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What changed in SHF Holdings, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of SHF Holdings, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+349 added−680 removedSource: 10-K (2024-04-01) vs 10-K (2023-04-14)

Top changes in SHF Holdings, Inc.'s 2023 10-K

349 paragraphs added · 680 removed · 192 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

111 edited+68 added−90 removed67 unchanged
Biggest changePursuant to the Merger Agreement, the Company acquired Abaca through mergers with the merger subsidiaries (the “Abaca Acquisition”), in exchange for (a) cash consideration in an amount equal to (i) $9,000,000 ($3,000,000 is payable at closing, with an additional $3,000,000 payable at each of the one-year and two-year anniversaries of the closing); and (b) $21,000,000 of validly issued, fully paid and non-assessable shares of the Company’s Class A Common Stock, $0.0001 par value per share, payable in two installments.
Biggest changePursuant 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”).
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 and NLIT, a special purpose acquisition company, and its sponsor, 5AK, LLC.
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.
The Company has been a front runner in assisting financial institutions that desire to provide reliable financial services to the industry and is well known amongst the leaders in the cannabis financial services arena.
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.
On September 28, 2022, the parties consummated the Business Combination, resulting in NLIT acquiring 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.
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.
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 enter the market with rigor, they find themselves exiting the market due to the complexity and demands of serving the cannabis industry.
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.
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 9 to the Consolidated Financial Statements included elsewhere in this Form 10-K.
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.
Although we do not 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.
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.
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. 13 Table of Contents 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.
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. 4 Table of Contents 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.
We continuously look for ways for 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 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.
How the Company Addresses These 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.
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.
We believe this window of opportunity, along with our proven track record, reduces the risk of any negative consequences as a result of servicing 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.
The Company, under the umbrella of our parent 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.
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.
We offer to our financial institutions clients a means to offer its 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 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.
The Company’s management is well positioned to assist growing markets; having created a reliable reputation and network over the past seven 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.
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 implemented remote work options that have enabled 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.
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.
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 20 states where cannabis is either legal medicinally or for full adult use.
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.
Pending Legislation Legislation pending at the federal level such as the SAFE 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.
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.
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 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. 12 Table of Contents Currently, substantially all deposits are maintained by PCCU, and all transmissions of funds to or from these deposit accounts are handled directly by PCCU.
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. 9 Table of Contents Currently, substantially all deposits are maintained at PCCU, and all transmissions of funds to or from these deposit accounts are handled directly by PCCU.
Our software is able to run on different 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.
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.
At the closing, 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.
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.
This multi-prong approach utilizing internal expertise and networks forged over the past 8 years will allow us to dominate the financial arena moving forward. ● Attract, Retain, Develop and Reward the Best Team Members to Execute our Strategy.
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.
Our focus on growing deposits is twofold on a strategic level. First, we must Know our Customer (KYC) in order to assist with facilitating the movement of their funds into the financial system with safe and sound practices.
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.
Performance evaluations done on an 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.
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.
So often, financial institutions wish to enter the market only to exit due to the complexities of serving the industry. We will seek out financial institutions that can provide reliable access to additional functionality and balance sheet access for growth.
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.
This initiative will incorporate a robust 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 ratio.
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.
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; this puts the entire financial institution at risk for enforcement actions.
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.
Our platform has been streamlined and finetuned for the past 7 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 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.
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 twenty plus related entities that financial institutions must monitor for adherence to anti-money laundering (“AML”)/BSA regulations.
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.
The largest 10 CRB accounts held at PCCU for the period ended December 31, 2022 represented less than 5% of fee income from onboarded deposits, which is currently our largest source of revenue.
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.
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.
Cross functional meetings are also scheduled regularly to ensure cross functional teamwork. 12 Table of Contents 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.
Any and all complaints are dealt with in the most professional and expedited manner, creating a level of trust between management and staff. 10 Table of Contents 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.
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.
Key to 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 specialty finance capabilities.
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.
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.
We believe that one of o ur 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.
Ultimately, we believe that our software can be updated to accommodate new industries and to enhance existing processes for increased efficiencies. 15 Table of Contents Financial institutions continue to shy away from banking the cannabis market due to cannabis remaining a Schedule 1 drug, thus illegal under federal law.
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.
In 2022, we formally produced our first marketing plan for the next level of success 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.
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.
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: Lending 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.
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.
(Refer to Note 3 to the Consolidated Financial Statements of the Company included elsewhere in this Annual Report on Form 10-K (the “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.
(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.
Few 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, 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.
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 nearly 600 accounts that were onboarded and validated in a methodical manner to ensure continuity of service while under significant regulator scrutiny.
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.
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.
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.
They are realizing that a specialized external program that separates and monitors cannabis activities is a much safer approach; providing Safe Harbor another opportunity to work side by side with larger banks.
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.
Attracting, developing, and retaining the best talent with the right skills is central to our long-term strategy to drive our success. 9 Table of Contents Our workforce composition is aligned with our business needs. Management trusts it has adequate human capital to operate its business successfully. The Company had 65 full-time equivalent employees, or FTEs, at the end of 2022.
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.
We believe that most institutions cannot withstand such a penalty and will not take that risk. BSA talent 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 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.
This is yet another opportunity for Safe Harbor 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, Safe Harbor benefits from servicing, monitoring, and validating compliance of depository relationships, earning fees on deposits.
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 primarily relates to offering services that are compliant with the 2014 FinCEN Guidance and the BSA. In addition, given our history of being born from a credit union, our services historically have been subject to regulatory oversight from the National Credit Union Administration (“NCUA”).
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”).
Our key strategic initiatives include: ● Compliance First: 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. ● Deposits A Primary Focus upon which to grow relationships.
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 .
In conjunction with the reorganization, all of the employees engaged in the operations contributed and certain PCCU employees were terminated from PCCU and hired as SHF employees. Collectively, oldco, 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 oldco was dissolved.
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.
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”). The reorganization effectively occurred July 1, 2021.
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.
We also believe that the successful completion of 16 regulatory examinations of our financial institution clients for which we provide onboarding services demonstrates that it is possible to structure onboarding, validation and monitoring services in a compliant manner.
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.
However, legislation will not protect financial institutions from breaches of Bank Secrecy Act (“BSA”) regulations, which may lead to significant penalties, often resulting in substantial fines assessed by FinCEN.
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.
This will enable us to speed up our processes and scale the lending portfolio in line with our depository growth. 8 Table of Contents ● 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.
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.
Item 1. BUSINESS Our Company and Our History Our business 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.
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. 13 Table of Contents SHF Holdings, Inc. (the “Company”), formerly known as Northern Lights Acquisition Corp.
This is the relationship we will strive for from the KYC competitive advantage we presently hold, with over 1000 accounts from which to select the most credit worthy opportunities and understand the business to whom we lend at a very intimate level. ● 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, we will build out the function in 2023.
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.
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 “Annual Report”), we use the terms “we,” “us,” “our” and the “Company” to refer to the business and operations of SHF Holdings, Inc. following the closing of the Business Combination.
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.
We believe our history and experience of providing compliant financial services and in conjunction with our financial institution clients successfully completing 16 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.
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.
On March 29, 2023, the Company and PCCU entered into a definitive transaction (Refer to Note 22, “Subsequent Events,” of the consolidated financial statements) 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.
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.
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 out such assets to expand and grow their operations while Safe Harbor builds a senior secured portfolio with a solid real estate base.
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.
Collateral types would include real estate, equipment, and other business assets. The 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.
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.
As a result of the Business Combination, PCCU is now the Company’s largest stockholder, owning 43.20% of the Company’s outstanding Class A Common Stock. 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.
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 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). The SAFE Act has not been brought to or passed by the Senate and therefore is not law.
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).
The Company’s services started with only 10 test CRBs resulting in current onboarded accounts representing approximately 60 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 69% from 2015 to 2021. Onboarded deposits processed in 2021 were approximately $3.6 billion.
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.
This understanding, diligence and underwriting is labor-intensive work requiring significant hands-on resources. 14 Table of Contents 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.
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.
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; ● 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.
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.
What Safe Harbor Does The Company has developed and commercialized a fully compliant financial services platform for financial institutions providing banking services to CRBs to access and maintain reliable financial services as long as both the financial institution client and the CRB meet regulatory requirements.
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.
We have built the present business over the past 8 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.
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.
Approximately 45% of our workforce is in Colorado and another 35% in Arkansas, with an expanding remote workforce to cultivate new and existing cannabis relationships in multiple states. Talent acquisition efforts focused on sales, business development and income generator roles.
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.
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. The Company’s program has actual “hands-on” experience in the market since January 2015. We have increased BSA activities every year to manage to the emerging market risks and growth of the portfolio.
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.
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 only quasi-protective measure in place is the Rohrabacher-Blumenauer Amendment to the Appropriations Budget.
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.
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. Key Challenges Legal Environment Cannabis remains a controlled substance under the CSA.
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.
The Company maintains relationships with PCCU, and other financial institutions in which the CRB funds are deposited and monetary transactions are performed.
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.
See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity. 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.
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.
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 last acquisition will enable us to assess and automate faster. ● Improve Brand Awareness.
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. 6 Table of Contents ● Improve Brand Awareness.
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.
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.
Since inception (including its predecessor, Eagle Legacy Services, LLC, a subsidiary of PCCU), the Company has onboarded over $12 billion in cannabis related funds into the financial system with what we believe to be the highest level of monitoring and validation.
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.
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.
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.
Acquisition of Abaca Furthermore, on October 29, 2022, the Company entered into an Agreement and Plan of Merger (the “Abaca Merger Agreement”) with SHF Merger Sub I, , SHF Merger Sub II, LLC, 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 Abaca security holders.
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”).
We believe there is currently a very small subset of the financial services industry willing to provide a full suite of financial services to CRBs and these providers are extremely fragmented.
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.
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.
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.
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; this forces them to purchase properties and fund their businesses from personal investment of operational cash, again strapping their own growth.
This provides an opportunity for lending, unlike the normal commercial market. 8 Table of Contents 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.
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 of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards.
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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Item 1A. RISK FACTORS We are subject to risks and uncertainties that could potentially negatively impact our business, financial conditions, results of operations and cash flows.
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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.
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This section contains a description of the risk and uncertainties identified by management that could, individually or in combination, harm our business, results of operations, liquidity and financial condition, as well as our financial instruments and our securities.
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In evaluating us and our business and making or continuing an investment in our securities, you should carefully consider the risks described below as well as other information contained in this Form 10-K and any risk factors and uncertainties discussed in our other public filings with the SEC under the caption “Risk Factors”.
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We may face other risks that are not contained in this Form 10-K, including additional risk that are not presently known, or that we presently deem immaterial. This Form 10-K and the risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in such forward-looking statements.
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Please refer to the section in this Form 10-K titled “Cautionary Note Regarding Forward-Looking Statements” for additional information regarding forward-looking statements. RISKS RELATED TO THE COMPANY’S BUSINESS Substantially all of the Company’s CRB customers’ deposits are currently held at PCCU, which means that our growth will be restricted until we can enter into agreements with additional financial institutions.
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Substantially all of the deposits of the Company’s CRB customers are currently held at PCCU, which constitutes approximately 60% of PCCU’s total assets.
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Under the Second Amended and Restated Support Services Agreement, PCCU has agreed to maintain its ratio of CRB-related deposits to total assets to 60% or greater unless a lower ratio is required by applicable regulatory or policy requirements.
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There can be no assurances that PCCU will be able to maintain this ratio of CRB-related deposits to total assets, or that its total assets will grow so as to permit its CRB deposits to grow.
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Therefore, unless we are able to expand the number of financial institutions at which deposits onboarded and monitored by the Company are held, our growth will be limited to the extent that PCCU’s assets may grow, if at all.
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Although under the Company’s Second Amended and Restated Account Servicing Agreement with PCCU, the Company is not restricted from onboarding and monitoring deposits at other financial institutions, there can be no assurances that we will be able to expand the number of financial institutions with which we will onboard and monitor deposits or, if we are able to enter into agreements with additional financial institutions, whether the terms of those agreements will be on comparable terms.
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In addition, if PCCU were to terminate either or both of the Second Amended and Restated Support Services Agreement or the Second Amended and Restated Account Servicing Agreement, our operations would be materially impaired if we were not able to obtain from third parties the services the Company receives from PCCU under the Second Amended and Restated Support Services Agreement or if we were not able to enter into arrangements with other financial institutions to host the deposits of the Company’s customers.
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The Company has only recently begun its loan program, which may make it more difficult for the Company to compete with other lenders, brokers and servicers. The Company, through its predecessor entity, began offering loan services through PCCU to CRBs in 2020.
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As a result, the Company’s loan program may be subject to factors inherent in a start-up business, such as competing with existing entities who have been offering loans and other lending-related services for longer than the Company has, ensuring that the Company’s systems are compliant with applicable laws and regulations, and ensuring that the Company’s systems and personnel are able to handle the anticipated pipeline of loan applications.
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The time to fully ramp-up the Company’s lending and loan servicing operations may be more difficult for the Company to compete against lenders and brokers that have been lending to CRBs for a longer period of time.
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The Company’s loan program is currently substantially dependent on PCCU, currently the largest funding source for the Company’s loans, which may limit the types, terms and amounts of loans that we may offer. The Company’s loan program currently depends on PCCU as the Company’s largest funding source for new loans to CRBs.
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To date, with the exception of one $500,000 loan funded directly by the Company during April 2022, all of the Company’s loans have been funded by PCCU. Under PCCU’s loan policy for loans to CRBs, PCCU’s board has approved aggregate lending limits at the lesser of 1.3125 times PCCU’s net worth or 65% of total CRB deposits.
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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. As of December 31, 2022, PCCU’s net worth was $133.23 million and CRB-related deposits were $161.14 million.
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As of December 31, 2021, PCCU’s net worth was $61.9 million and CRB-related deposits were $146.3 million. In addition, loans to any one borrower or group of associated borrowers are limited by applicable NCUA regulations to the greater of $100,000 or 15% of PCCU’s net worth.
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As a result, our ability to expand our loan program will be limited by PCCU’s growth unless we are able to expand our capacity to make loans directly or find other financial institutions and lenders willing to make loans to CRBs.
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In addition, even if we are able to identify additional lenders, we may not be able to negotiate comparable terms. 21 Table of Contents The Company may face competition from traditional financial institutions and other lenders and service providers for its lending and other services, which may adversely affect the Company’s ability to achieve our business goals and its results of operations.
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The Company operates in an increasingly competitive market for its lending, compliance, customer intake and management services. Our competitors for our compliance and customer-focused services include both traditional financial institutions and fintech companies.
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Lending competitors include both private investment funds and public REITs focused on the cannabis industry, as well as traditional financial institutions that have begun offering loans to CRBs. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do.
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In particular, because traditional financial institutions may have a cost of funds more comparable to ours, we may face greater competition in providing loans to CRBs. There can be no assurances that we will be able to successfully compete against these competitors, which may adversely affect the Company’s ability to achieve its business goals and its results of operations.
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The soundness of our financial institution clients could adversely affect us. Because our clients are other financial institutions, our ability to grow our operations and client base could be adversely affected by the actions and commercial soundness of other financial institutions for whom we provide services or who might seek our services.
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Financial institutions are interrelated as a result of trading, clearing, counterparty or other relationships.
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As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the banking and financial services industry generally, have led to market-wide liquidity problems and could lead to losses, defaults or regulatory actions against the financial institutions with which we do business or with whom we may seek to provide services.
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There can be no assurances that the occurrence of any such losses, defaults or regulatory actions would not materially and adversely affect our results of operations.
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The Company intends to focus its lending to CRBs on commercial loans, which could increase the risk in the Company’s loan portfolio, resulting in higher provisions for loan losses and adversely affecting the Company’s results of operations.
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The Company intends to focus its lending efforts on commercial loans to CRBs, including commercial real estate loans, commercial business secured by other assets such as equipment or accounts receivable, and unsecured loans. Historically, these loans have had higher risks than other types of loans, such as loans secured by residential real estate.
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For example, repayment of commercial real estate loans and commercial business loans are dependent on income being generated by the rental property or business in amounts sufficient to cover operating expenses and debt service. If the borrowers of these types of loans default, the collateral may not be liquidated as easily and may involve expensive workout techniques.
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Commercial lending may also involve large balances of loans to single borrowers or related groups of borrowers. If these loans become nonperforming, The Company may have to increase its reserves for loan losses, which would negatively affect its results of operations. In addition, loans secured by commercial real estate may deteriorate in value during the time the credit is extended.
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Real estate values and the real estate markets are generally affected by a variety of factors including, but not limited to, changes in economic conditions, fluctuations in interest rates, the availability of credit, changes in tax laws and other statutes, regulations, and policies, and acts of nature.
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Weakening of the real estate market could result in an increase loan defaults and a reduction in the value of the collateral securing those loans, which in turn could adversely affect our profitability and asset quality.
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If the collateral securing a loan is liquidated to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.
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Loans to CRBs secured by properties and assets that are, and will be, subject to extensive regulations, such that if such collateral was foreclosed upon those regulations may result in significant costs and materially and adversely affect the Company’s business, financial condition, liquidity and results of operations.
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The loans presently funded by our financial institution clients, and the loans that are expected to be made in the future, may be secured by properties and assets that are, and will be, subject to various state and local laws and regulatory requirements, and we, our client financial institutions, or a third party would be subject to such requirements if such collateral was foreclosed upon.
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State and local property regulations may restrict the use of collateral or the ability to foreclose on the collateral. Among other things, these restrictions may relate to cultivation of cannabis, the use of water and the discharge of waste water, fire and safety, seismic conditions, asbestos-cleanup or hazardous material abatement requirements.
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Neither the Company, its financial institution clients, nor third parties engaged to assist with the liquidation or foreclosure process will take possession of cannabis inventory, cannabis paraphernalia or other cannabis-related assets, nor will they take title to real estate used in cannabis-related businesses.
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Applicable regulations under state law that govern CRBs generally do not permit the taking of title to real estate involved in commercial sales of cannabis, whether through foreclosure or otherwise, without prior regulatory approval. The sale of a license or other realization of the value of licenses also requires the approval of state and local regulatory authorities.
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While the loan agreements and related security agreements provide for foreclosure remedies, receivership remedies and/or other remedies that would permit the sale or other realization of real property collateral, the regulatory requirements and statutory prohibitions related to real property used in cannabis-related operations may cause significant delays or difficulties in realizing upon the expected value of such real property collateral.
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We make no assurance that existing regulatory policies will not materially and adversely affect the value of such collateral, or that additional regulations will not be adopted that would increase such potential material adverse effect. The negative affect on such collateral could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.
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The Company is obligated to indemnify PCCU for all losses resulting from defaults of the CRB loans made by PCCU to the Company’s customers. Pursuant to the Company’s Loan Servicing Agreement with PCCU, the Company has agreed to indemnify PCCU for all losses resulting from the defaults of loans made by PCCU to CRB customers.
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This means that the Company will be solely responsible for all costs of negotiating forbearances or refinancing the defaulted loans, loss mitigation, and collection efforts, whether conducted directly or by an affiliate or third party, including realizing the proceeds from any collateral as a result of a sale of collateral by the borrower or through a third party engaged to assist the borrower n the liquidation process.
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The Company’s indemnity is subordinate to PCCU’s other means of collecting on the loans including repossession of collateral, recourse against personal and/or corporate guarantors and other default remedies available in the loan agreements.
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Since borrowers are not parties to the agreement between the Company and PCCU, any indemnity payments do not relieve borrowers of their obligation to PCCU nor would such payments preclude PCCU’s right to future recoveries from the borrowers.
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As a result, we will be required to establish loan loss reserves relating to these loans, even though we are not the funding lender.
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Because these loans will not be an asset on our balance sheet, the loan loss reserves are anticipated to be reflected as a liability in our financial statements, versus a contra-asset. 22 Table of Contents If the Company’s allowance for loan losses is not sufficient to cover actual loan losses for loans held in the Company’s portfolio or for which it was otherwise responsible, the Company’s results of operations and financial condition will be negatively affected.
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In the event loan customers do not repay their loans according to their terms and the proceeds of liquidating the collateral securing these loans is insufficient to satisfy any remaining loan balance, the Company may experience significant indemnity losses associated with these loans.
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Such credit risk is inherent in the lending business, and failure to adequately assess such credit risk could have a material adverse effect on our financial condition and results of operations.
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The Company will be required to establish loan loss reserves for all loans for which it is the lender, for all the Company originated loans made by PCCU to CRB customers, and in other instances where it may be contractually liable to indemnify a lender for loan losses.
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The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and judgment and will require the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
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Although we have agreed with PCCU in the Loan Servicing Agreement that we will maintain or have access to sufficient liquidity to satisfy our indemnity obligations to PCCU under the Loan Servicing Agreement, we cannot be certain that our loan loss reserves will be adequate over time to cover losses in PCCU-funded loans or loans funded by other funding sources in the Company’s portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, or borrowers repaying their loans.
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If the Company’s loan loss reserves are not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected.
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In addition, charge-offs of defaulted loans in future periods that exceed the related reserves may require us to add to our loan loss reserves, which would result in a decrease in net income and capital, and could have a material adverse effect on our financial condition and results of operations.
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Certain assets of CRB borrowers may not be used as collateral or transferred due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability. Each state that has legalized cannabis in some form has adopted its own set of laws and regulations that differ from one another.
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In particular, laws and regulations differ among states and even localities regarding the collateralization or transferability of cannabis-related assets, such as cannabis licenses, cannabis inventory, and ownership interests in licensed cannabis companies. Some state laws and regulations where borrowers operate may prohibit the collateralization or transferability of certain cannabis-related assets.
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Other states may allow the collateralization or transferability of cannabis-related assets, but with restrictions, such as meeting certain eligibility requirements, utilization of state receiverships, and/or upon approval by the applicable regulatory authority.
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Prohibitions or restrictions on the ability to take possession of certain cannabis-related assets securing the loans of our borrowers could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.
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In addition, because the sales of such assets may be forced upon the borrower when time may be of the essence and available to a limited number of potential purchasers, the sales prices may be less than the prices obtained with more time in a larger market.
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Foreclosure of security interests on loans to CRBs that are in default could result in losses. In general, a foreclose procedure is required to liquidate collateral provided on loans in default. Alternatively, a borrower may be required under the terms of the loan documents to dispose of certain business assets to satisfy the loan commitments.
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Foreclosure processes and other liquidations of collateral are often lengthy and expensive.
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Results of foreclosure and liquidation processes may be uncertain, as claims may be asserted by the relevant borrower or by other creditors or investors in such borrower that interfere with the foreclosure or liquidation process, such as claims that challenge the validity or enforceability of the loan or the priority or perfection of the security interests.
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Borrowers may resist foreclosure actions or may refuse to comply with loan requirements by asserting numerous claims, counterclaims and defenses against our client financial institutions or us, including, without limitation, lender liability claims and defenses, even when the assertions may have no merit, in an effort to prolong the foreclosure action or delay the liquidation of collateral and seek to force us or the financial institution into a modification or buy-out of the loan for less than the amount owed.
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Additionally, the transfer of certain collateral to us or our financial institution clients may be limited or prohibited by applicable laws, regulations and/or public company listing standards.
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See “ Loans to CRBs secured by properties and assets that are, and will be, subject to extensive regulations, such that if such collateral was foreclosed upon those regulations may result in significant costs and materially and adversely affect the Company’s business, financial condition, liquidity and results of operations. ” For transferable collateral, foreclosure, or other remedies available may be subject to certain laws and regulations, including the need for regulatory disclosure and/or approval of such transfer.
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If federal law were to change to permit cannabis companies to seek federal bankruptcy protection, the applicable borrower could file for bankruptcy, which would have the effect of staying the foreclosure actions or liquidation processes and delaying the foreclosure or liquidation processes and potentially result in reductions or discharges of debt owed.
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Foreclosure or forced liquidation may create a negative public perception of the collateral property, resulting in a diminution of its value. Moreover, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to repay the loan in full.
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Any costs or delays involved in the foreclosure or a liquidation of the underlying property will reduce the net proceeds realized and, thus, increase the potential for loss.
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In the event a borrower defaults on any of its loan obligations and such debt obligations are equitized, neither the Company nor its financial institution clients will hold such equity interests, which may result in additional losses on loans to such entity. 23 Table of Contents Interest rate volatility could significantly reduce our profitability, business, financial condition, results of operations and liquidity.
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Our earnings will depend in part on the relationship between the yield on our earning assets, primarily loans and investment securities, and the cost of funds, primarily borrowings.
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This net interest margin is susceptible to significant fluctuation and is affected by economic and competitive factors that influence the yields and rates for, and the volume and mix of, our interest-earning assets and interest-bearing liabilities. Interest rate risk is exposure to movement in interest rates that could have an adverse impact on our net interest income.
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Interest rate risk arises from the imbalance in the repricing, maturity and/or cash flow characteristics of assets and liabilities.
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Although neither the Company nor the Company currently have any borrowings from third parties, to the extent that either incur indebtedness that will be subject to interest rate risk to the degree that our interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than our interest earning assets.
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In addition, increases in interest rates could reduce the pipeline of borrowers desiring to obtain loans from us or through our loan program if these borrowers seek alternate sources of capital. As a result, fluctuations in interest rates could have a material adverse impact on our business, financial condition, results of operations or liquidity.
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The Company may become subject to regulation in additional states as it expands its operations.
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The Company was previously considered a credit union service organization (“CUSO”) and as a result of its status as a Colorado limited liability company and its relationship with PCCU, a Colorado-chartered credit union, the Company is subject to various Colorado and federal laws, rules and regulations.
Removed
Although the Company is no longer considered a CUSO following the closing of the Business Combination, the Company may become subject to the laws of additional states as it expands its operations by opening offices, maintaining employees or otherwise establishing a substantial footprint in additional states. The Company is dependent on PCCU for certain administrative services.
Removed
Pursuant to the Second Amended and Restated Support Services Agreement, PCCU has been providing the Company with certain administrative services, including services relating to information technology and systems, accounting and financial services, human resources and marketing. The Company may also request that certain PCCU employees be available to the Company on a shared basis to perform duties for the Company.
Removed
For these services, the Company paid PCCU a monthly fee equal to $30.96 per CRB account in addition to reimbursement of direct expenses. Under the Second Amended and Restated Support Services Agreement, PCCU is also entitled to retain 25% of all investment income derived from CRB cash and investments.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. PROPERTIES Our corporate headquarters were located in Arvada, Colorado pursuant to a month-to-month lease from PCCU as of December 31, 2022. The Company has relocated its executive offices to 72,132 square feet of lease office space Golden, CO.
Biggest changeItem 2. Properties. 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.
Removed
In addition, the Company assumed a lease on a property in Little Rock, AR, in connection with the Abaca Transaction (please see “Abaca Acquisition” above).
Added
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.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWhile the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, we believe that potential liabilities relating to pending matters are not likely to be material to our financial position, results of operations or cash flows.
Biggest changeWhile 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.
In addition, as part of the ordinary course of business, we are 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.
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.
Item 3. LEGAL PROCEEDINGS We are, from time to time, in the ordinary course, engaged in litigation, and we have a small number of unresolved claims pending.
Item 3. Legal Proceedings. We may, from time to time, in the ordinary course, be subject to various legal proceedings and disputes.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeWe may retain future earnings, if any, for future operations, expansion and debt repayment and has no current plans to pay cash dividends for the foreseeable future.
Biggest changeDividend Policy We have not paid any cash dividends on our Class A Common Stock to date. We may retain future earnings, if any, for future operations, expansion and debt repayment and has no current plans to pay cash dividends for the foreseeable future.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES Market Information Our Class A Common Stock and Public Warrants are currently listed on NASDAQ under the symbols “SHFS” and “SHFS,” respectively.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our Class A Common Stock and Public Warrants are currently listed on The Nasdaq Capital Market under the symbols “SHFS” and “SHFS,” respectively.
Removed
Prior to the consummation of the Business Combination, the Company’s units, common stock and warrants were listed on NASDAQ under the symbols “NLITU,” “NLIT,” and “NLITW” respectively. Dividend Policy We have not paid any cash dividends on our Class A Common Stock to date.
Added
Holders of Record As of March 28,2023, there were 113 holders of our Class A Common Stock and 21 holders of our Public Warrants. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Removed
Securities Authorized for Issuance under Equity Compensation Plan As of March 31, 2023, there were 4,037,147 shares of Class A Common Stock initially authorized for issuance under our 2022 Stock Incentive Plan (the “Incentive Plan”), which our stockholders approved on June 28, 2022 in connection with the Business Combination. The Incentive Plan became effective immediately upon the Closing.
Added
Recent Sales of Unregistered Securities There have been no securities sold by the Company for the period covered by this Annual Report on Form 10-K which were not registered under the Securities Act. Included are new issues, securities issued upon conversion from other share classes, and securities issued in exchange for property, services, or other securities.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeA reconciliation of net income to non-GAAP EBITDA and Adjusted EBITDA is as follows: Year Ended December 31, 2022 2021 Net (loss)/ income $ (35,128,083 ) $ 3,286,887 Interest expense 802,797 - Depreciation and amortization 189,275 1,921 Taxes (9,252,893 ) - EBITDA (43,388,904 ) 3,288,808 Other adjustments – Loan loss provision 506,212 1,399 Change in the fair value of warrants and forward purchase derivatives 8,058,091 - Deferred loan origination fees and costs (1,890 ) - Stock option conversion 2,806,336 - Change in fair value of forward purchase agreement 33,322,248 - Adjusted EBITDA $ 1,302,093 $ 3,290,207 The decrease in our income on an EBITDA and Adjusted EBITDA basis for the year ended December 31, 2022, is due to substantial drop in the value of forward purchase agreement, increase in professional fees pursuant to business combination activity as well as increases in compensation, employee benefits, marketing, insurance, and additional items, as discussed under “ Discussion of our Results of Operations ” below.
Biggest changeA 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 23 Table of Contents 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.
Components of our Results of Operations Revenue The Company generates interest and fee income through providing a variety of services to PCCU 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.
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.
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 Unit Purchase Agreement.
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.
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, the Company does not hold customer deposits.
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.
On September 19, 2022, the parties entered into the first amendment to the 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 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.
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 $70.0 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.
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.
In addition to PCCU, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided to other financial institutions under the Safe Harbor Master Program Agreement.
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.
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 $0.00001 per share with such designation rights and preferences as may be determined from time to time by the Company’s Board of Directors.
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.
On September 22, 2022, the parties entered into the second amendment to the purchase agreement to provide for the deferral of a total of $50 million of the $70 million 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.
The residual $35.0 million is due in six quarterly installments of $6.4 million thereafter. Interest accrues at an effective annual rate of approximately 4.71%.
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%.
Under the Loan Servicing Agreement, SHF has agreed to indemnify PCCU from all claims related to default-related loan losses as defined in the Loan Servicing Agreement.
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.
Pursuant to the third amendment to the Unit Purchase Agreement, the deferred consideration shall be 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.
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.
The accompanying audited 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. 45 Table of Contents Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP.
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. 26 Table of Contents Critical Accounting Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP.
The Company reports a provision for loan losses both as it relates to loans funded internally and those carried by PCCU or other financial institutions. The Company indemnifies PCCU for losses on loans to borrowers sourced by the Company and funded by PCCU.
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. 43 Table of Contents 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.
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.
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 GAAP.
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.
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 agrees to pay SHF all revenue generated from CRB accounts. Amounts due to SHF are due monthly in arrears and upon receipt of invoice.
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.
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 $ 44,102,572, 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.
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.
Through that mission and as an early leader with over seven years of experience, the Company 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 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.
Effective February 2022, the Company 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.
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.
As of December 31, 2022, 3,669,504 Class A Common Stock are held by the purchasers under 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.
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.
Historically, the Company has charged fees based on cannabis related deposit account activity. During 2022, 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 historical and anticipated deposit levels.
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.
For accounting purposes, the cash received for loan origination fees and costs is initially deferred and recognized as interest income utilizing the interest method. 42 Table of Contents Other Metrics For our business operations, we monitor the following key metrics.
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.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS References in this section to “we,” “us,” or “our” refer to SHF Holdings, Inc (herein referred to as the “Company”). References to “management” refer to our officers and board of managers.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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.
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.
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.
Support Services Agreement Effective 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.
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.
As of December 31, 2022, there were 14,616 preferred shares issued or outstanding and no preferred shares outstanding on December 31, 2021. ● 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 $0.00001 per share.
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. 22 Table of Contents ● 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, 2022 and December 31, 2021, there were 20,815,912 and 3,393,175 shares, respectively, of Class A Common Stock issued or outstanding.
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.
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. 39 Table of Contents Subsequent to the completion of the business combination, the status of PCCU has changed from Parent to majority shareholder of the Company pursuant to its ownership of 60.8% of the Company.
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.
On September 28, 2022, the parties entered into the third amendment to the purchase agreement to provide for the deferral of a total of $56,949,800 of the $70,000,000 due at the closing. Effective February 11, 2022, the Company entered into a Loan Servicing Agreement with PCCU.
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.
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.
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.
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.
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.
PCCU’s Board of Directors approved the contribution of certain assets and operating activities associated with operations from both the Branches and Safe Harbor Services (“SHS”) a wholly-owned subsidiary of PCCU, to SHF Holding, Co., LLC.
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.
Since inception, the Company has assisted PCCU in processing more than $12 billion in cannabis related funds and, through its relationship with PCCU and other financial institutions, the Company has successfully navigated 16 state and federal banking exams. 38 Table of Contents In strategically selected geographic areas, the Company licenses to other financial institutions its proprietary software and Safe Harbor Program (the “Program”) to provide compliance-related services to CRBs.
Through its relationship with its financial institution clients, the Company has successfully navigated 16 state and federal banking exams. 20 Table of Contents 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.
SHF Holding, Co., LLC then contributed the same assets and related operations to SHF, LLC with PCCU’s investment in SHF, LLC maintained at the SHF Holding, Co., LLC level (the “reorganization”). The reorganization effectively occurred July 1, 2021.
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.
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.
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.
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 SHF. SHF will also reimburse PCCU for any of its out-of-pocket expenses relating to the services provided to SHF.
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.
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 ratio of ancillary accounts to cannabis specific accounts increased during 2022.
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.
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 65% of total CRB deposits.
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.
Through our proprietary platform and on a multi-state level, the Company 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 ● 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.
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.
(“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”).
Subsequent to the completion of the transaction, NLIT changed its name to “SHF Holdings, Inc.” (herein referred to as the “Company”).
No separate equity accounts are maintained for SHS, SHF or the Branches. 41 Table of Contents 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.
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.
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 the Company.
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.
On March 29, 2023, the Company and PCCU entered into a definitive transaction (Refer to Note 22, “Subsequent Events,” of the consolidated financial statements) 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. 40 Table of Contents 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.
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 has granted, 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 has issued 11,200,000 shares of the Company’s Class A Common Stock to PCCU.
Account Servicing Agreement Effective July 1, 2021, SHF entered into 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 assumes the costs associated with the CRB accounts.
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.
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.
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.
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 accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.
We base our estimates on our experience and other assumptions that we believe are reasonable, and we evaluate these estimates on an ongoing basis.
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.
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.
Pursuant to the Amended and Restated Account Servicing Agreement, SHF’s fees for such services will equal 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.
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.
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. (Refer to Note 22, “Subsequent Events,” of the consolidated financial statements.) The loan interest income reflects our share of loan interest on issued credit.
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.
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, 2022, the Company has identified four (4) material weaknesses within our internal controls over financial reporting related to its Deferred Tax Asset, Going Concern, Revenue Recognition, and Complex Financial Instruments.
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.
In conjunction with the 2022 Plan, as of December 31, 2022, the Company had granted stock options which are described in more detail below.
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.
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.
In addition, in conjunction with the Unit Purchase Agreement, the Company and PCCU entered into a Loan Servicing Agreement.
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.
Metrics will include average loan balance, average life to repayment, average effective interest rate and loan status, amongst others.
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.
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.
Overview Founded in 2015 by PCCU (please see “Business Reorganization” below for a description of the Company’s organization), the Company’s mission is to provide access to reliable and compliant financial services for the legal cannabis industry.
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.
Compensation and benefits consist of employee wages and associated benefits while professional services consist of legal, general consulting and accounting fees.
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. 24 Table of Contents Compensation and benefits consist of employee wages and associated benefits while professional services consist of legal, general consulting and accounting fees.
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. On October 26, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA Inc.
Furthermore, PCCU agreed to defer $3,143,388, representing certain excess cash of SHF, LLC due to the Seller under the Definitive Unit Purchase Agreement, and the reimbursement of certain reimbursable expenses under the Definitive Unit Purchase Agreement. 21 Table of Contents Pursuant to the Unit Purchase Agreement, the Company entered into the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement under similar terms as the July 2021 agreements.
As part of the Program, we provide the following to financial institutions interested in licensing the Program to assist in compliant cannabis banking: ● Initial customer due diligence – Know Your Customer ● Customer application management ● Program management support ● Compliance monitoring ● Regulatory exam assistance Business Reorganization On February 11, 2022, SHF, LLC and SHF Holding Co., LLC, the sole member of SHF, LLC, and Partner Colorado Credit Union (“PCCU”), the sole member of SHF Holding, Co., LLC, entered into a definitive purchase agreement (herein referred to as the “Business Combination”) with Northern Lights Acquisition Corp.
As part of the Program, we provide the following to financial institutions interested in licensing the Program to assist in compliant cannabis banking: ● Initial customer due diligence – Know Your Customer; ● Customer application management; ● Program management support; ● Compliance monitoring; and ● Regulatory exam assistance.
Year Ended December 31, 2022 2021 Change ($) Change (%) Average monthly ending deposit balance (1) $ 208,155,596 180,462,421 27,693,175 15.35 % Account fees (2) $ 5,951,337 5,982,785 (31,448 ) (0.53 )% Average active accounts (3) 967 535 432 80.75 % Average account balance (4) $ 215,259 337,313 (122,054 ) (36.18 )% Average fees per account (4) $ 6,154 11,183 (5,029 ) (44.97 )% (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.
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.
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 Loan Servicing Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement.
This Agreement sets forth the terms and conditions of the lending and account-related services, governing the relationship between the Company and PCCU.
In addition, effective July 1, 2021, the entity entered into an Account Servicing Agreement and Support Servicing Agreement which were subsequently amended and restated.
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.
In conjunction with the reorganization, all of Branches’ employees and certain PCCU employees were terminated from PCCU and hired as SHF, LLC employees. Collectively, oldco, the Branches and SHF, LLC represent the “Carved-Out Operations.” After the reorganization, SHF, LLC contains the entirety of the Carved-Out Operations and oldco was dissolved.
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.
Other adjustments include estimated future loan losses not yet realized including amounts indemnified to PCCU for loans funded by them.
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.
As of December 31, 2022, SHF reported a contract asset and liability of $21,170 and $996 and on December 31, 2021, SHF reported a contract asset and liability of $18,317 and $8,333, respectively.
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.
Loan interest earned on the Company’s direct loans and the indemnified loans increased as the Company increases its focus on lending. For the year ended December 31, 2022, SHF serviced 11 loans in the year ended December 31, 2022, as compared to 4 loans in the year ended December 31, 2021.
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.
The Amended and Restated Support Services Agreement also sets forth certain agreements of PCCU to limit bonus distributions to its members to $30,000,000 during any 12-month period following the effective date of the agreement and to allow its ratio of CRB-related deposits to total assets to equal at least 65% unless otherwise dictated by regulatory, regulator or policy requirements.
Finally, under the Commercial Alliance Agreement, PCCU will continue to allow its ratio of CRB-related deposits to total assets to equal at least 60% unless otherwise dictated by regulatory, regulator or policy requirements.
The following discussion and analysis of our financial performance and results of operations should be read in conjunction with our condensed consolidated financial statements. Forward Looking Statements All statements other than statements of historical facts contained in this report, including statements regarding future operations, are forward-looking statements.
The following discussion and analysis of our financial performance and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements included elsewhere in this Form 10-K This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.
Under this method of accounting, NLIT was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination is treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a recapitalization.
Purchase Agreement and Public Company Costs The Business Combination detailed above was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, NLIT was treated as the acquired company for financial reporting purposes.
Discussion of our Results of Operations —2022 Compared to 2021 (Year Ended December 31) Revenue Year Ended December 31, 2022 2021 Change ($) Change (%) Deposit, activity, onboarding income $ 6,063,939 $ 6,039,358 $ 24,581 0.41 % Safe Harbor Program income 164,062 478,041 (313,979 ) (65.68 )% Investment income 2,120,640 376,918 1,743,722 462.63 % Loan interest income 1,130,178 102,961 1,027,217 997.68 % Miscellaneous fee income - 8,301 (8,301 ) (100.00 )% Total Revenue $ 9,478,819 $ 7,005,579 $ 2,473,240 35.30 % Account fee income consists of deposit account fees, activity fees and onboarding income.
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.
Cash flows For the year ended December 31, 2022, the Company’s cash provided by operations was $ 1,697,380 , compared to cash provided by $2,946,383 for the year ended December 31, 2021. This was mainly due to reduced net income from operations with an additional amount resulting from changes across operating assets and liabilities.
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.
Forward purchase derivative The Company accounts for the forward purchase derivative assumed in the business combination in accordance with the guidance contained in ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The Company classifies the forward purchase derivative as an asset or liability carried at fair value and adjusts the forward purchase derivative to fair value at each reporting period.
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.
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, PCCU allocations, provisions for loan losses and other general and administrative expenses.
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.
SHF’s indemnity liability reflects SHF management’s estimate of probable loan losses inherent under the agreement at the balance sheet date. Management uses a disciplined process and methodology to establish the liability, and the estimates are sensitive to risk ratings assigned to individual loans covered by the agreement as well as economic assumptions driving the estimation model.
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.
Removed
In some cases, forward-looking statements may be identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “expect,” “objective,” “plan,” “potential,” “seek,” “grow,” “target,” “if,” and similar expressions intended to identify forward-looking statements.
Added
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.
Removed
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations, objectives, and financial needs.
Added
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.
Removed
For the loans subject to this agreement, the Company underwrites 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.
Added
On October 26, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA Inc. (“Luminous”).

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SHF Holdings, Inc. 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.
Biggest changeItem 7A. Quantitative and Qualitative Disclosures About Market Risk. 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.

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