SHF Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited Condensed Consolidated Financial Statements and the related notes thereto appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Unless the context otherwise requires, references in this section to “we,” “us,” or “our” refer to SHF Holdings, Inc and its subsidiaries (herein referred to as the “Company”). References to “management” refer to our officers and Board of Directors. The following discussion and analysis of our financial performance and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, results of operations, revenues, operating expenses, and capital expenditures, sales and marketing initiatives and competition. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “suggests,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

We discuss many of these risks in other filings we make from time to time with the SEC. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q, which are inherently subject to change and involve risks and uncertainties. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.

Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed with the SEC, including our Annual Report on Form 10-K, filed with the SEC on April 1, 2024, with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

We provide services to a variety of cannabis-industry participants in 41 states, including financial institutions that support 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 enabled service 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 software-based services platform for financial institutions providing banking services to cannabis-related businesses (“CRBs”). Our software enabled services access and maintain reliable financial information to enable both our financial institution clients and our CRB clients to meet regulatory requirements. Our platform has been streamlined and fine-tuned since 2014. Our software platform enables the Company’s staff to efficiently guide financial institution clients and 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 financial services 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 while simultaneously reducing barriers to expanding into new service offerings.

CRB Deposits

The Company maintains relationships with PCCU and other financial institutions in which CRBs’ 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 to monitor account activity for those accounts the Company facilitated the onboarding.

The Company earns income on deposit activity and from onboarding fees, which have historically been the majority of our revenue. When we help establish a new relationship between a CRB or ancillary service provider with our financial institution clients 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. Additionally, the Company assesses fees monthly based on the frequency and amount of deposit activity fees of the applicable CRB client. These fees are also based on business type and size.

The Company earns investment income based on the balances maintained on deposit by our CRB clients with our financial institution clients. Our financial institution clients invest the deposits of our CRB clients principally in US Treasury Federal Overnight Securities. We recognize revenue pursuant to the interest earned on these deposit balances and incur a cost of revenue we owe to the financial institution for facilitating the investment activity. Under our PCCU CAA, the Company pays 25% of the investment income as a hosting cost of revenue fee to PCCU based on the earned investment income from the CRB deposit balances maintained at PCCU. Through its relationship with PCCU, depository amounts invested are typically restricted to low-risk assets with high liquidity and modest returns. The investment income is significantly influenced by the levels of CRB deposits and the prevailing interest rate environment for cash and similar assets.

Commercial Lending Program

We earn interest income from lending activity we facilitate between our CRB clients and our financial institution clients and to a lesser extent, direct lending by the Company. The robust CRB deposits onboarded by the Company and held at PCCU provide a strong foundation for lending capacity. In 2020, the Company launched a commercial lending program that has developed to be our largest revenue component by value and percentage. The program focuses on senior secured lending, with smaller unsecured loans also being considered. Collateral types include real estate, equipment, and other business assets.

Currently, lending is primarily funded through PCCU. The Company is seeking relationships with additional financial institutions and other sources of working capital to directly fund the loans. The Company, in collaboration with third parties manages loan underwriting and loan servicing. As the program develops, the Company intends to establish a full-service internal lending function to perform a larger percentage of the underwriting and servicing activities, improve efficiency and increase profitability of this revenue element.

Key Metrics

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

Non-GAAP Measures

We use certain non-GAAP measures, referenced in this MD&A. These measures are not recognized measures under GAAP and do not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation from nor as a substitute for our financial information reported under GAAP. We use non-GAAP measures including EBITDA, Adjusted EBITDA and Adjusted EBITDA margin which may be calculated differently by other companies. These non-GAAP measures and metrics are used to provide investors with supplemental measures of our operating performance and liquidity and thus highlight trends in our business that may not otherwise be apparent when relying solely on GAAP measures. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. We also recognize that securities analysts, investors and other interested parties frequently use non-GAAP measures in the evaluation of companies within our industry.

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 (loss)/income (the most directly comparable U.S. 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 you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. 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 U.S. GAAP results.

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

For the three and nine months ended September 30, 2024, our EBITDA income improved primarily as a result of decrease in General and Administrative expenses. This reduction was driven by lower investment hosting fees, decreased amortization and depreciation expenses, and reduced business insurance costs. Additionally, there were decreases in compensation, employee benefits, marketing expenses, and other insurance costs. These factors contributing to our financial performance are further discussed 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. The Company has entered into a Commercial Alliance Agreement with PCCU (referred to as “PCCU CAA”), 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. 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 are 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.

(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 nine months ended September 30, 2024, there was a decline in the average number of accounts and fees compared to the previous period, primarily due to a decrease in clientele following the termination of an agreement with the Central Bank of Arkansas. We expect this trend to shift as we lead with our lending program typically requiring borrowers to place deposits with financial institutions with which we have relationships.

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 by 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.

Operating expenses

Operating expenses consist of compensation and benefits, professional services, rent expense, 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 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 —2024 Compared to 2023 (Nine Months Ended September 30)

Revenue

Account fee income consists of deposit account fees, activity fees and onboarding income. 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 decrease in deposit, activity and onboarding income was primarily attributable to the decrease in the number of accounts related to the Abaca acquisition. In the nine months ended September 30, 2024, PCCU accounted for $3,778,633 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $356,369 in account hosting expenses, in accordance with the PCCU CAA. In the nine months ended September 30, 2023, PCCU contributed $4,051,353 to the revenue from similar sources, with account hosting expenses amounting to $170,987 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 services to the cannabis industry.

Under our Commercial Alliance Agreement with PCCU (“PCCU CAA”), we pay 25% of the investment income as a hosting fee based on this income. In the nine months ended September 30, 2024, the income derived from investment income associated with PCCU totaled $1,601,611. In relation to this income, the Company incurred $374,591 in investment hosting fees, consistent with the stipulations of the PCCU CAA. In the nine months ended September 30, 2023, PCCU’s contribution to investment income amounted to $4,051,353, against which the Company recorded investment hosting fees of $978,671, 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 previously had a Loan Servicing Agreement with PCCU (related party) which has since been superseded by the PCCU CAA. 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 nine months ended September 30, 2024, SHF serviced twenty-four loans, as compared to twelve loans in the nine months ended September 30, 2023. In nine months ended September 2024, the Company recognized $4,814,349 in loan interest income attributable to PCCU activities. The related expenses for this income included $106,946 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the PCCU CAA. In nine months ended September 2023, loan interest income from PCCU operations amounted to $1,977,337, with associated loan servicing fees totaling $53,790, pursuant to the same agreements. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.

Operating expenses

Compensation and employee benefits decreased in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 on account of stock-based compensation and also related to a reduction in force.

Rent expenses decreased in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 due to reduction in the number of lease properties.

(Benefit)/ Provision for credit losses increased in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 due to increase in loan portfolio amount .

For the nine months ended September 30, 2024, general and administrative expenses decreased across various categories including: i) approximately $ 604,080 in investment hosting fees due to a reduction in investment income, and ii) approximately $535,179 in amortization and depreciation due to the reduction in the gross value of intangible assets from impairment recorded in 2023.

Other income /(expenses)

For the nine months ended September 30, 2024, the fair value of deferred consideration decreased by $908,574. This reduction was due to a decline in the fair value adjustment on the stock and cash consideration payable to the Abaca shareholders, as a result of payments made before the end of 2023, and a decrease in the share price as of September 30,2024, which affected the fair value of the third anniversary payment.

The interest expenses decreased by $551,135, primarily due to the elimination of the interest component on the deferred cash consideration payable to the PCCU related to the business combination, which was settled and restructured at the end of the first quarter of 2023.

The change in the fair value of warrant liabilities by $3,173,843 was attributable to the decrease in the share price.

Provision for income taxes

Our provision for income taxes in the nine months ended September 30, 2024 increased $1,255,062, compared to the same period in 2023, due to an increase in income before provision for income taxes.

Discussion of our Results of Operations —2024 Compared to 2023 (Three Months Ended September 30)

Revenue

Account fee income consists of deposit account fees, activity fees and onboarding income. 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 decrease in deposit, activity and onboarding income was primarily attributable to the decrease in the number of accounts related to the Abaca acquisition. In the three months ended September 30, 2024, PCCU accounted for $1,354,036 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $131,002 in account hosting expenses, in accordance with the PCCU CAA. In the three months ended September 30, 2023, PCCU contributed $1,287,669 to the revenue from similar sources, with account hosting expenses amounting to $54,729 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.

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. Under our Commercial Alliance Agreement with PCCU (“PCCU CAA”), we pay 25% of the investment income as a hosting fee based on this income. In the three months ended September 30, 2024, the income derived from investment income associated with PCCU totaled $434,949. In relation to this income, the Company incurred $96,870 in investment hosting fees, consistent with the stipulations of the PCCU CAA. In three months ended September 30, 2023, PCCU’s contribution to investment income amounted to $1,186,246, against which the Company recorded investment hosting fees of $273,939, 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 PCCU CAA. 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 quarter ended September 30, 2024, SHF serviced twenty-four loans, as compared to twelve loans in the quarter ended September 30, 2023. In the quarter ended September 30, 2024, the Company recognized $1,341,501 in loan interest income attributable to PCCU activities. Related expenses for this income included $34,889 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the PCCU CAA. In the quarter ended September 30, 2023, loan interest income from PCCU operations amounted to $906,213, with associated loan servicing fees totaling $25,120, pursuant to the same agreements. These expenses were categorized under “General and Administrative Expenses” in the Consolidated Statements of Operations.

Operating expenses

Compensation and employee benefits decreased in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 on account of stock-based compensation and the decrease in the headcount.

Rent expenses decreased in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 due to reduction in the number of lease properties.

(Benefit)/ Provision for credit losses increased in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 due to increase in loan portfolio amount.

For the three months ended September 30, 2024, general and administrative expenses decreased across various categories including: i) approximately $177,069 in investment hosting fees due to a reduction in investment income, and (ii) approximately $128,014 in amortization and depreciation due to the reduction in the gross value of intangible assets from impairment recorded in 2023.

Other income /(expenses)

For the three months ended September 30, 2024, the fair value of deferred consideration decreased by $128,496. This reduction was due to a decline in the fair value adjustment on the stock and cash consideration payable to the Abaca shareholders, as a result of payments made before the end of 2023, which affected the fair value of the third anniversary payment.

The change in the fair value of warrant liabilities by $1,275,007 was attributable to the decrease in the share price.

Provision for income taxes

Our provision for income taxes in the three months ended September 30, 2024 decreased by $55,104, compared to the same period in 2023, due to an increase in income before provision for income taxes.

Financial Condition

Cash and cash equivalents

Cash and cash equivalents totaled $5,861,475 and $4,888,769 as of September 30, 2024 and December 31, 2023, respectively.

Cash flows

For the nine months ended September 30, 2024, the Company generated $3,207,069 in cash from operations, compared to cash used of $225,032 for the nine months ended September 30, 2023. This improvement was mainly due to lower operating expenses and the greater number of performing loans at better interest rates than the previous period.

For the nine months ended September 30, 2024, the Company generated $8,173 in cash from investing activities, compared to $783,481 for the nine months ended September 30, 2023. The decrease was primarily due to the repayment of loans by customers in the previous period.

For the nine months ended September 30, 2024, the Company used $2,242,536 in cash for financing activities, compared to zero cash flow in the corresponding period of 2023. This was mainly due to the repayments on the senior secured promissory note during 2024, which was not in place during the nine months ended September 30, 2023.

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 September 30, 2024, the Company reports no significant commitments to capital investments.

As of September 30, 2024, the Company had $5,861,475 in cash and net working capital deficit of $2,520,441 as compared to $4,888,769 in cash and net working capital deficit of $135,355 as at December 31, 2023. The retained deficit was $69,091,050 on September 30, 2024, and $71,569,821 on December 31, 2023. The Company has also generated operating income of $176,909 and $802,013 for the three months and nine months period ended September 30, 2024.

For the nine months ended September 30, 2024, the Company reported positive operating income. However, considering the historical data from the four preceding quarters, where the Company experienced negative operating income and negative net working capital, management acknowledges the need to closely evaluate the financial performance in upcoming quarters to mitigate any going concern risks. As of September 30, 2024, due to these historical trends, there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the date these unaudited condensed consolidated financial statements were 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 unaudited condensed 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.

Litigation

As reported on its Current Report on Form 8-K, on October 17, 2024 the Company caused a declaratory judgment complaint to be filed in the District Court for the City and County of Denver, Colorado, captioned SHF Holdings, Inc. v. Daniel Roda, Gregory W. Ellis, and James R. Carroll, Case No. 2024CV33187, Denver County District Court (“Declaratory Judgement Complaint”). The Declaratory Judgement Complaint was filed related to the Amended Abaca Merger Agreement, dated October 26, 2023. On November 4, 2024, in connection with the Declaratory Judgment Complaint, the Company filed a motion with the court requesting that the court authorize the Company to deposit the $3,000,000 payment owed pursuant to the Amended Abaca Merger Agreement into the court’s registry so that it can be distributed in accordance with the terms of the Amended Abaca Merger Agreement. The payment obligation of $3,000,000 has already been accounted for in the working capital deficit disclosed in the Liquidity and Going Concern section.

Critical Accounting Estimates

As of September 30, 2024, there were no significant changes in the application or the nature of accounting estimates that are considered critical in nature from those presented in our 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 (June 23, 2026) or (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.

Internal Control Over Financial Reporting

In connection with our management assessment of internal control over financial reporting as of and for the nine months ended September 30, 2024, the Company has identified two (2) material weaknesses within our internal controls associated with Revenue Recognition and Complex Financial Instruments. Refer to Item 4 of this Quarterly Report on Form 10-Q 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 PCCU CAA 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 PCCU CAA entered on March 29, 2023, between PCCU and the Company.

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 PCCU CAA 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 (referred to as PCCU CAA). This Agreement sets forth the terms and conditions of the lending and account-related services, governing the relationship between the Company and PCCU. The PCCU CAA 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 PCCU CAA 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 PCCU CAA. Under the PCCU CAA, 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 PCCU CAA to indemnify PCCU from certain default-related loan losses (as fully defined in the PCCU CAA).

In addition, the PCCU CAA 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 PCCU CAA, 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 PCCU CAA 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.

The schedule below demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits:

* If the loans funded by PCCU exceed the limiting capacity, the PCCU CAA specifies that PCCU will be unable to fund additional loans until the incremental capacity is positive.

The revenue from the PCCU Agreements recognized in the statements of operations consists of the following for the periods ended September 30, 2024, and September 30, 2023:

The operating expense from the PCCU Agreements recognized in the statements of operations consists of the following for the periods ended September 30, 2024, and September 30, 2023:

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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.

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 September 30, 2024 due to the material weaknesses described below. In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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.

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, solely due to the below-mentioned material weaknesses, the Company’s disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective as of September 30, 2024.

Material Weaknesses

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 September 30, 2024, which existed at previous periods:

Revenue Recognition: The Company’s revenue is 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: The Company has had a material weakness with regard to the ineffectiveness in management review controls of the accounting, disclosure and valuation of complex financial instruments (warrants, deferred consideration, 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.

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 September 30, 2024 material weaknesses, there was no changes in our internal control over financial reporting that occurred during quarterly period ended September 30, 2024 covered by this Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for their mediation of the material weaknesses and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we have expanded and will continue to improve these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards.