certain excess cash of SHF due to PCCU under the Business Combination Agreement, and the reimbursement of certain reimbursable expenses under the Business Combination Agreement.

On October 26, 2022, the Company, entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA Inc. (“Luminous”), an affiliate of the sponsor of NLIT. Under the Forbearance Agreement, PCCU agreed to defer all payments owed by the Company pursuant to the Business Combination Agreement for a period of six months from the date of the Forbearance Agreement.

On October 31, 2022, the Company entered into an Agreement and Plan of Merger (the “Abaca Merger Agreement”) by and among the Company, SHF Merger Sub I, a Delaware corporation and a direct wholly-owned subsidiary of the Company (“Merger Sub I”), SHF Merger Sub II, LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of the Company (“Merger Sub II” and, together with Merger Sub I, the “Merger Subs”), Rockview Digital Solutions, Inc., a Delaware corporation, d/b/a Abaca (“Abaca”) and Dan Roda, solely in such individual’s capacity as the representative of the security holders of Abaca (the “Abaca Stockholders’ Representative”). On November 11, 2022, the parties to the Abaca Merger Agreement entered into an amendment to the Abaca Merger Agreement to modify the number of shares of the Company’s Class A Common Stock to be issued as consideration thereunder. On November 15, 2022, the parties consummated the transactions contemplated by the Abaca Merger Agreement, as amended. Pursuant to the Abaca Merger Agreement, as amended, (a) Merger Sub I merged with and into Abaca, with Abaca surviving as a direct wholly-owned subsidiary of the Company (“Merger I”) and (b) immediately following the effective time of the Merger I, Abaca merged with and into Merger Sub II (“Merger II” and, collectively with Merger I, the “Mergers”), with Merger Sub II surviving Merger II as a direct wholly-owned subsidiary of the Company.

Pursuant to the Abaca Merger Agreement, as amended, the Company acquired Abaca together with its proprietary financial technology platform in exchange for $30,000,000, paid in a combination of cash and shares of the Company as follows: (a) cash consideration in an amount equal to (i) $9,000,000 ($3,000,000 was payable at the closing of the Mergers (the “Merger Closing”), with an additional $3,000,000 payable at each of the one-year and two-year anniversaries of the Merger Closing), (collectively, the “Cash Consideration”); and (b) 2,100,000 shares of Class A Common Stock at the Merger Closing and $12,600,000 (minus an outstanding note balance of $500,000, plus accrued interest) in shares of Class A Common Stock at the one-year anniversary of the Merger Closing based on a 10-day VWAP (collectively, the “Share Consideration”). Each of the Company, the Merger Subs, and Abaca provided customary representations, warranties and covenants in the Abaca Merger Agreement.

On March 29, 2023, the Company and PCCU entered into a definitive transaction to settle and restructure the deferred obligations, including $56,949,800 into a five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25%; a Security Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all of the assets of the Company; and a Securities Issuance Agreement, pursuant to which the Company will issue 11,200,000 shares of the Company’s Class A Common Stock to PCCU. The Company and PCCU also entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Loan Servicing Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement.

The First Amendment modified, among other things, the First Anniversary Parent Shares to be issued as consideration so that the First Anniversary Parent Shares equal $12,600,000 minus the note balance of $500,000, plus accrued interest, divided by the 10-day VWAP of the Parent Common Stock for the 10 days immediately preceding the first anniversary of the Closing Date. The Second Amendment modified, among other things, the First Anniversary Parent Shares to be issued as consideration so that the First Anniversary Parent Shares equal $12,600,000 less the Closing Note Balance and Working Capital Adjustment, collectively in the amount of $928,356.16, divided by $2.00 per share. As a result, 5,835,822 shares of Parent Common Stock will be issued as the First Anniversary Parent Shares. The Second Amendment also added a Third Anniversary Consideration Payment of $1,500,000 which will be payable in cash, stock, or a combination of both at Company’s discretion. If the Company decides to pay with shares, their value will be determined by the 10-day NASDAQ average before the anniversary, with prices ranging between $2.00 and $4.36. Shares given purely for payment won’t be restricted by the Lock-Up Agreement. However, if the Lock-Up Agreement is in effect, the payment will be split into $750,000 cash and an equivalent $750,000 in shares. The lock-up duration for any shares will adhere to the legal minimum. In the event of a company stock consolidation or similar activity, the number of shares to be issued for the payment will be adjusted to reflect the decreased total of outstanding shares. No changes were made to the cash payments of $3,000,000 payable at each of the one-year and two-year anniversaries of the original closing. The Company has agreed to prepare and file a Registration Statement within 45 calendar days of the execution of the Second Amendment registering the resale of all Registrable Securities. The Company has also granted the Abaca Stockholders’ Representative the right to nominate three qualified candidates for the Company’s Board of Directors to the Company’s Nominating and Corporate Governance Committee (“NCG Committee”) of which the NCG Committee shall select and recommend one candidate for service on the Company’s Board of Directors in the Company’s 2024 annual proxy statement.

On February 27, 2024, The Company and the Abaca Stockholders’ Representative entered into First Amendment to Second Amendment to Agreement and Plan of Merger Warrant Agreement and Lock-up Agreement, revising the Second Amendment to their Merger Agreement. This revision modifies the Common Stock’s registration requirements and timelines, updates the warrant agreement by changing warrant durations and eliminating the redemption clause, and adjusts the Lock-Up Agreement to shorten the lock-up period to match the amendment’s effective date. These modifications were mutually agreed upon to ensure both compliance and clarity in the ongoing agreements.

Our Board has unanimously determined that the Second Amendment, First Amendment to Second Amendment and Warrant Agreement are advisable and in the best interests of the Company’s stockholders, has approved the Second Amendment and Warrant Agreement on the terms and subject to the conditions set forth therein. The foregoing description of the Second Amendment, First Amendment to Second Amendment and the Warrant Agreement, along with the supporting documents, and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Second Amendment, First Amendment to Second Amendment and the Warrant Agreement, copies of which are attached hereto as Exhibits 2.1 and 2.2 and are incorporated herein by reference

Corporate Information

Our mailing address is 1526 Cole Blvd., Suite 250, Golden, Colorado 80401. Our telephone number is (303) 431-3435.

Available Information

We maintain a website at the address https://shfinancial.org/. On our website, you can access, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our annual proxy statement on Schedule 14A, and amendments to those materials filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. Materials are available online as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, the SEC maintains a website at the address www.sec.gov (http://www.sec.gov) that contains the information we file or furnish electronically with the SEC. The information contained on our website or on the SEC’s website is not incorporated by reference in, or considered part of, this Annual Report on Form 10-K.

Emerging Growth Company Status

We are an “emerging growth company,” or “EGC”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

In addition, Section 107 of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period, for as long as it is available. We will remain an EGC until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act and (b) in which we have total annual gross revenue of at least $1.07 billion, (2) the date on which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, and (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning provided in the JOBS Act.

Risk factors

As filed, 394 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

For a complete discussion of the Company’s risks and uncertainties, please refer to the risk factors included under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on April 14, 2023, as well as the limitation factors included in the forward-looking statement in this Form 10-K for the year ended December 31, 2023.

Cybersecurity

As filed, 4,347 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

The Company employs internal resources and third-party service providers to manage, operate and administer our day-to-day operations, business and affairs, subject to the direction and supervision of the Board. The Board recognizes the critical importance of maintaining the trust and confidence of our business partners. The Board plays an active role in overseeing management of our risks, and cybersecurity represents an important component of the Company’s overall approach to risk management and oversight. The Company and its management are committed to protecting the confidentiality of all non-public information related to the Company’s clients, shareholders and their personnel.

Risk Management and Strategy

The Company relies on its Management and employees to execute its comprehensive cybersecurity program, and has adopted a written information security program, which is designed to address applicable requirements under Regulation S-P and the FTC Safeguards Rule. Consequently, the Company also relies on the processes for assessing, identifying, and managing material risks from cybersecurity threats. The processes include, among other things, maintaining secure digital or physical access to information assets, using manual and automated detection methods for malicious code, due diligence of third-party vendors, and engaging a leading provider of cybersecurity services to assess and manage cybersecurity risk. For third-party service vendors that perform a variety of important functions for our business, we seek to engage reliable, reputable service vendors that maintain cybersecurity programs.

All of the Company’s officers and employees are subject to its policies and procedures. The Company utilizes both internal and third-party cybersecurity services, including threat detection and response, vulnerability assessment and monitoring, security incident response and recovery and general cybersecurity education and awareness. We engage in periodic assessment and training regarding the policies, standards and practices designed to address cybersecurity threats and incidents. Our cybersecurity risk management is integrated into our overall enterprise risk management and shares common methodologies, reporting channels and governance processes that apply across our enterprise risk management.

To date, we have not experienced any cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected the Company and we are not aware of any cybersecurity threats that are reasonably likely to affect the Company, including its business strategy, results of operations or financial condition.

Governance

Management oversees the Company’s cybersecurity risk management process. Management has adopted a charter that provides to periodically review and discuss with the Board the guidelines and policies with respect to risk assessment and risk management of cybersecurity and other risk exposures relevant to the Company’s computerized information system controls and security. Management may receive additional training in cybersecurity and data privacy matters to enable its oversight of such risks. Management will report to the Board on the substance of such reviews and discussions and, as necessary, recommend to the Board such actions as the Management deems appropriate.

As noted above, the Company relies on our internal Information Systems in connection with the Company’s day-to-day operations. The Company relies on the internal processes for assessing, identifying, and managing material risks from cybersecurity threats.

The Company’s Chief Financial Officer, Chief Legal Officer, and Head of IT work collaboratively with other employees of the Company to ensure protection of the Company’s Information Systems from cybersecurity threats and to promptly respond to any cybersecurity incidents. These members of the Company’s management team monitor the prevention, detection, mitigation and remediation of cybersecurity threats and incidents and report such threats and incidents to the board when appropriate. They have gained relevant knowledge, skills and experience in information technology and cybersecurity risk management, including overseeing third-party vendors in such areas, over their careers at the Company or other organizations.

Properties

As filed, 496 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

The Company leases approximately 8043 square feet of office space as its executive offices in Golden, Colorado at a cost of approximately $15,470 per month, increasing annually to a maximum of $19,618 for the final six months of the term. The lease term expires July 31, 2029. In addition, the Company also leases approximately 2705 square feet of office space in Little Rock, Arkansas. The lease term continues through and including July 31, 2026 at an expense of approximately $3,000 per month.

Legal proceedings

As filed, 2,436 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

We may, from time to time, in the ordinary course, be subject to various legal proceedings and disputes. In addition, as part of the ordinary course of business, we may be parties to litigation involving claims relating to the ownership of funds in particular accounts, the collection of delinquent accounts, credit relationships, challenges to security interests in collateral and foreclosure interests, which are incidental to our regular business activities. While the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, we are currently not aware of any such pending or threatened legal proceedings or claims that we believe will have or is likely to have, individually or in the aggregate, a material adverse effect on our business, financial position, results of operations or cash flows. Where appropriate, reserves for these various matters of litigation are established, under FASB ASC Topic 450, Contingencies, based in part upon management’s judgment and the advice of legal counsel.

At least quarterly, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For those matters where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments based on our quarterly reviews. For other matters, where a loss is not probable or the amount of the loss cannot be estimated, we have not accrued legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters, if unfavorable, may be material to our financial position, results of operations or cash flows for a particular period, depending upon the size of the loss or our income for that particular period.

Management's discussion and analysis

As filed, 62,991 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

References in this section to “we,” “us,” “our,” “SHF” or the “Company” refer to SHF Holdings, Inc. References to “management” refer to our officers and board of managers. The following discussion and analysis of our financial performance and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements included elsewhere in this Form 10-K This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Overview

Founded in 2015 by Partner Colorado Credit Union (“PCCU”) (please see “Business Reorganization” below for a description of SHF’s organization), SHF’s mission is to provide access to reliable and compliant financial services for the legal cannabis industry. Through that mission and as an early leader with over nine years of experience, SHF is a leading provider of access to reliable and compliance driven banking, lending and other financial services to financial institutions desiring to provide those services to the cannabis industry.

Through our proprietary platform and on a multi-state level, SHF provides access to the following banking related services through PCCU and other financial institutions:

Business checking and savings accounts;
Cash management accounts;
Savings and investment options;
Commercial lending;
Courier services (via third-party relationships);
Remote deposit services;
Automated Clearing House (ACH) payments and origination; and
Wire payments.

Our services allow Cannabis Related Businesses (herein referred to as “CRBs”) to obtain services from financial institutions that allow them to run their business more efficiently and effectively with improved financial insight into their business and access to resources to help them grow. Due to limited availability of payment and other banking solutions for the cannabis industry, most businesses transact with high volumes of cash. Our fintech platform benefits CRBs and financial institutions by providing CRBs with access to financial institutions and financial institutions access to increased deposits with the comfort of knowing that those deposits have been compliantly monitored and validated. By facilitating the daily deposits of cash receipts between CRBs and financial institutions, the risks associated with high cash on hand are mitigated, creating a safer atmosphere for the CRB’s employees and the financial institutions at which the deposit accounts are held. Because the Company is not a financial institution, it does not hold customer deposits. All deposit accounts are held by the Company’s financial institution clients and all transmissions of funds to and from deposit accounts are handled directly by the financial institutions. In an industry with limited capital and financing options, we offer access to loan options at what we believe to be competitive rates, often with less punitive terms than the current industry average. Our financial institution clients offer loan options including senior secured debt and operating lines of debt. Collateral types include real estate, equipment, and other business assets. We also provide access to lending options for ancillary service providers serving the cannabis industry as these businesses also can have difficulty finding reliable financial services.

To ensure access to consistent and dependable banking access to CRBs, we provide our compliance, validation and monitoring services to financial institutions in a compliance driven environment ensuring strict adherence to the Bank Secrecy Act/FinCEN guidance and related anti money laundering provisions. Since inception, the Company has assisted in the processing of more than $22 billion in cannabis related funds. Through its relationship with its financial institution clients, the Company has successfully navigated 16 state and federal banking exams.

In strategically selected geographic areas, the Company has licensed its proprietary software and Safe Harbor Program (the “Program”) to other financial institutions to provide compliance-related services to CRBs. As part of the Program, we provide the following to financial institutions interested in licensing the Program to assist in compliant cannabis banking:

Initial customer due diligence – Know Your Customer;
Customer application management;
Program management support;
Compliance monitoring; and
Regulatory exam assistance.

Business Reorganization

SHF was formed by PCCU following the approval of the contribution of certain assets and operating activities associated with operations from both certain branches and Safe Harbor Services, a wholly-owned subsidiary of PCCU, to SHF Holding, Co., LLC. SHF Holding, Co., LLC then contributed the same assets and related operations to SHF, with PCCU’s investment in SHF maintained at the SHF Holding, Co., LLC level. The reorganization effectively occurred July 1, 2021. In conjunction with the reorganization, all of the employees engaged in the operations and certain PCCU employees were terminated from PCCU and hired as SHF employees. The relevant operations of the PCCU branches, and SHF, represent the “Carved-Out Operations.” After the reorganization, the entirety of the Carved-Out Operations were owned by SHF and the Pre-Public Company was dissolved. In addition, effective July 1, 2021, SHF entered into an Account Servicing Agreement and Support Services Agreement with PCCU, which memorialized the operational relationship between SHF and PCCU and which were subsequently amended and restated and are discussed in Note 10 to the Consolidated Financial Statements included elsewhere in this Form 10-K.

On February 11, 2022, SHF and SHF Holding Co., LLC, the sole member of SHF, and PCCU, the sole member of SHF Holding, Co., LLC, entered into a definitive Unit Purchase Agreement (herein referred to as the “Business Combination”) with Northern Lights Acquisition Corp. (“NLIT”), a special purpose acquisition company, and its sponsor, 5AK, LLC. Subsequent to the completion of the transaction, NLIT changed its name to “SHF Holdings, Inc.” (herein referred to as the “Company”). On September 19, 2022, the parties entered into the First Amendment to the Unit Purchase Agreement to extend the date by which the closing had to occur from August 31, 2022 until September 28, 2022 and provide for the deferral of $30 million of the $70 million in cash due at the closing. On September 22, 2022, the parties entered into the second amendment to the Unit Purchase Agreement to provide for the deferral of a total of $50 million of the $70 million due at the closing. On September 28, 2022, the parties entered into the third amendment to the Unit Purchase Agreement to provide for the deferral of a total of $56,949,800 of the $70,000,000 due at the closing.

Pursuant to the Unit Purchase Agreement, upon the closing of the transaction, NLIT purchased all of the issued and outstanding membership interests of SHF in exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares of the entity’s Class A common stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash. At transaction close, 1,831,683 shares of the Class A Common Stock were deposited with an escrow agent to be held in escrow for a period of 12 months following the closing date to satisfy potential indemnification claims of the parties. In addition, $3,143,388 in cash and cash equivalents representing the amount of cash on hand at July 31, 2021, less accrued but unpaid liabilities, were paid to PCCU at the final transaction close.

The Company’s lending services program currently depends on PCCU as its largest funding source for new loans to CRBs. Under PCCU’s loan policy for loans to CRBs, PCCU’s board of directors has approved aggregate lending limits at the lessor of 1.3125 times PCCU’s net worth or 60% of total CRB deposits. Concentration limits for the deployment of loans are further categorized as (i) real estate secured, (ii) construction, (iii) unsecured and (iv) mixed collateral with each category limited to a percentage of PCCU’s net worth. In addition, loans to any one borrower or group of associated borrowers are limited by applicable National Credit Union Association regulations to the greater of $100,000 or 15% of PCCU’s net worth.

On September 28, 2022, the parties consummated the Business Combination, resulting in NLIT, consistent with the aforementioned parameters, purchasing all of the issued and outstanding membership interests of SHF in exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares of the Company’s Class A Common Stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash, $56,949,801 of which will be paid on a deferred basis.

The purpose of the $56,949,800 deferral is to provide the Company with additional cash to support its post-closing activities. Pursuant to the third amendment to the Unit Purchase Agreement, the deferred consideration was to paid in one payment of $21,949,801 on or before December 15, 2022, and the $35,000,000 balance in six equal installments of $6,416,667, payable beginning on the first business day following April 1, 2023, and on the first business day of each of the following five fiscal quarters, for a total of $38,500,002, including interest of $3,500,002. Furthermore, PCCU agreed to defer $3,143,388, representing certain excess cash of SHF, LLC due to the Seller under the Definitive Unit Purchase Agreement, and the reimbursement of certain reimbursable expenses under the Definitive Unit Purchase Agreement.

Pursuant to the Unit Purchase Agreement, the Company entered into the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement under similar terms as the July 2021 agreements. In addition, in conjunction with the Unit Purchase Agreement, the Company and PCCU entered into a Loan Servicing Agreement. On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Amended and Restated Support Services Agreement, the Amended and Restated Account Servicing Agreement, and the Loan Servicing Agreement.

On October 26, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA Inc. (“Luminous”). As per the terms of the agreement, PCCU has agreed to defer all payments owed pursuant to the Unit Purchase Agreement for a period of six (6) months from the date hereof while the Parties engage in good faith efforts to renegotiate the payment terms applicable to the Deferred Obligation (the “Forbearance Period”).

Purchase Agreement and Public Company Costs

The Business Combination detailed above was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, NLIT was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination is treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a recapitalization. The net assets of NLIT are recognized at fair value (which is expected to be consistent with carrying value), with no goodwill or other intangible assets recorded.

Other related events in connection with the Business Combination are summarized below:

The 2,875,000 of Class B Common Stock converted at the closing to an equal number of shares of Class A Common stock.
Upon closing of the Business Combination, 11,386,139 shares of Class A Common Stock were issued to PCCU as set forth in and pursuant to the terms of the Purchase Agreement.

PCCU was due to receive a cash payment of $3.1 million at the consummation of the Business Combination, which represented the amount of SHF’s cash on hand at July 31, 2021, less accrued but unpaid liabilities. In addition, pursuant to the terms of the Purchase Agreement, the Company is responsible for reimbursing the Seller for its transaction expenses.

Approximately $56.9 million of the $70 million of cash proceeds due to PCCU was deferred and is due to the Seller. Approximately $21.9 million of the amount was due to PCCU beginning December 15, 2022. The residual $35 million is due in six quarterly installments of $6.4 million thereafter. Interest accrues at an effective annual rate of approximately 4.71%. A sum of 1,200,000 shares of Class A Common Stock were escrowed until the amount is paid in full.
The Parent-Entity Net Investment appearing in the balance sheet of the Company amounting to $9,124,297 on the date of business combination was transferred to additional paid in capital.
Immediately prior to the Closing, 20,450 shares of Series A Convertible Preferred were purchased by the PIPE Investors pursuant to the PIPE Securities Purchase Agreements for an aggregate value of $20,450,000. The shares of Series A Convertible Preferred were converted into 2,045,000 shares of Class A Common Stock at a purchase price of $10.00 per share of Class A Common Stock. Twenty (20) percent of the aggregate value was deposited into a third party escrow account for purposes of paying the PIPE Investors any required Registration Delay Payments. Upon the filing of the registration statement 10 calendar days subsequent to closing, 17.5% of the escrow amount was released with the remaining amount once all securities were included in an effective registration statement.
For tax purposes, the transaction is treated as a taxable asset acquisition, resulting in an estimated tax basis Goodwill balance of $43,198,800, creating a deferred tax asset reported as Additional Paid-in Capital in the equity section of the balance sheet as of the date of the business combination. There is not any goodwill for book reporting purposes as no goodwill or other intangible assets are to be recorded in accordance with GAAP.
Preferred Stock: The Company is authorized to issue 1,250,000 preferred shares with a par value of $0.0001 per share with such designation rights and preferences as may be determined from time to time by the Company’s Board of Directors. As of December 31, 2023, there were 1101 preferred shares issued or outstanding and 14,616 preferred shares issued or outstanding on December 31, 2022.

Class A Common Stock: The Company is authorized to issue up to 130,000,000 shares of Class A Common Stock with a par value of $0.0001 per share. Holders of the Company’s Class A Common Stock are entitled to one vote for each share. As of December 31, 2023, and December 31, 2022, there were 54,563,371 and 20,815,912 shares, respectively, of Class A Common Stock issued or outstanding. As of December 31, 2023, and December 31, 2022, 3,667,377 Class A Common Stock are held by the purchasers under the Forward Purchase Agreement dated June 16, 2022, by and among the Company and such purchasers.
Parent-Entity Net Investment: Parent-Entity Net Investment balance in the consolidated balance sheets represents PCCU’s historical net investment in the Carved-Out Operations. For purposes of these consolidated financial statements, investing requirements have been summarized as “Parent-Entity Net Investment” and represent equity as no cash settlement with PCCU is required. No separate equity accounts are maintained for SHS, SHF or the Branches.

Key Metrics

In addition to the measures presented in our consolidated financial statements, our management regularly monitors certain measures in the operation of our business. These key metrics are discussed below.

Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) and Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed EBITDA and Adjusted EBITDA, both of which are non-GAAP financial measures that we calculate as net income before taxes and depreciation and amortization expense in the case of EBITDA and further adjusted to exclude non-cash, unusual and/or infrequent costs in the case of Adjusted EBITDA. Below we have provided a reconciliation of net income (the most directly comparable GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.

We present EBITDA and Adjusted EBITDA because these metrics are a key measure used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of investment capacity. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.

EBITDA and Adjusted EBITDA have limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and
EBITDA and Adjusted EBITDA do not reflect tax payments that may represent a reduction in cash available to us.

Because of these limitations, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results.

A reconciliation of net income to non-GAAP EBITDA and Adjusted EBITDA is as follows:

	Year Ended December 31, 2023	2022
Net loss	$(17,279,847)	$(35,128,083)
Interest expense	1,113,466	705,204
Depreciation and amortization	1,373,707	189,275
Taxes	(1,829,701)	(9,252,893)
EBITDA	(16,622,375)	(43,486,497)
Other adjustments –
Provision for credit losses	290,857	506,212
Change in the fair value of warrants and forward purchase derivatives	1,853,920	8,058,091
Change in fair value of Forward Purchase Agreement	-	33,322,248
Change in the fair value of deferred consideration	(4,570,157)	97,593
Deferred loan origination fees and costs	27,271	(1,890)
Stock based compensation	3,739,156	2,806,336
Goodwill and long-lived intangible assets impairment	18,907,739	-
Adjusted EBITDA	$3,626,411	$1,302,093

The increase in our income on both an EBITDA and Adjusted EBITDA basis for the fiscal year ending December 31, 2023, can be attributed to several key factors. These include a rise in deposits and activity income, which was significantly influenced by the growth in account numbers following the Abaca acquisition. Additionally, there was an increase in employee benefits and general and administrative expenses, coupled with a decrease in professional expenses, as detailed in the ‘Discussion of our Results of Operations’ section below. Other adjustments include estimated future credit losses not yet realized, including amounts indemnified to PCCU for loans funded by them, change in the fair value of warrants and forward purchase derivates, Change in fair value of Forward Purchase Agreement, Stock based compensation and Goodwill and long-lived intangible assets impairment. The Company had entered into a Loan Servicing Agreement with PCCU, pursuant to which the Company agreed to indemnify PCCU for claims associated with CRB activities including any loan default related losses for loans funded by PCCU; the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement. Deferred loan origination fees and costs represent the change in net deferred loan origination fees and costs. When included with a new loan origination, we receive an upfront loan origination fee in conjunction with new loans funded by our financial institution partners and incur costs associated with originating a specific loan. For accounting purposes, the cash received for loan origination fees and costs is initially deferred and recognized as interest income utilizing the interest method.

Other Metrics

For our business operations, we monitor the following key metrics.

Total account balances, number of accounts and average account balances

Our lending capacity is dependent on the size of our managed deposit base and number of active accounts. In addition, fees are generated based on open accounts and account activity. We monitor account activity including deposits, withdrawals and ending account balance daily. Total account balances represent the balance of onboarded and monitored deposits on hand at financial institution clients at period end. Average account balance represents the total account balance divided by the number of accounts at the period end.

Account fees per average active accounts managed

Currently a significant amount of our fees is generated from account openings, active accounts and account activity. As a result, we monitor account openings and closings on a daily, weekly and monthly basis. We strive to meet the appropriate balance between depository balances and fees and therefore review account fees per average number of active accounts managed.

Year Ended December 31,		2023	2022	Change ($)	Change (%)
Average monthly ending deposit balance	(1)	$204,923,090	208,155,596	(3,232,506)	(1.55)%
Account fees	(2)	$7,735,582	5,951,337	1,784,245	29.98%
Average active accounts	(3)	932	967	(35)	(3.62)%
Average account balance	(4)	$219,835	215,259	4,576	2.13%
Average fees per account	(4)	$8,298	6,154	2,144	34.84%

(1) Represents the average of monthly ending account balances

(2) Reported account activity fee revenue

(3) Represents the average of monthly ending active accounts

(4) Refer to the below section – Discussion of Results of our Operations for additional discussion of trends.

For the year ending December 31, 2023, there was a decline in the average number of accounts compared to the previous year, primarily due to a decrease in clientele following the termination of an agreement with the Central Bank. Despite this, the average size and fees associated with accounts saw an increase, largely attributed to the acquisition of Abaca. We anticipate this pattern to persist as our lending program, which generally necessitates borrowers to make deposits at our affiliated financial institutions, remains a key focus.

We are focused on enhancing and growing our lending platform. Incremental lending key metrics will be monitored as this portion of our business grows in volume. Metrics will include average loan balance, average life to repayment, average effective interest rate and loan status, amongst others.

Components of our Results of Operations

Revenue

The Company generates interest and fee income through providing a variety of services to PCCU and other financial institutions to facilitate its banking services to CRBs including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding to account inquiries, responding to customer service inquiries relating to CRB deposit accounts held at financial institution clients, and sourcing and originating loans. In addition, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided under the Safe Harbor Master Program Agreement.

Operating expenses

Operating expenses consist of compensation and benefits, professional services, rent expense, parent allocations, provisions for credit losses and other general and administrative expenses.

Compensation and benefits consist of employee wages and associated benefits while professional services consist of legal, general consulting and accounting fees.

The Company reports a provision for credit losses both as it relates to loans funded internally and those carried by PCCU or other financial institutions. The Company indemnifies PCCU and other financial institutions for the losses on loans to borrowers sourced by the Company and funded by PCCU and other financial institutions. The Company anticipates comparable arrangements with other financial institutions that fund loans to borrowers sourced by the Company.

Other general and administrative expenses consist of various miscellaneous items including account hosting fees, insurance expense, advertising and marketing, travel meals and entertainment and other office and operating expense.

Discussion of our Results of Operations —2023 Compared to 2022 (Year Ended December 31)

Revenue

Year Ended December 31,	2023	2022	Change ($)	Change (%)
Deposit, activity, onboarding income	$8,614,945	$6,063,939	$2,551,006	42.07%
Safe Harbor Program income	130,688	164,062	(33,374)	(20.34)%
Investment income	5,844,836	2,120,640	3,724,196	175.62%
Loan interest income	2,972,434	1,130,178	1,842,256	163.01%
Total Revenue	$17,562,903	$9,478,819	$8,084,084	85.29%

Account fee income consists of deposit account fees, activity fees and onboarding income. Historically, the Company has charged fees based on cannabis related deposit account activity. During 2023, we reduced our fee percentage for cannabis specific accounts in order to ensure we were competitive with the market and for many accounts implemented a flat fee structure for certain CRB accounts based on client specific activity levels. In addition, we receive a flat fee and lower rates for ancillary accounts, which are accounts provided to businesses servicing the cannabis industry in general but do not manufacture, possess, distribute or transport cannabis. The increase in deposit, activity and onboarding income was primarily attributable to the increase in the number of accounts related to the Abaca acquisition. In 2023, PCCU accounted for $5,150,397 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $529,209 in account hosting expenses, in accordance with the Loan Servicing Agreement and the Commercial Alliance Agreement. In 2022, PCCU contributed $5,554,922 to the revenue from similar sources, with account hosting expenses amounting to $255,853 as per the Loan Servicing Agreement provisions. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.

The Company provides similar account services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided under the Safe Harbor Master Program Agreement. Revenue has decreased as we narrow the financial institutions and states we allow under this program and instead focus on servicing CRBs directly. The reduction in Safe Harbor Program income is a result of the reduction in the number of accounts.

We have agreements with PCCU (related party) and Five Star Bank (FSB) where our financial institution clients pay us interest on the daily account balance as per the rates in the agreements. In fiscal 2022 and up to the third quarter of 2023, our investment earnings were solely from interest on deposits at the Federal Reserve Bank, capped at the earnings accrued by PCCU from its reserves. However, a strategic shift in the fourth quarter of 2023 led us to adopt Federal Reserve’s interest rates applied to the daily average balance of SHF customer deposits, with certain exclusions. This method, applied retroactively from the beginning of 2023, resulted in incremental revenue of $549,000 recognized in the fourth quarter. Under our Commercial Alliance Agreement, we pay 25% of the investment income as a hosting fee to PCCU based on this income. In 2023, the income derived from investment income associated with PCCU totaled $5,803,114. In relation to this income, the Company incurred $1,445,517 in investment hosting fees, consistent with the stipulations of the Loan Servicing Agreement and the Commercial Alliance Agreement. In 2022, PCCU’s contribution to investment income amounted to $2,110,572, against which the Company recorded investment hosting fees of $519,406, as governed by the terms of the Loan Servicing Agreement. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.

We had a Loan Servicing Agreement with PCCU (related party) where our financial institution carries the loan balances on their financial statement; the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement. The loan interest income reflects our share of loan interest on issued loans. We are obligated to pay 0.35% on the total outstanding principal of each loan that is funded and serviced by PCCU. Loan interest earned on the Company’s direct loans and the indemnified loans grew as the Company increased its focus on lending. For the year ended December 31, 2023, SHF serviced 22 loans, as compared to 11 loans in the year ended December 31, 2022. In 2023, the Company recognized $2,883,192 in loan interest income attributable to PCCU activities. Related expenses for this income included $81,577 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the Commercial Alliance Agreement. In the preceding year, 2022, loan interest income from PCCU operations amounted to $989,642, with associated loan servicing fees totaling $26,088, pursuant to the same agreements. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.

Operating expenses

Year Ended December 31,	2023	2022	Change ($)	Change (%)
Compensation and employee benefits	$10,334,212	$6,695,319	$3,638,893	55.35%
General and administrative expenses	6,568,662	2,390,539	4,178,123	174.78%
Impairment of goodwill	13,208,276	-	13,208,276	100.00%
Impairment of long-lived intangible assets	5,699,463	-	5,699,463	100.00%
Professional services	1,858,137	1,985,343	(127,206)	(6.41)%
Rent expense	315,615	99,246	216,369	218.01%
Provision for loan losses	290,857	506,212	(215,355)	(42.54)%
Total Operating Expenses	$38,275,222	$11,676,659	$26,598,563	227.79%

Compensation and employee benefits expenses rose due to an increase in stock-based compensation and a higher headcount, in anticipation of business expansion.

General and administrative expenses increased across various categories including: i) $926,111 in investment hosting fees as a result of the increase in investment income, ii) $715,771 in increased bank sharing fees due to the increase in the number of accounts related to the Abaca acquisition, iii) $1,184,432 in amortization and depreciation, and iv) $343,187 in business insurance.

Professional services expense reduced primarily due to the reduction in the legal fees and consulting fees associated with acquisition and SEC filing.

Impairment of goodwill and finite-lived intangible assets arose from the annual impairment assessment conducted on December 31, 2023, and an interim impairment assessment on June 30, 2023, triggered by the termination of the Master Services and Revenue Sharing Agreement with the Central Bank. Under this agreement, the Company offered expertise and intellectual property to cannabis-related businesses primarily in Arkansas.

Provision for credit losses has decreased due to the adoption of ASU 2016-13 as of January 1, 2023, utilizing the modified retrospective method.

Financial Condition

Cash and cash equivalents

Cash, cash equivalents totaled $4,888,769 and $8,390,195 as of December 31, 2023 and 2022, respectively.

Cash flows

For the year ended December 31, 2023, the Company’s cash used in operations was $832,144 compared to cash provided by operations of $1,697,380, for the year ended December 31, 2022. This was mainly due to increase in the operating expenses and payments of the liabilities pertaining to the reverse acquisition along with an additional amount resulting from changes in working capital. See discussion under “Discussion of our Results of Operations” above for more information.

Contract assets and liabilities

Deferred revenue is primarily related to contract liabilities associated with the Company agreements. As of December 31, 2023, SHF reported a contract asset and liability of $0 and $21,922 respectively and on December 31, 2022, SHF reported a contract asset and liability of $21,170 and $996, respectively.

Liquidity and going concern

Liquidity refers to our capacity to fulfill anticipated cash demands, encompassing obligations to settle debt, sustain assets and operations, distribute earnings to shareholders, and cover other typical business expenditures. Our cash outflows predominantly settle towards repaying debt principal and interest, distributing dividends to shareholders, and financing our operational activities. The main contributors to our liquidity are the cash inflows from our operational performance. As of the end of the fiscal year on December 31, 2023, the Company reports no significant commitments to capital investments.

As of December 31, 2023, the Company had $4,888,769 cash and net working capital deficit of $135,355. The Company has also incurred an operating loss of $20,712,319 for the year ended December 31, 2023, and cash flows used in operating activities of $832,144.

Based upon these factors, management of the Company has determined that there is a risk of substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the date these consolidated financial statements have been issued.

If the Company is not able to sustain its present level of operations, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned expansion programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result should the Company not continue as a going concern as a result of this uncertainty.

Critical Accounting Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as disclosure of contingent assets and liabilities. An appreciation of our critical accounting policies is necessary to understand our financial results. In some cases, we could reasonably use different accounting policies and estimates, and changes in our estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates, and our financial condition or results of operations could be affected. We base our estimates on our experience and other assumptions that we believe are reasonable, and we evaluate these estimates on an ongoing basis. We refer to the following accounting estimates as critical accounting estimates, based on their importance to the financial reporting and potential for changes in future periods:

Revenue recognition

The company records revenue when it meets its service obligations, which include various fees charged for financial services such as account maintenance and transaction fees, along with other miscellaneous fees. When determining transaction prices, the company considers potential variations in these fees, which may fluctuate based on customer usage and specific contract terms. This is in line with ASC 606 standards, which require the allocation of transaction prices to the specific services provided within a contract, such as setup and ongoing fees for certain programs. The company also earns revenue from interest on loans, which includes those directly issued and those backed by a partnership with PCCU under a commercial alliance agreement. Investment income consist of interest earned on the daily deposits balance with financial institution. A strategic change in the fourth quarter of 2023 saw the company adopt a new method for calculating interest on customer deposit balances, excluding certain amounts. This new approach, applied retroactively to the start of 2023, led to an additional $549,000 in revenue for that quarter. The company’s customer base mainly consists of financial institutions that serve cannabis-related businesses (CRBs), with revenue primarily generated in the United States. Under the terms of its Commercial Alliance Agreement with PCCU, the company is obligated to pay PCCU various fees, including a loan servicing fee of 0.35% of the current loan balance, and monthly service fees based on account balances, with rates varying for balances below and above $1 million. Additionally, the company must pass on 25% of its investment hosting fees to PCCU, which are calculated from the returns on PCCU-related deposits.

Indemnity liability

The indemnification component of the Loan Servicing Agreement is accounted for in accordance with ASC 460 Guarantees, which follows guidance in ASC 326 - Financial Instruments - Credit Losses (ASC Topic 326), for estimating expected credit losses under the current expected credit loss (“CECL”) methodology, presented in the liabilities section in the consolidated balance sheets as an “Indemnity liability”. The Company accounts for the indemnification component of the Commercial Alliance Agreement for claims related to cannabis-related businesses, with a particular emphasis on default-related credit losses. The Company’s indemnity is secondary to other recovery methods like foreclosure or guarantor recourse. Indemnity payments don’t absolve borrowers of their obligations, maintaining PCCU’s rights to recoveries. The indemnification is considered a general loss contingency under ASC 460 due to uncertainties that could lead to losses, resolved by future events. The Company’s liability for indemnity is based on management’s estimation of probable credit losses at the balance sheet date, influenced by individual loan risk ratings and economic assumptions in the estimation model. These risk ratings are re-evaluated quarterly. The indemnity liability for the pooled component is derived from an estimate of expected credit losses primarily using an expected loss methodology that incorporates risk parameters such as probability of default (“PD”) and loss given default (“LGD”) which are derived from internally developed model estimation approaches for smaller homogenous loans. The PD is quantified by analyzing historical data to determine the rate at which loans have defaulted within the portfolio, relative to the total outstanding loans as of the end of the reporting period. This rate is expressed as a percentage and serves as a key indicator of the likelihood of default across the loan pool. LGD assessments are conducted to estimate the potential loss amount in the event of a default, considering the recoverable value from the collateral liquidation against the remaining loan balance. This involves a detailed analysis of two primary components: the loss on principal, which arises from the gap between the collateral’s liquidation value and the unpaid principal balance of the loan; and the loss associated with various ancillary costs to recover, including, but not limited to, foregone interest, transaction costs, legal and administrative fees, and expenses related to the maintenance and renovation of the property.

Changes in the PD and LGD directly affect the estimated indemnity liability. An increase in PD, indicating a higher likelihood of defaults, necessitates a larger indemnity liability to cover potential losses, impacting the company’s financial reserves. Conversely, a decrease in PD would lower the required indemnity liability, reflecting a more favorable risk outlook. Similarly, a rise in LGD, due to reduced collateral values or higher recovery costs, increases the estimated loss per default, requiring a higher indemnity liability. Conversely, a reduction in LGD suggests more loss recoveries, allowing for a decrease in the indemnity liability.

Stock-based compensation

In conjunction with the 2022 Plan, as of December 31, 2023, the Company had granted stock options and restricted stock units which are described in more detail below:

Stock options

The Company awards stock options to incentivize employee ownership and performance, applying ASC 718 for equity-based payments. Options, with a 10-year term with their fair value determined at the grant date, considering either market price or the Black-Scholes model. This model factors in expected option term, stock price volatility (set at 100% due to significant price fluctuations since listing), risk-free interest rates (aligned with U.S. Treasury rates), and an assumed zero dividend yield, given the Company’s history of not paying dividends. The expected option term is derived using the simplified method, averaging the contractual term and vesting period. Compensation cost is recognized over the service period on a straight-line basis, with immediate recognition of forfeitures. Changes in valuation assumptions could significantly alter fair value estimates.

Restricted Stock Units / Restricted Stock Awards

The Company values equity-based payments under ASC 718, using fair value at grant date for stock awards, recognizing expenses over the service period. Fair value is estimated via the market price or Black-Scholes model, considering variables like expected term, stock volatility, risk-free rates, and forfeiture rates. Given the stock’s limited listing period and significant price drop, volatility is presumed at 100%. Risk-free rates align with U.S. Treasury rates matching the awards’ lifespans. The options’ expected term merges the contractual and vesting durations. The Company assumes zero dividend, reflecting the Company’s history and future dividend outlook, impacting the valuation of stock-based compensation. Changes in valuation assumptions could significantly alter fair value estimates.

Forward Purchase Agreement

The Company, under a Forward Purchase Agreement (FPA) with Midtown East, which was later reassigned to Verdun and Vellar, involved complex transactions around Class A common stock. Initially, about 3.8 million shares were acquired from the market. Post-business combination, the Company disbursed $39.6 million for these shares and associated costs. The FPA allows for an early termination sale of shares by the assignees, with proceeds above the reset price going to them and the rest to the Company. The final settlement at the Maturity Date includes a cash or share payment based on the Forward Price and a Maturity Cash Consideration. In 2022, the reset price adjustment, influenced by the common stock’s trading value and preferred share conversions, significantly reduced the FPA receivable from $37.9 million to $4.6 million. No further transactions or value changes were noted in the year end December 31, 2023, maintaining the FPA receivable’s value. The value of the forward purchase agreement could diminish if the Company issues any securities at a price below the reset price of $1.25 per share before the agreement expires.

Forward Purchase Derivative

The Company records the forward purchase derivative from a business combination as per ASC 815, marking it as an asset or liability at fair value, adjusted each reporting period. Fair value adjustments are recognized in the consolidated statement of operations. The Monte-Carlo Simulation, applying Geometric Brownian Motion for stock price projections, was utilized for valuation in the year ended December 31, 2022. In 2022, the company fully accounted for the maximum contractual liability. Throughout 2023, there were no notable shifts in risk factors that would impact the values of FPA derivatives. As a result, the valuation established on December 31, 2022, was maintained for the year ended December 31, 2023.

Impairment of Goodwill and Finite-lived intangible assets

On November 15, 2022, the company finalized a significant acquisition for $30 million, resulting in the recognition of $19,266,276 in goodwill and $10,800,000 in amortizable intangible assets, which included market-related intangible assets valued at $2,100,000, customer relationships at $2,000,000, and developed technology at $6,700,000. According to ASC 350 and 360, the company is required to perform impairment assessments annually or more frequently if needed. An interim assessment conducted on June 30 utilized a hybrid approach, dividing emphasis between the income approach (one-third) and the market approach (two-thirds) for evaluating goodwill’s fair value. Additionally, specific methods were applied to the intangibles: the Royalty Method for market-related intangibles, the Discounted Cash Flow Method for customer relationships, and the Cost to Re-create Method for developed technologies. This interim evaluation led to a goodwill impairment of $13.2 million, a $1,865,668 impairment for market-related intangible assets, and a $1,814,795 impairment for customer relationships. The annual assessment on December 31, 2023, also adopted the hybrid approach for goodwill valuation and applied the Relief from Royalty Method for market-related intangibles and developed technologies, along with the Multi-Period Excess Earnings Method for customer relationships, resulting in a $2,019,000 impairment for developed technologies.

The impairment determination process is inherently subjective, heavily reliant on assumptions about future conditions and events that might affect asset values. For impairment testing under ASC 350 and ASC 360 regarding goodwill and other intangibles, critical assumptions include future cash flow projections, appropriate discount rate determination reflective of asset-specific risks, the estimated useful lives of intangible assets, and customer attrition rates for assets tied to customer relationships. These assumptions are affected by wider market and economic factors, including interest rate fluctuations, inflation, and sector-specific developments. Due to these variables, impairment test outcomes can significantly shift over time with changes in the company’s operational performance, market dynamics, technological innovations, or strategic decisions like asset disposals or cessation of certain operations. This variability highlights the complex and judgment-based nature of impairment testing, emphasizing the potential for notable fluctuations in impairment charges across different periods.

Warrants Liability

The Company’s accounting for warrants, including Public, Private Placement, PIPE, and Abaca warrants, constitutes a critical accounting estimate due to the significant judgments and assumptions involved in their valuation and the potential impact on our financial statements. These warrants are recorded at fair value on a recurring basis, requiring the use of observable market data and valuation techniques that involve significant estimates and assumptions. For Public warrants, the Company utilizes Level 1 inputs, relying on exchange-traded prices which provide a transparent and observable market valuation. This approach minimizes the level of estimation uncertainty associated with these warrants. Private Placement and PIPE Warrants valuation, as of 2023, has transitioned from third-party reports to internal assessments by the Company, employing Level 3 inputs derived from unobservable inputs. This shift aims to enhance the precision of the valuation process, allowing for adjustments reflective of the unique characteristics of these warrants and prevailing market conditions. Key assumptions in this valuation include the expected volatility of our stock, the risk-free interest rate, the expected life of the warrants, and the dividend yield. Variability in these assumptions could significantly impact the fair value estimates of these warrants. For Abaca Warrants, the Company also utilizes an internal assessment approach with Level 3 inputs. The valuation assumptions include, but are not limited to, the exercise price, the fair market value of the underlying Class A Common Stock, the expected term of the warrants, and the risk-free interest rate. Future variations in these critical assumptions could arise from changes in market conditions, such as fluctuations in the volatility of the Company’s stock, alterations in the risk-free interest rate reflecting broader economic shifts, or adjustments in the expected life of the warrants due to changes in the holders’ exercise behavior. Additionally, regulatory changes or shifts in the market perception of the Company could also necessitate adjustments to these assumptions. Changes in these assumptions could lead to significant variations in the recorded fair value of the warrants, impacting the Company’s financial position and results of operations. The Company closely monitors these assumptions and market conditions to ensure that the warrant valuations accurately reflect their fair market value on reporting date.

Deferred consideration

The Company’s accounting for the deferred consideration arising from the acquisition of Abaca represents a critical accounting estimate, consistent with ASC Topic 815, “Derivatives and Hedging” (“ASC 815 “). This consideration, due to its failure to meet the equity classification criteria under ASC 815, is accounted for as a derivative liability. This approach necessitates the recognition of this obligation on the balance sheet at its fair value, with subsequent adjustments to fair value reflected at each reporting period end. The determination of fair value involves significant judgments and assumptions, particularly in light of the complex terms outlined in the Abaca merger agreement and its amendments. The deferred consideration includes cash payments scheduled at various anniversaries of the merger closing, the issuance of common stock based on specified conditions, and the introduction of additional consideration and stock warrants as per the latest amendments to the agreement. The fair value assessment of these components is influenced by several factors, including the Company’s stock price, the volatility of the stock, the risk-free interest rate, and the specific terms of the deferred and stock considerations as amended. Future variations in the fair value of this derivative liability could arise from changes in the Company’s stock price, fluctuations in market volatility, alterations in the risk-free interest rate, or changes in the terms of the agreement as negotiated with the Abaca stockholders. Such changes could be prompted by evolving business strategies, market conditions, or regulatory environments that impact the financial and operational aspects of the agreement. These estimates and assumptions are subject to inherent uncertainties and the exercise of management’s judgment. Changes in these critical assumptions could lead to significant adjustments in the recorded fair value of the derivative liability associated with the Abaca acquisition’s deferred consideration. These adjustments could materially impact the Company’s financial position and results of operations, emphasizing the importance of the estimates and assumptions used in the valuation of this complex financial instrument. The Company closely monitors related developments and market conditions to ensure the derivative liability is accurately valued, providing transparency and reliability on the reporting date.

Emerging Growth Company Status

SHF is an emerging growth company (“EGC”), as defined in the JOBS Act. Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued until such time as those standards apply to private companies. In electing this relief, the JOBS Act does not preclude an EGC from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. SHF has elected to use this relief and will do so until the earlier of the date that it (a) is no longer an emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result of the elected JOBS Act relief, these combined and consolidated financial statements may not be comparable to companies that do not elect JOBS Act relief or choose to early adopt different accounting pronouncements than SHF.

Internal Control Over Financial Reporting

In connection with our management assessment of internal control over financial reporting as of and for the year ended December 31, 2023, the Company has identified three (3) material weaknesses within our internal controls associated with Revenue Recognition, Complex Financial Instrument and Credit losses. Refer to Item 9A of this document for additional details.

Related Party Relationships

Account Servicing Agreement

The Company had an Account Servicing Agreement with PCCU. SHF provides services as per the agreement to CRB accounts at PCCU. In addition to providing the services, SHF assumed the costs associated with the CRB accounts. These costs include employees to manage account onboarding, monitoring and compliance, rent and office expense, insurance and other operating expenses necessary to service these accounts. Under the agreement, PCCU agreed to pay SHF all revenue generated from CRB accounts. Amounts due to SHF were due monthly in arrears and upon receipt of invoice. This agreement was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.

Support Services Agreement

On July 1, 2021, SHF entered into a Support Services Agreement with PCCU. In connection with PCCU hosting the depository accounts and the related loans and providing certain infrastructure support, PCCU receives (and SHF pays) a monthly fee per depository account. In addition, 25% of any investment income associated with CRB deposits is paid to PCCU. This agreement was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.

Loan Servicing Agreement

Effective February 11, 2022, SHF entered into a Loan Servicing Agreement with PCCU. The agreement sets forth the application, underwriting and approval process for loans from PCCU to CRB customers and the loan servicing and monitoring responsibilities provided by both PCCU and SHF. PCCU receives a monthly servicing fee at the annual rate of 0.25% of the then-outstanding principal balance of each loan funded and serviced by PCCU. For the loans that are subject to this agreement, SHF originates the loans and performs all compliance analysis, credit analysis of the potential borrower, due diligence and underwriting and all administration, including hiring and incurring the costs of all related personnel or third-party vendors necessary to perform these services. Under the Loan Servicing Agreement, SHF has agreed to indemnify PCCU from all claims related to default-related credit losses as defined in the Loan Servicing Agreement. This agreement was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.

Commercial Alliance Agreement

On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement. This Agreement sets forth the terms and conditions of the lending and account-related services, governing the relationship between the Company and PCCU. The Commercial Alliance Agreement replaces and supersedes, in their entirety, the following agreements entered into between the aforementioned parties: the Amended and Restated Loan Servicing Agreement (the “Loan Servicing Agreement”, dated September 21, 2022); the Second Amended and Restated Account Servicing Agreement (“the “Account Servicing Agreement,” dated May 23, 2022, effective February 11, 2022) and the Second Amended and Restated Support Services Agreement (the “Support Agreement,” dated May 23, 2022, effective February 11, 2022).

The Commercial Alliance Agreement sets forth the application, underwriting, loan approval, and foreclosure process for loans from PCCU to borrowers that are cannabis-related businesses and the loan servicing and monitoring responsibilities provided by the Company and PCCU. In particular, the Commercial Alliance Agreement provides for procedures to be followed upon the default of a loan to ensure that neither the Company nor PCCU will take title to or possession of any cannabis-related assets, including real property, that may be collateral for a loan funded by PCCU pursuant to the Commercial Alliance Agreement. Under the Commercial Alliance agreement, the PCCU has the right to receive monthly fees for managing loans. For SHF-serviced loans, which are CRB loans provided by the PCCU but primarily handled by SHF, a yearly fee of 0.25% of the remaining loan balance is applied. On the other hand, loans both financed and serviced by the PCCU are charged a yearly fee of 0.35% on their outstanding balance. These fees are calculated using the average daily balance of each loan for the preceding month. In addition, the Company’s is obligated by the Commercial Alliance Agreement to indemnify PCCU from certain default-related loan losses (as fully defined in the Commercial Alliance Agreement).

In addition, the Commercial Alliance Agreement provides for certain fees to be paid to the Company for certain identified account related services to include: all cannabis-related income, including all lending-related income (such as loan origination fees, interest income on CRB-related loans, participation fees and servicing fees), investment income, interest income, account activity fees, processing fees, flat fees, and other revenue generated from cannabis and multi-state hemp accounts that are hosted on PCCU’s core system for a monthly fee equal to $30.96 per account in 2022, $25.32-$27.85 per account in 2023, and $26.08-$28.69 in 2024. In addition, as it pertains to CRB deposits held at PCCU, investment and interest income earned on these deposits (excluding interest income on loans funded by PCCU) will be shared 25% to PCCU and 75% to the Company. Finally, under the Commercial Alliance Agreement, PCCU will continue to allow its ratio of CRB-related deposits to total assets to equal at least 60% unless otherwise dictated by regulatory, regulator or policy requirements. The initial term of the Commercial Alliance Agreement is for a period of two years, with a one-year automatic renewal unless a party provides one hundred twenty days’ written notice prior to the end of the term.

In fiscal 2022 and up to the third quarter of 2023, our investment earnings were solely from interest on deposits at the Federal Reserve Bank, capped at the earnings accrued by PCCU from its reserves. However, a strategic shift in the fourth quarter of 2023 led us to adopt Federal Reserve’s interest rates applied to the daily average balance of SHF customer deposits, with certain exclusions. This method, applied retroactively from the beginning of 2023, resulted in incremental revenue of $549,000 recognized in the fourth quarter. Under our Commercial Alliance Agreement, we are obligated to remit 25% of the investment hosting fees to PCCU based on this income.

The below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits at December 31, 2023 and December 31, 2022.

	December 31, 2023	December 31, 2022
CRB related deposits	$129,350,998	$161,138,975
Capacity at 60%	77,610,599	96,683,385
PCCU net worth	81,087,746	133,231,565
Capacity at 1.3125	106,670,306	174,866,429
Limiting capacity	77,610,599	174,866,429
PCCU loans funded	55,660,039	18,898,042
Amounts available under lines of credit	525,000	996,958
Incremental capacity	$21,425,560	$154,971,429

The revenue from operation on the statement of operations consists of the following agreement mentioned above for the year ended December 31, 2023, and December 31, 2022:

	Year ended December 31, 2023	Year ended December 31, 2022
Account Servicing Agreement	$3,075,458	$8,823,608
Commercial Alliance Agreement	10,761,245	-
Total	$13,836,703	$8,823,608

The operating expense on the statement of operations consists of the following agreement mentioned above for the year ended December 31, 2023, and December 31, 2022:

	Year ended December 31, 2023	Year ended December 31, 2022
Support Services Agreement	$378,730	$775,259
Loan Servicing Agreement	11,929	26,088
Commercial Alliance Agreement	1,665,644	-
Total	$2,056,303	$801,347

Market risk

As filed, 182 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise required with respect to market risk.

Controls and procedures

As filed, 8,344 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.

Evaluation of Disclosure Controls and Procedures

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements in accordance with GAAP. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has identified three (3) material weaknesses, as described below. Each deficiency was concluded to be a “material weakness”, which is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. Based on these material weaknesses identified in the management evaluation of internal controls over financial reporting, management has concluded that our internal control over financial reporting was not effective as of December 31, 2023.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Management’s Report on Internal Control over Financial Reporting

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2023 due to the material weaknesses described below. In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Annual Report on Form 10-K present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We consider the following material weaknesses to be outstanding as of December 31, 2023:

Revenue Recognition: During fiscal year 2022 and 2023, the Company’s revenue was earned through certain related party contracts with PCCU that define contractually the revenue earned by the Company from PCCU for account servicing. The Company has identified a material weakness in our internal control over financial reporting related to the need to enhance the design and operating effectiveness of internal controls over the review of revenue recognition from allocations that occurs on a monthly basis between the Company and PCCU.

To remediate this material weakness, the Company has implemented a monthly process with enhanced management review controls to perform and review revenue recognition. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures.

Complex Financial Instruments: During fiscal year 2022 and 2023, the Company had a material weakness with regard to the ineffectiveness in management review controls of the accounting, disclosure and valuation of complex financial instruments (warrants, Forward Purchase Agreement, and stock-based compensation).

To remediate this material weakness, the Company has implemented a quarterly process with enhanced management review controls to perform and review complex financial instruments. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures.

Credit Losses: During the three months ending March 31, 2023, the Company identified a material weakness with regard to the initial implementation of CECL. This included initially not having supporting documentation of the model aligning to the calculations recorded, and incorrectly applying the modified retrospective adoption through the Consolidated Statements of Operations only, as opposed to the Consolidated Statements of Parent-Entity Net Investment and Stockholders’ Equity on January 1, 2023.

To remediate this material weakness, the Company enhanced the allowance model documentation during the period from June 30, 2023, through December 31, 2023, and has implemented a quarterly process with enhanced management review controls to perform and review CECL, however remediation requires ensuring these controls are effective over time. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures.

With the implementation of our remediation plans for each material weakness, we believe, in subsequent periods, these material weaknesses can be remediated.

We plan to continue to assess and improve our internal controls and procedures and to take further action as necessary or appropriate to address any other matters we identify.

Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. A failure to maintain effective internal controls over financial reporting could result in errors in its financial statements that could require the Company to restate past financial statements, cause the Company to fail to meet its reporting obligations and cause investors to lose confidence in the Company’s reported financial information, all of which could materially and adversely affect the Company.

Changes in Internal Control over Financial Reporting

Other than as noted above in the December 31, 2023 material weaknesses, there was no changes in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2022 covered by this Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Figures reported in this filing

Standardized line items from the XBRL in this filing, for the period ended 2023-12-31. Comparative periods it repeats are left out.

Figures reported in this filing
Line item	Period	Value	XBRL concept
Revenue	12 months2023-01-01 to 2023-12-31	$17.6m	us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax
Operating income	12 months2023-01-01 to 2023-12-31	−$20.7m	us-gaap:OperatingIncomeLoss
Interest expense	12 months2023-01-01 to 2023-12-31	$1.1m	us-gaap:InterestExpense
Income tax	12 months2023-01-01 to 2023-12-31	−$1.8m	us-gaap:IncomeTaxExpenseBenefit
Net income	12 months2023-01-01 to 2023-12-31	−$17.3m	us-gaap:NetIncomeLoss
Diluted EPS	12 months2023-01-01 to 2023-12-31	−$0.41	us-gaap:EarningsPerShareDiluted
Basic EPS	12 months2023-01-01 to 2023-12-31	−$0.41	us-gaap:EarningsPerShareBasic
Diluted shares (weighted)	12 months2023-01-01 to 2023-12-31	42,574,563 shares	us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding
Operating cash flow	12 months2023-01-01 to 2023-12-31	−$832.1k	us-gaap:NetCashProvidedByUsedInOperatingActivities
Capital expenditure	12 months2023-01-01 to 2023-12-31	$208.4k	us-gaap:PaymentsToAcquirePropertyPlantAndEquipment
Cash and equivalents	At period end2023-12-31	$4.9m	us-gaap:CashAndCashEquivalentsAtCarryingValue
Current assets	At period end2023-12-31	$7.8m	us-gaap:AssetsCurrent
Total assets	At period end2023-12-31	$67.9m	us-gaap:Assets
Current liabilities	At period end2023-12-31	$7.9m	us-gaap:LiabilitiesCurrent
Total liabilities	At period end2023-12-31	$33.5m	us-gaap:Liabilities
Long-term debt	At period end2023-12-31	$55.6m	us-gaap:LongTermDebt
Shareholders' equity	At period end2023-12-31	$34.4m	us-gaap:StockholdersEquity

Source: SEC EDGAR, the filing index for accession 0001493152-24-012360. Last ingested by Listed: Oct 30, 2026, 17:32 ET. Listed shows no prices and gives no investment advice.