UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _______to_______
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
(Former name or former address, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically, if any, every Interactive Date File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Stock Market LLC | ||||
| The Stock Market LLC |
As of August 14, 2024, there were outstanding shares of the Company’s Class A Common Stock, $ par value per share.
SHF HOLDINGS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SHF Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June
30, 2024 (Unaudited) | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable – trade | ||||||||
| Accounts receivable – related party | ||||||||
| Prepaid expenses – current portion | ||||||||
| Accrued interest receivable | ||||||||
| Short-term loans receivable, net | ||||||||
| Other current assets | ||||||||
| Total Current Assets | $ | $ | ||||||
| Long-term loans receivable, net | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right to use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax asset | ||||||||
| Prepaid expenses – long term position | ||||||||
| Forward purchase receivable | ||||||||
| Security deposit | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable-related party | ||||||||
| Accrued expenses | ||||||||
| Contract liabilities | ||||||||
| Lease liabilities – current | ||||||||
| Senior secured promissory note – current portion | ||||||||
| Deferred consideration – current portion | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | $ | $ | ||||||
| Warrant liabilities | ||||||||
| Deferred consideration – long term portion | ||||||||
| Forward purchase derivative liability | ||||||||
| Senior secured promissory note—long term portion | ||||||||
| Net deferred indemnified loan origination fees | ||||||||
| Lease liabilities – long term | ||||||||
| Indemnity liability | ||||||||
| Total Liabilities | $ | $ | ||||||
| Commitment and Contingencies (Note 13) | ||||||||
| Stockholders’ Equity | ||||||||
| Convertible preferred stock, $ par value, shares authorized, and shares issued and outstanding on June 30, 2024, and December 31, 2023, respectively | ||||||||
| Class A common stock, $ par value, shares authorized, and issued and outstanding on June 30, 2024, and December 31, 2023, respectively | ||||||||
| Additional paid in capital | ||||||||
| Retained deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | $ | $ | ||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 1 |
SHF Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For
the three months ended June 30, | For
the six months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Compensation and employee benefits | $ | $ | $ | $ | ||||||||||||
| General and administrative expenses | ||||||||||||||||
| Impairment of goodwill | ||||||||||||||||
| Impairment of finite-lived intangible assets | ||||||||||||||||
| Professional services | ||||||||||||||||
| Rent expense | ||||||||||||||||
| Provision (benefit) for credit losses | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | $ | $ | $ | $ | ||||||||||||
| Operating income/ (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Other income /(expenses) | ||||||||||||||||
| Change in the fair value of deferred consideration | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of warrant liabilities | ||||||||||||||||
| Total other income/ (expenses) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income/ (loss) before income tax | ( | ) | ( | ) | ||||||||||||
| Income tax benefit/ (expense), net | ( | ) | ( | ) | ||||||||||||
| Net income/ (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average shares outstanding, basic | ||||||||||||||||
| Basic net income/ (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average shares outstanding, diluted | ||||||||||||||||
| Diluted income / (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 2 |
SHF Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 2024
| Preferred Stock | Class
A Common Stock | Additional Paid-in | Retained | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Conversion of PIPE shares | - | - | ||||||||||||||||||||||||||
| Restricted stock units (net of tax) | - | - | ||||||||||||||||||||||||||
| Stock compensation cost | - | - | ||||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
FOR THE THREE MONTHS ENDED JUNE 30, 2023
| Preferred Stock | Class
A Common Stock | Additional Paid-in | Retained | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Conversion of PIPE shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock option conversion | - | - | ||||||||||||||||||||||||||
| Restricted stock units | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| 3 |
SHF Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2024
| Preferred Stock | Class
A Common Stock | Additional Paid-in | Retained | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Conversion of PIPE shares | ( | ) | ( | ) | ||||||||||||||||||||||||
| Restricted stock units (net of tax) | - | |||||||||||||||||||||||||||
| Stock compensation cost | - | - | ||||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance, June 30, 2024 | ( | ) | ||||||||||||||||||||||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2023
| Preferred Stock | Class
A Common Stock | Additional Paid-in | Retained | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Cumulative effect from adoption of CECL | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of PIPE shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock option conversion | - | - | ||||||||||||||||||||||||||
| Restricted stock units | - | |||||||||||||||||||||||||||
| Reversal of deferred underwriting cost | - | - | ||||||||||||||||||||||||||
| Issuance of shares to PCCU (net of tax) | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 4 |
SHF Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For
the six months ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income/ (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income/ (loss) to net cash provided by/ (used in) operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock compensation expense (net of RSU tax adjustment) | ||||||||
| Amortization of net deferred indemnified loan origination fees | ( | ) | ( | ) | ||||
| Interest expense | ||||||||
| (Benefit)/ provision for credit losses | ( | ) | ||||||
| Lease expense | ||||||||
| Impairment of goodwill | ||||||||
| Impairment of finite-lived intangible assets | ||||||||
| Deferred tax expense/(benefit), net | ( | ) | ||||||
| Change in the fair value of deferred consideration | ( | ) | ||||||
| Change in fair value of warrant | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable – trade | ( | ) | ( | ) | ||||
| Accounts receivable – related party | ||||||||
| Contract assets | ||||||||
| Prepaid expenses | ||||||||
| Accrued interest receivable | ( | ) | ||||||
| Deferred underwriting payable | ( | ) | ||||||
| Other current assets | ||||||||
| Other current liabilities | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accounts payable – related party | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Contract liabilities | ||||||||
| Net deferred indemnified loan origination fees | ||||||||
| Security deposit | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| CASH FLOWS PROVIDED BY INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net repayment of loans | ||||||||
| Net cash provided by investing activities | ||||||||
| CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
| Repayment of senior secured promissory note | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ||||||
| Net increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents – beginning of period | ||||||||
| Cash and cash equivalents – end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Interest paid | $ | $ | ||||||
| Non-Cash transactions: | ||||||||
| Shares issued for the settlement of PCCU debt obligation | $ | $ | ||||||
| Cumulative effect from adoption of CECL | ||||||||
| Reversal of deferred underwriting cost | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 5 |
SHF Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Organization and Business Operations
Business Description
SHF Holdings, Inc. (the “Company”), based in Golden, Colorado, specializes in financial technology designed to facilitate banking service solutions tailored to the cannabis industry. Initially, the Company’s operations were developed as a credit union service organization, and asset of Partner Colorado Credit Union (“PCCU”). A strategic reorganization on July 1, 2021 consolidated select assets and activities from PCCU into SHF LLC (“SHF”) under SHF Holding Co., LLC. On September 28, 2022, Northern Lights Acquisition Corp. (“NLIT”) acquired SHF, changing its name from Northern Lights Acquisition Corp. to SHF Holdings, Inc., (the “Business Combination”). The Business Combination aimed to enhance the Company’s financial services and market footprint in the cannabis sector.
Further expanding its capabilities, the Company acquired Rockview Digital Solutions, Inc. d/b/a Abaca (“Abaca”) on October 31, 2022. This merger, executed in two steps, positioned Abaca as a wholly-owned subsidiary, bolstering the Company’s fintech offerings and market reach.
The Company facilitates a range of financial services through its financial institution partners using a proprietary technology platform for deposit compliance and ongoing deposit activity compliance with banking regulations and regulators. These include access to business checking and savings accounts, cash management, commercial lending, courier services, remote deposit services, ACH payments, and wire payments. These services enable cannabis businesses to manage their finances effectively while ensuring regulatory compliance. The company generates revenue from fee income, investment income, loan interest income and by offering compliance services to certain financial institutions serving the cannabis industry.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
i. Significant Accounting Policies
The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and results of operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”).
Refer to Note 2 to the Company’s Annual Report on Form 10-K for a description of the Company’s significant accounting policies. The Company has included disclosures below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly, (ii) have material changes or (iii) the Company views as critical as of the date of this report.
| 6 |
ii. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the SEC.
The accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, statements of shareholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the three and six months ended June 30, 2024, are not necessarily indicative of the results that may be expected for the current year ending December 31, 2024 or other interim periods. The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2023, included in the Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).
The
Company has made certain immaterial reclassifications to the statements of operations for the three and six months ended June 30, 2023,
to conform to the presentation for the three and six months ended June 30, 2024. These reclassifications, totaling $
The condensed consolidated financial statements include the accounts of SHF Holdings, Inc., its subsidiaries where the Company have controlling financial interests. All intercompany balances and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.
iii. Concentrations of Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash. Cash balances are maintained substantially in accounts at PCCU, which are insured by the National Credit Union Share Insurance Fund (“NCUSIF”) up to regulatory limits. From time to time, cash balances may exceed the NCUSIF insurance limit. The Company has not experienced any credit losses associated with its cash balances in the past.
In addition to providing compliance and related services for its financial institution partners, the Company offers services to businesses operating primarily in the cannabis industry as well as businesses offering cannabis adjacent services. Cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability to execute our business plan.
Currently the Company substantially relies on PCCU to hold customer deposits and fund its originated loans. The majority of the Company’s revenue is generated by deposits and loans hosted by PCCU pursuant to a commercial alliance agreement dated March 29, 2023 between PCCU and the Company, as previously disclosed as an exhibit to the Form 10-K for the fiscal year ended December 31, 2023 (the “Commercial Alliance Agreement”).
The
Company had only one loan on its balance sheet as of June 30, 2024, which comprises
| 7 |
iv. Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Material estimates that are particularly subject to change in the near term include the determination of the allowance for credit losses, indemnification liabilities, useful lives of intangibles and the fair value of financial instruments. Actual results could differ from the estimates.
v. Liquidity and Going Concern
As
of June 30, 2024, the Company had $
For the six months ended June 30, 2024, the Company reported positive operating income and net working capital. However, considering the historical data, where the Company experienced negative operating income and negative net working capital, management acknowledges the need to closely evaluate the financial performance in upcoming quarters to mitigate any going concern risks. As of June 30, 2024, due to these historical trends, there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the date these unaudited condensed consolidated financial statements were issued.
If the Company is not able to sustain its present level of operations, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned expansion programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result should the Company not continue as a going concern as a result of this uncertainty.
| 8 |
vi. Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective are not expected to have a material impact on the Company’s financial position or results of operations upon adoption.
Adopted Standards
Current Expected Credit Losses (“CECL”)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In November 2019, the FASB issued ASU No. 2019-10 Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The update allows the extension of the initial effective date for entities which have not yet adopted ASU No. 2016-02. The standard is effective for annual reporting periods beginning after December 15, 2022 for private companies and SEC filers classified as smaller reporting entities, with early adoption permitted. Entities apply the standard’s provisions by recording a cumulative effect adjustment to retained deficit. The Company has adopted ASU 2016-13 as of January 1, 2023, utilizing the modified retrospective method.
CECL Transition Impact: The table below provides details on the transition impacts of adopting CECL. Other balance sheet lines not presented were not affected by CECL.
CECL Transition Impact:
| Assets | December
31, 2022 | Transition Adjustment | January
1, 2023 | |||||||||
| Loans receivable, gross | $ | $ | $ | |||||||||
| Less: Allowance for credit loss | ( | ) | ( | ) | ( | ) | ||||||
| $ | $ | ( | ) | $ | ||||||||
| Liabilities & Equity | December
31, 2022 | Transition Adjustment | January
1, 2023 | |||||||||
| Indemnity liability | $ | $ | $ | |||||||||
| Retained deficit | ( | ) | ( | ) | ( | ) | ||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Troubled Debt Restructurings and Vintage Disclosures
This Accounting Standard Update (ASU 2022-02) eliminates the recognition and measurement guidance on troubled debt restructurings for creditors that have adopted ASC 326 and requires them to make enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. The new guidance also requires public business entities to present current period gross write-offs (on a current year-to-date basis for interim-period disclosures) by year of origination in their vintage disclosures. For entities that have adopted ASU 2016-13, this ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has adopted this standard as of January 1, 2023 and the ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.
| 9 |
Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
This Accounting Standard Update (ASU 2022-03) clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered when measuring fair value. Recognizing a contractual restriction on the sale of an equity security as a separate unit of account is not permitted. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company has adopted this standard as of January 1, 2024 and the ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.
Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
This Accounting Standard Update (ASU 2022-06) defers the Sunset Date of ASC Topic 848, Reference Rate Reform (Topic 848), which provides temporary optional relief in accounting for the impact of Reference Rate Reform. This ASU is effective upon issuance (December 21, 2022) and generally can be applied through December 31, 2024. This ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.
Investments-Equity Method and Joint Ventures
In March 2023, the FASB issued ASU 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures using the Proportional Amortization Method. The FASB issued final guidance allowing entities to apply the proportional amortization method to equity investments in all tax credit programs that meet the conditions in ASC 323-740, rather than just investments in qualified affordable projects that generate low income housing tax credits, as was required under the legacy guidance. The guidance is effective for public business entities for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. This ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.
Standards Pending to be Adopted
Business Combinations-Joint Venture Formations
In August 2023, the FASB issued 2023-05, Business Combinations-Joint Venture Formations (Subtopic 805-60); Recognition and Initial Measurement. This ASU contains guidance requiring certain joint ventures to apply a new basis of accounting upon formation by recognizing and initially measuring most of their assets and liabilities at fair value. This guidance is effective for all joint venture formations with a formation date on or after January 1, 2025. Early adoption is permitted. Joint Ventures formed before the effective date have the option to apply it retrospectively, while those formed after the effective date are required to apply it prospectively. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.
Disclosure Improvements, “Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.”
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements, “Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU amends the disclosure or presentation requirements related to various subtopics in the FASB codification.
The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other entities, the amendments will be effective two years later. The amendments in this Update should be applied prospectively. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the codification and will not become effective for any entity. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.
Segment Reporting
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). This ASU requires public entities to provide disclosures of significant segment expenses and other segment items. It also requires public entities to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Public entities with a single reportable segment will have to provide all the disclosures required by ASC 280, including the significant segment expense disclosures. This guidance is applied retrospectively to all periods presented, unless it is impractical. This ASU applies to all public entities and is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.
| 10 |
Income Taxes
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740). This ASU requires public business entities to disclose in their rate reconciliation table additional categories of information about income taxes paid, including certain disclosures that would be disaggregated by jurisdiction and other categories. This ASU is effective for fiscal years after December 15, 2024. Early adoption would be permitted. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.
ASU 2024-01: Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards
ASU 2024-01 clarifies the scope applications of profits interest awards by adding illustrative guidance to ASC 718 “Compensation-Stock Compensation.” The amendments in the ASU apply to all reporting entities that account for profits interest awards as compensation to employees or non-employees in return for goods or services.
The term “profits interest” is not explicitly defined in US GAAP. Rather, an IRS Revenue Procedure (Rev Proc 93-27) defines a “Profits Interest” as a “partnership interest other than a capital interest.” Unlike a capital interest, which provides rights to existing net assets of an entity, a profits interest only provides rights to future profits and/or equity appreciation of an entity. This distinction, along with other terms, conditions and characteristics of profits interests often complicates accounting decisions for profits interests, leading to diversity in practice whether to account for profits interests under ASC 718 or other US GAAP.
The ASU introduces four (4) illustrative examples of fact patterns that demonstrate how an entity would apply the scope guidance in paragraph 718-10-15-3 to a profits interest or similar award with certain features.
The ASUs are effective for public entities for fiscal years beginning after December 15, 2024, including interim periods within those years. For all other entities, adoption is required for fiscal years beginning after December 15, 2025. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.
ASU 2024-02: Codification Improvements—Amendments to Remove References to the Concepts Statements
The ASU contains amendments to the Codification that remove references to various FASB Concepts Statements. The FASB has a standing project on its agenda to address suggestions received from stakeholders on the Accounting Standards Codification and other incremental improvements to US GAAP. This effort facilitates Codification updates for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or the structure of guidance and other minor improvements. In the Board’s view, removing all references to Concept Statements in the guidance will simplify the codification and draw a distinction between authoritative and non-authoritative literature.
The amendments in the Update are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.
Note 3. Deferred Consideration
On
November 11, 2022, as provided in Exhibit 2.1 of the Current Report of Form 8-K on November 14, 2022, the Company entered into the first
Amendment to the Merger Agreement and Plan of Merger to that certain Agreement and Plan of Merger, dated as of October 29, 2022, by and
among the Parent, SHF Merger Sub I, a Delaware corporation and a direct wholly-owned subsidiary of Parent (“Merger Sub I”),
SHF Merger Sub II, LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Parent (“Merger Sub II”
and, together with Merger Sub I, the “Merger Subs”), Rockview Digital Solutions, Inc., a Delaware corporation, d/b/a Abaca
and Dan Roda, solely in such individual’s capacity as the representative of the Company Security Holders (collectively with the
“Merger Agreement”). The Merger Agreement provided for payment of $
Under
the Second Amendment to Agreement and Plan of Merger, dated October 26, 2023, by and among SHF Holdings, Inc., a Delaware corporation,
Merger Sub I, a Delaware corporation, [Merger Sub II], a Delaware limited liability corporation, Rockview Digital Solutions, Inc., a
Delaware corporation, d/b/a Abaca and Dan Roda, solely in such individual’s capacity as the representative of the Abaca security
holders as referenced in Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on October 27, 2023 (the “Amended
Abaca Merger Agreement”)The revised terms, provides for deferred stock consideration of shares of Class A Common Stock
issued at the first anniversary of the Abaca Merger Agreement based on a recalculated value of $ per share. No changes affected the
scheduled cash payments. Furthermore, a third-anniversary consideration of $
| 11 |
The change in the amount of deferred consideration from January 1, 2023, to June 30, 2024, is as follows:
| Stock consideration | Cash consideration | Third
Anniversary Consideration Payment | ||||||||||
| January 1, 2023 | $ | $ | $ | |||||||||
| Less: Working capital adjustment | ( | ) | - | |||||||||
| Less: Issuance of shares and payment to shareholders | ( | ) | ( | ) | - | |||||||
| Less: Issuance of Abaca warrants | ( | ) | - | - | ||||||||
| Less: Issuance of third anniversary payment consideration | ( | ) | - | |||||||||
| Less: Gain recognized in the consolidated statements of operations | ( | ) | - | - | ||||||||
| Add: Fair value adjustment | ||||||||||||
| December 31, 2023 | ||||||||||||
| Add: Fair value adjustment | ( | ) | ||||||||||
| June 30, 2024 | $ | $ | $ | |||||||||
Note 4. Goodwill and Finite-lived Intangible Assets
Goodwill
The Company’s goodwill was derived from the Abaca Merger , where the purchase price exceeded the fair value of the net identifiable assets acquired. Goodwill is tested for impairment at least annually, or more frequently if a triggering event occurs.
In
2023, the Company conducted an interim goodwill and intangible impairment assessment on June 30, 2023, and found that the carrying value
of goodwill exceeded its fair value, leading to the recognition of a $
As of June 30, 2024, the Company has not conducted an interim impairment assessment of its assets, due to the absence of any triggering events. Therefore, no additional impairment charges have been recognized in this reporting period.
As
of June 30, 2024, and December 31, 2023, the Company’s accumulated goodwill impairment was $
Finite-lived intangible assets
The Company reviews its finite-lived intangible assets for impairment at least annually on December 31 unless any events or circumstances indicate it is more likely than not that the fair value of the finite-lived intangible assets is less than its carrying value.
In
2023, following a triggering event in the second quarter, the Company performed an interim goodwill and intangible asset impairment assessment.
In accordance with our established policy, an annual review was also conducted on December 31, 2023. The finite-lived intangible assets
evaluated include market-related intangibles, customer relationships, and developed technologies. The interim analysis resulted in an
impairment charge of $
As of June 30, 2024, the Company has not conducted an interim impairment assessment of its assets, due to the absence of any triggering events. Therefore, no additional impairment changes have been recognized in this reporting period.
| 12 |
Following is a summary of the Company’s finite-lived intangible assets as of June 30, 2024 and December 31, 2023:
Remaining Life in | December
31, 2023 (A) | Acquired
in Acquisition (B) | Amortization (C) | Impairment (D) | June
30, 2024 (A+B-C-D) | |||||||||||||||||
| Market related intangible assets | $ | $ | $ | $ | $ | |||||||||||||||||
| Customer relationships | ||||||||||||||||||||||
| Developed technology | ||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | $ | |||||||||||||||||
Remaining Life in | December
31, 2022 (A) | Acquired
in Acquisition (B) | Amortization (C) | Impairment (D) | December 31, 2023
| |||||||||||||||||
| Market related intangible assets | $ | $ | $ | $ | ||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||
| Developed technology | ||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | ||||||||||||||||||
During
the six months ended June 30, 2024, amortization expense and impairment of finite-lived intangible assets were $
Note 5. Loans Receivable
Commercial real estate loans receivable, net consist of the following:
| June
30, 2024 | December
31, 2023 | |||||||
| Commercial real estate loans receivable, gross | $ | $ | ||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Commercial real estate loans receivable, net | ||||||||
| Current portion | ( | ) | ( | ) | ||||
| Noncurrent portion | $ | $ | ||||||
Allowance for Credit Losses
The allowance for credit losses is maintained at a level believed to be sufficient to provide for estimated credit losses based on evaluating known and inherent risks in the loan portfolio. The Company’s estimated the allowance for credit losses on the reporting date in accordance with the credit loss policy described in Note 2 to the 2023 Form 10-K.
| 13 |
The allowance for credit losses consists of the following activity for the three and six months ended June 30, 2024 and June 30, 2023:
| Three months ended June 30, | 2024 | 2023 | ||||||
| Allowance for credit losses | ||||||||
| Beginning balance | $ | $ | ||||||
| Charge-offs | ||||||||
| Recoveries | ||||||||
| Benefit | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
| Six months ended June 30, | 2024 | 2023 | ||||||
| Allowance for credit losses | ||||||||
| Beginning balance | $ | $ | ||||||
| Cumulative effect from adoption of CECL | ||||||||
| Charge-offs | ||||||||
| Recoveries | ||||||||
| Benefit | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
| June
30, 2024 | June
30, 2023 | |||||||
| Loans receivable: | ||||||||
| Individually evaluated for an allowance for credit loss | $ | $ | ||||||
| Collectively evaluated for an allowance for credit loss | ||||||||
| $ | ||||||||
| Allowance for credit losses: | ||||||||
| Individually evaluated for an allowance for credit loss | $ | $ | ||||||
| Collectively evaluated for an allowance for credit loss | ||||||||
| $ | ||||||||
On June 30, 2024 and December 31, 2023, no loans were past due or classified as non-accrual.
Credit quality of loans:
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks credit quality indicators based on the loan payment status on monthly basis. The Company continuously evaluates the credit quality of each indemnified loan by assessing the risk factors and assigning a risk rating based on a variety of factors. The detailed breakdown of risk factors are described in Note 6 to the unaudited condensed consolidated financial statements.
The carrying value, excluding the CECL Reserve, of the Company’s loans held at carrying value within each risk rating is as follows:
| Risk rating | June
30, | December
31, 2023 | ||||||
| 4 | $ | $ | ||||||
| Grand total | $ | $ | ||||||
Note 6. Indemnification Liability
As discussed at Note 8 to the unaudited condensed consolidated financial statements, and pursuant to the Commercial Alliance Agreement with PCCU, PCCU funds loans through a third-party vendor. SHF earns the associated interest and pays PCCU a loan hosting payment at an annual rate of 0.35% of the outstanding loan principal funded and serviced by PCCU and 0.25% of the outstanding loan principle serviced by SHF. The below schedule details outstanding amounts funded by PCCU and categorized as either collateralized loans or unsecured loans and lines of credit.
June
30, | December
31, 2023 | |||||||
| Secured term loans | $ | $ | ||||||
| Unsecured loans and lines of credit | ||||||||
| Total loans funded by PCCU | $ | $ | ||||||
Secured
loans contained an interest rate ranging from
| 14 |
SHF has agreed to indemnify PCCU for losses on certain PCCU loans. The indemnity liability reflects SHF management’s estimate of probable credit losses inherent under the agreement at the balance sheet date. The Company’s estimated indemnity liability on the reporting date was calculated in accordance with the allowance for credit loss and indemnity liability policies described in Note 2 to the Company’s 2023 Form 10-K.
The indemnity liability activity are as follows:
Six months ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Cumulative effect from adoption of CECL | ||||||||
| Charge-offs | ||||||||
| Recoveries | ||||||||
| (Benefit)/ Provision | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
As of June 30, 2024, the company’s entire loan portfolio was current and performing. However, as of December 31, 2023, one loan had been classified as nonaccrual. On December 29, 2023, the company successfully negotiated an amendment agreement to the nonaccrual loan agreement, resulting in the payment of all overdue amounts and restoring the loan to current status. During the second quarter of 2024, the company received the full principal amount of the loan, along with all accrued interest.
Credit quality of indemnified loans:
As part of the on-going monitoring of the credit quality of the Company’s indemnified loan portfolio, management tracks credit quality indicators based on the loan payment status on monthly basis. The Company continuously evaluates the credit quality of each indemnified loan by assessing the risk factors and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, projected cash flow, loan structure and exit plan, loan-to-value ratio, fixed charge coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 10-point scale, the Company’s loans are rated “0” through “10,” from less risk to greater risk, which ratings are defined as follows:
| Risk rating |
Category | Description | ||
| 0 | Risk Free | Free of repayment risk. The loan is fully guaranteed by the full faith and backing of the US Government or entirely secured by cash controlled by SHF. | ||
| 1 | Highest Quality | High caliber loan with the lowest risk of default. Significant excess cash flow after debt service and moderate to low leverage. | ||
| 2 | Excellent | High quality loan that carry’s a low risk of default. Strong cash flow and relatively few negative individual risk factors. | ||
| 3 | Good | Loans with lower-than-average level of risk. Excess cash flow and other factors contributing to the overall low level of risk in the loan. | ||
| 4 | Average | Risk factors may be mixed with some negative and some positive aspects, but the overall rating will indicate an average level of risk. | ||
| 5 | Fair | Loans in this category have the maximum level of risk that can be accepted while still recommending a new loan for origination. The loan risk factors may contain multiple negative factors, but they are generally outweighed by the positive aspects of the loan. | ||
| 6 | Watch List | There is a temporary and curable condition resulting in a lower risk rating. | ||
| 7 | Special Mention | There is a potential weakness that may result in the deterioration of the prospect of repayment that are not temporary and may require additional collection or workout efforts. | ||
| 8 | Substandard | Loans in this category are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged and have well-defined weaknesses that jeopardize the liquidation of the debt with distinct possibility of loss. SHF may be required to advance additional funds to manage the loan. Escalated collection activities such as foreclosure have been scheduled with anticipated losses up to 20% of the outstanding balance. | ||
| 9 | Doubtful | Collection or liquidation in full highly questionable and improbable. Escalated collection activities such as foreclosure have commenced with anticipated losses from 20% to 50% of the outstanding balance. | ||
| 10 | Loss | Uncollectable loans. A complete write-off is imminent although a partial recovery may be affected in the future. |
SHF has agreed to indemnify PCCU from all claims related to SHF’s cannabis-related business. Other than potential credit losses, no other circumstances were identified meeting the requirements of a loss contingency.
| 15 |
The carrying value, excluding the CECL Reserve, of the Company’s indemnified loans held at carrying value within each risk rating is as follows:
| Risk rating | June
30, | December
31, 2023 | ||||||
| 3 | $ | $ | ||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| Grand total | $ | $ | ||||||
The provision (benefit) for credit losses on the statement of operations consists of the following activity for the three months ended June 30, 2024 and June 30, 2023:
| June 30, 2024 | June 30, 2023 | |||||||||||||||||||||||
| Commercial real estate loans | Indemnity liability | Total | Commercial real estate loans | Indemnity liability | Total | |||||||||||||||||||
| Provision (benefit) | $ | ( | ) | ( | ) | ( | ) | $ | ( | ) | $ | $ | ||||||||||||
The provision (benefit) for credit losses on the statement of operations consists of the following activity for the six months ended June 30, 2024 and June 30, 2023:
| June 30, 2024 | June 30, 2023 | |||||||||||||||||||||||
| Commercial real estate loans | Indemnity liability | Total | Commercial real estate loans | Indemnity liability | Total | |||||||||||||||||||
| Provision (benefit) | $ | ( | ) | ( | ) | ( | ) | $ | ( | ) | $ | $ | ||||||||||||
Note 7. Property and Equipment, Net
Property and equipment consist of the following:
June
30, | December
31, 2023 | |||||||
| Equipment | $ | $ | ||||||
| Software | ||||||||
| Improvement | ||||||||
| Office furniture | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Note 8. Related Party Transactions
Commercial Alliance Agreement
On
March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement. This Agreement sets forth the terms and conditions
governing the relationship between the Company and PCCU. The Commercial Alliance Agreement sets forth the application, underwriting,
loan approval, and foreclosure process for loans from PCCU to borrowers that are cannabis-related businesses and the loan servicing and
monitoring responsibilities provided by the Company and PCCU. In particular, the Commercial Alliance Agreement provides for procedures
to be followed upon the default of a loan to ensure that neither the Company nor PCCU will take title to or possession of any cannabis-related
assets, including real property, that may be collateral for a loan funded by PCCU pursuant to the Commercial Alliance Agreement. Under
the Commercial Alliance agreement, PCCU has the right to receive monthly fees for managing loans. For CRB loans, which are funded by
PCCU but primarily managed by the Company, a yearly fee of
| 16 |
The below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits:
June
30, | December
31, 2023 (Unaudited) | |||||||
| CRB related deposits | $ | $ | ||||||
| Capacity at 60% | ||||||||
| PCCU net worth | ||||||||
| Capacity at 1.3125 | ||||||||
| Limiting capacity | ||||||||
| PCCU loans funded | ||||||||
| Amounts available under lines of credit | ||||||||
| Incremental capacity* | $ | ( | ) | $ | ||||
| * |
The revenue from the Commercial Alliance Agreement recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Account servicing agreement | $ | $ | $ | $ | ||||||||||||
| Commercial Alliance Agreement | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The operating expenses from the Commercial Alliance Agreement recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Support services agreement | $ | $ | $ | $ | ||||||||||||
| Loan servicing agreement | ||||||||||||||||
| Commercial Alliance Agreement | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 17 |
The outstanding balances associated with PCCU disclosed in the balance sheet are as follows:
June
30, | December
31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Accounts payable | ||||||||
| Senior Secured Promissory Note (Refer to Note 9 to the unaudited condensed consolidated financial statements) | ||||||||
Of
the $
Note 9. Senior Secured Promissory Note
June
30, | December
31, 2023 | |||||||
| Senior Secured Promissory Note (current) | $ | $ | ||||||
| Senior Secured Promissory Note (long term) | ||||||||
| $ | $ | |||||||
On
March 29, 2023, the Company and PCCU entered into definitive transaction documents to settle and restructure the deferred obligation
following the Business Combination under which the Company has issued the five-year Senior Secured Promissory Note (the “PCCU Note”)
in the principal amount of $
The
PCCU Note amount will be paid in 54 installments of principal and interest of $
The repayment schedule of the outstanding principal amount of the PCCU Note as of June 30, 2024, is as follows:
| Year of payment | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Grand total | $ | |||
| 18 |
Note 10. Leases
The
Company has non-cancellable operating leases for facility space with varying terms. All of the active leases for facility space qualified
for capitalization under FASB ASC 842, Leases. These leases have remaining lease terms between to
The Company analyzes contracts above certain thresholds to identify leases and lease components. Lease and non-lease components are not separated for facility space leases. The Company uses its contractual borrowing rate to determine lease discount rates when an implicit rate is not available. Total lease cost for the three and six months ended June 30, 2024 and June 30, 2023, included in Unaudited Condensed Consolidated Statements of Operations, is detailed in the table below:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Short-term lease cost | ||||||||||||||||
| Total Lease Cost | $ | $ | $ | $ | ||||||||||||
June
30, | December
31, 2023 | |||||||
| ROU assets that are related to lease properties are presented as follows: | ||||||||
| Beginning balance | $ | $ | ||||||
| Additions to right-of-use assets | ||||||||
| Amortization charge for the period | ( | ) | ( | ) | ||||
| Lease modifications | ||||||||
| Ending balance | $ | $ | ||||||
| Further information related to leases is as follows: | ||||||||
| Weighted-average remaining lease term | ||||||||
| Weighted-average discount rate | % | % | ||||||
Future minimum lease payments as of June 30, 2024, and December 31, 2023, are as follows:
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Year | ||||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total future minimum lease payments | $ | $ | ||||||
| Less: Imputed interest | ||||||||
| Operating lease liabilities | ||||||||
| Less: Current portion | ||||||||
| Non-current portion of lease liabilities | $ | $ | ||||||
| 19 |
Note 11. Revenue
Disaggregated revenue
Revenue by type are as follows:
| Three
months ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Deposit, activity, onboarding income | $ | $ | ||||||
| Safe Harbor Program income (expense) | ( | ) | ||||||
| Investment income | ||||||||
| Loan interest income | ||||||||
| Total Revenue | $ | $ | ||||||
| Six
months ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Deposit, activity, onboarding income | $ | $ | ||||||
| Safe Harbor Program income | ||||||||
| Investment income | ||||||||
| Loan interest income | ||||||||
| Total Revenue | $ | $ | ||||||
Account fee income to the Company are derived from the businesses holding accounts with our financial institution partners and consists of deposit account fees, account activity fees, and onboarding income, each of which is recognized on a periodic basis as per the fee schedule with financial institution partners. The Company also receives income related to outsourced support of financial institutions providing banking to the cannabis industry whose income is recognized on the basis of usage as per the agreements. Loan interest income consist of interest earned on both direct and indemnified loans pursuant to the Commercial Alliance Agreement. Investment income consists of interest earned on the daily deposits balances of the cannabis businesses held with the Company’s financial institution partners.
Under
the Company’s Commercial Alliance Agreement, the Company is obligated to remit
Note 12. Commitments and contingencies
| ● | The Company is involved in, or has been involved in, arbitrations or various other legal proceedings that arise from the normal course of its business. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material impact on the Company’s results of operations, balance sheets and cash flows due to defense costs, and divert management resources. The Company cannot predict the timing or outcome of these claims and other proceedings. |
| ● | In connection with the issuance of Class A Common Stock to Abaca shareholders, the Company commits to registering the stock upon the exercise of Abaca Warrants if required by law or regulation to ensure the shares can be sold without restrictive legends, known as the Warrant Registration Requirement. Should this requirement arise, the Company is obliged to file a registration statement with the SEC within 45 calendar days of notification of the Warrant Registration Requirement. The failure to file within this timeframe constitutes an event of default. Moreover, the Company is dedicated to making the registration statement effective as promptly as possible and maintaining its effectiveness, along with a current prospectus, until the Warrants expire according to this Agreement’s terms. In the event a registration statement triggered by a Warrant Registration Requirement is not declared effective by the SEC within one year from its filing date, Warrant holders are entitled to exercise their Warrants on a cashless basis from the 366th day post-filing until the statement becomes effective. |
| 20 |
Basic net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period. For the Company’s diluted earnings per share calculation, the Company uses the “if-converted” method for preferred stock and convertible debt and the “treasury stock” method for Warrants and Options.
| For the three month period ended June 30, | 2024 | 2023 | ||||||
| Net Income/ (loss) | $ | $ | ( | ) | ||||
| Weighted average shares outstanding – basic | ||||||||
| Basic net income/ (loss) per share | $ | $ | ( | ) | ||||
| Weighted average shares outstanding – diluted | ||||||||
| Diluted net income/ (loss) per share | $ | $ | ( | ) | ||||
| For the six month period ended June 30, | 2024 | 2023 | ||||||
| Net Income/ (loss) | $ | $ | ( | ) | ||||
| Weighted average shares outstanding – basic | ||||||||
| Basic net income/ (loss) per share | $ | $ | ( | ) | ||||
| Weighted average shares outstanding – diluted | ||||||||
| Diluted net income/ (loss) per share | $ | $ | ( | ) | ||||
| Weighted average shares calculation – basic | Three months ended June 30, | Six months ended June 30, | ||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Company public shares | ||||||||||||||||
| Company initial stockholders | ||||||||||||||||
| PCCU stockholders | ||||||||||||||||
| Shares issued for abaca acquisition | ||||||||||||||||
| Restricted stock units issued | ||||||||||||||||
| Conversion of preferred stock | ||||||||||||||||
| Grand total | ||||||||||||||||
| Weighted average shares calculation - diluted | Three
months ended June 30, | Six
months ended June 30, | ||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Shares used in computation of basic earnings per share | ||||||||||||||||
| Shares to be issued to Abaca shareholders | ||||||||||||||||
| Restricted stock units | ||||||||||||||||
| Conversion of preferred stock | ||||||||||||||||
| Grand total | ||||||||||||||||
| 21 |
| Three
months ended June 30, | Six
months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Warrants | ||||||||||||||||
| Share based payments | ||||||||||||||||
| Shares to be issued to Abaca shareholders | ||||||||||||||||
| Conversion of preferred stock | ||||||||||||||||
| Grand total | ||||||||||||||||
The holders of Series A Convertible preferred stock shall be entitled to receive, and the Company shall pay, dividends on shares of Series A Convertible preferred stock equal (on an as-if-converted-to-Class-A-common stock basis) to and in the same form as dividends actually paid on shares of the Class A Common Stock when, as and if such dividends are paid on shares of the Class A Common Stock. No other dividends shall be paid on shares of Series A convertible preferred stock.
Note 14. Forward Purchase Agreement
On
June 16, 2022, the Company entered into a Forward Purchase Agreement (“FPA”) with Midtown East Management NL, LLC (“Midtown
East”), which subsequently assigned obligations to purchase shares of Class A Stock each to Verdun Investments LLC (“Verdun”)
and Vellar Opportunity Fund SPV LLC – Series 1 (“Vellar”) through assignment and novation agreements. The collective
acquisition involved million Class A shares, with Midtown East, Verdun, and Vellar waiving their redemption rights. The Company incurred
costs totaling $
| As
at December 31, 2023 | Shares
sold during the six months ended June 30, 2024 | As
at June 30, 2024 | ||||||||||||||||||||||||||||
| S.no | Name of the party | Opening Shares (a) | Amount | Shares (b) | Amount | Shares (c=a-b) | Rest
price (iii) | Amount (c x iii) | ||||||||||||||||||||||
| 1 | Vellar | $ | $ | $ | ||||||||||||||||||||||||||
| 2 | Midtown East | |||||||||||||||||||||||||||||
| 3 | Verdun | |||||||||||||||||||||||||||||
| Grand total | $ | $ | $ | |||||||||||||||||||||||||||
| 22 |
Note 15 Warrant Liabilities
Public and Private Placement Warrants
As
of June 30, 2024 and December 31, 2023, the Company had
The Public and Private Placement Warrants may only be exercised for a whole number of Class A Common Stock.
No warrant will be exercisable for cash or on a cashless basis, and the Company will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, or an exemption from registration is available.
Redemption of warrants become exercisable when the price per Class A Common Stock equals or exceeds $. Once the warrants become exercisable, the Company may redeem the warrants:
| ● | in whole and not in part; |
| ● | at
a price of $ |
| ● | upon not less than 30 days’ prior written notice of redemption to each warrant holder; and |
| ● | if, and only if, the reported last sale price of the Class A Common Stock equals or exceeds $ per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like and certain issuances of Class A Common Stock and equity-linked securities) for any 20 trading days within a 30-trading day period commencing no earlier than the date the warrants become exercisable and ending on the third business day before the date on which the Company sends the notice of redemption to the warrant holders. |
If and when the warrants become redeemable by the Company, the Company may exercise its redemption rights; this is also the case if the Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If the Company calls the warrants for redemption, management will have the option to require all holders that wish to exercise the Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of Class A Common Stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants.
The private placement warrants are identical to the public warrants, except that the private placement warrants and the Class A Common Stock issuable upon the exercise of the private placement warrants were not transferable, assignable or saleable, subject to certain limited exceptions. Additionally, the private placement warrants are exercisable on a cashless basis and non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the private placement warrants are held by someone other than the initial purchasers or their permitted transferees, the private placement warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants.
PIPE Warrants
As
of June 30, 2024 and December 31, 2023, the Company had
The
PIPE Warrants have an adjusted exercise price of $
Abaca Warrants
As
of June 30, 2024, and December 31, 2023, the Company issued
| 23 |
The
Note 16. Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:
| ○ | Level 1 – Observable, unadjusted quoted prices in active markets | |
| ○ | Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability | |
| ○ | Level 3 – Unobservable inputs with little or no market activity that require the Company to use reasonable inputs and assumptions |
The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period.
Assets and Liabilities Reported at Fair Value on a Recurring Basis
Public Warrants:
Public warrants are recorded at fair value on a recurring basis. The Company obtains exchange traded price, of Level 1 inputs, based on observable data to value these warrants.
Private Placement Warrants:
Private Placement Warrants are recorded at fair value on a recurring basis based upon an internal Company assessed value of these derivatives with Level 3 inputs, which are derived from the Black-Scholes model.
PIPE Warrants:
PIPE Warrants are recorded at fair value on a recurring basis based upon an internal Company assessed value of these derivatives with Level 3 inputs, which are derived from the Black-Scholes model.
Abaca Warrants:
Abaca Warrants are recorded at fair value on a recurring basis. The Company assessed the value of these derivatives with Level 3 inputs. Level 3 inputs, based on unobservable data derived from the Black-Scholes model.
Third Anniversary Payment Consideration:
Third anniversary payment consideration are recorded at fair value on a recurring basis. The Company values these derivatives based on third party reports for Level 3 inputs. Level 3 inputs are based on unobservable data derived from the Black Scholes-Merton model.
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Forward Purchase Option Derivatives:
Forward purchase option derivatives are recorded at fair value on a recurring basis. In 2022, the Company values these derivatives based on third party reports for Level 3 inputs. In 2023 and 2024, no significant risk factor changes affecting forward purchase option derivative values were noted.
The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy on June 30, 2024 and December 31, 2023:
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Total Fair Value | Quoted Prices in Active Markets (Level 1) | Significant Other Unobservable Inputs (Level 3) | Total Fair Value | Quoted Prices in Active Markets (Level 1) | Significant Other Unobservable Inputs (Level 3) | |||||||||||||||||||
| Description | ||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| PIPE warrants | $ | $ | ||||||||||||||||||||||
| Public warrants | $ | $ | ||||||||||||||||||||||
| Private placement warrants | $ | $ | ||||||||||||||||||||||
| Abaca warrant | $ | $ | ||||||||||||||||||||||
| Forward purchase derivative liability | $ | $ | ||||||||||||||||||||||
| Third anniversary payment consideration | $ | $ | ||||||||||||||||||||||
Assets Measured at Fair Value on a Nonrecurring Basis
Assets that are measured at fair value on a nonrecurring basis primarily comprises of property, plant and equipment, right-to-use assets, finite lived intangible assets and goodwill. The Company does not record these at fair value on a recurring basis, however, the carrying value of the assets may be reduced to fair value when the Company determines that impairment has occurred.
At December 31, 2023, the Company’s developed technology asset were measured at fair value on a nonrecurring basis as result of annual impairment testing. In order to evaluate the fair value of the developed technology asset, the annual impairment test employed the Relief from Royalty Method for accurately reflecting market conditions and asset performance.
The following table presents the carrying amounts and fair values of financial instruments measured on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
| As on December 31, 2023 | ||||||||||||||||||||
Carrying amount | Fair value | Fair value measurement using | ||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Developed Technology | $ | |||||||||||||||||||
The following table provides quantitative information regarding Level 3 fair value measurements inputs as it relates to the finite lived intangible assets as of their measurement dates:
| As on December 31, 2023 | Developed technology | |||
| Royalty rate | % | |||
| Discount rate | % | |||
| Estimated useful life | ||||
| Tax rate | % | |||
There were no assets or liabilities recorded at fair value on a nonrecurring basis for the period ended June 30, 2024.
Fair Value of Financial Instruments
The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. With the exceptions of loans receivable, warrants and forward purchase option derivatives, the Company considers the carrying amounts of its financial instruments (cash, accounts receivable and accounts payable) in the balance sheet to approximate fair value because of the short-term or highly liquid nature of these financial instruments.
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The following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:
| As on June 30, 2024 | ||||||||||||||||||||
| Carrying amount | Fair value | Fair value measurement using | ||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Forward purchase receivables | ||||||||||||||||||||
| Loans | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Deferred consideration | ||||||||||||||||||||
| Senior Secured Promissory note | ||||||||||||||||||||
| Public warrants | ||||||||||||||||||||
| Private placement warrants | ||||||||||||||||||||
| PIPE Warrants | ||||||||||||||||||||
| Abaca Warrants | ||||||||||||||||||||
| Third anniversary payment consideration | ||||||||||||||||||||
| Forward purchase derivative | ||||||||||||||||||||
| As on December 31, 2023 | ||||||||||||||||||||
| Carrying amount | Fair value | Fair value measurement using | ||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Forward purchase receivables | ||||||||||||||||||||
| Loans | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Deferred consideration | ||||||||||||||||||||
| Senior secured promissory note | ||||||||||||||||||||
| Public warrants | ||||||||||||||||||||
| Private placement warrants | ||||||||||||||||||||
| PIPE warrants | ||||||||||||||||||||
| Abaca warrants | ||||||||||||||||||||
| Forward purchase derivative | ||||||||||||||||||||
| Third anniversary payment consideration | ||||||||||||||||||||
| 26 |
The change in the assets measured at fair value on a recurring basis for which the Company have utilized Level 3 inputs to determine fair value are presented in the following table:
| For the period ended June 30, 2024 | ||||||||||||||||||||
| PIPE Warrants | Abaca Warrant | Private Placement Warrants | Third Anniversary Payment Consideration | Forward Purchase Derivative | ||||||||||||||||
| Balance as at December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Fair value adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Balance as at the March 31, 2024 | $ | $ | $ | $ | $ | |||||||||||||||
| Fair value adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Balance at the June 30, 2024 | $ | $ | $ | $ | $ | |||||||||||||||
| For the period ended June 30, 2023 | ||||||||||||||||||||
| PIPE Warrants | Abaca Warrant | Private Placement Warrants | Third Anniversary Payment Consideration | Forward Purchase Derivative | ||||||||||||||||
| Balance as at December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Fair value adjustment | ( | ) | ( | ) | ||||||||||||||||
| Balance as at the March 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Fair value adjustment | ( | ) | ( | ) | ||||||||||||||||
| Balance at the June 30, 2023 | $ | $ | $ | |||||||||||||||||
As of June 30, 2024 and on December 31, 2023, the valuation of private placement warrants, PIPE warrants, and Abaca warrants was carried out using the Black-Scholes model, while the fair value of the Abaca third anniversary payment consideration was determined using the Black Scholes Merton Option pricing model. As of June 30, 2024 and December 31, 2023, these warrants were valued using Level 3 inputs.
As of December 31, 2023, the Company assessed the fair value of its forward purchase agreement (FPA) derivative utilizing a Monte Carlo Simulation within a risk-neutral setting, which is a particular instance of the Income Approach, based on calculations from December 31, 2022. Throughout the periods ended June 30, of 2023 and 2024, there were no notable alterations in risk factors that would impact the valuation of the FPA derivative. Consequently, management retained the December 31, 2022, valuation for December 31, 2023 and June 30, 2024. The Company will continue to monitor the fair value of the forward option derivative each reporting period with subsequent revisions to be recorded in the Statements of Operations.
During the period ended June 30, of 2023 and 2024, there were no changes in the classification of financial instruments within Level 2 and Level 3 of the fair value hierarchy.
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The following table provides quantitative information regarding Level 3 fair value measurements inputs as it relates to the private placement warrants and public warrants as of their measurement dates:
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||
| PIPE Warrants | Private Warrants | Third Anniversary Payment Consideration | Abaca Warrants | PIPE Warrants | Private Warrants | Third Anniversary Payment Consideration | Abaca Warrants | |||||||||||||||||||||||||
| Exercise price | $ | $ | $ | |||||||||||||||||||||||||||||
| Share Price | $ | $ | ||||||||||||||||||||||||||||||
| Expected term (years) | ||||||||||||||||||||||||||||||||
| Volatility | % | % | % | % | % | % | % | % | ||||||||||||||||||||||||
| Risk-free rate | % | % | % | % | % | % | % | % | ||||||||||||||||||||||||
The following table provides quantitative information regarding Level 3 fair value measurements inputs as it relates to the forward purchase derivatives as of their measurement dates on June 30, 2024 and December 31, 2023:
June 30, 2024 | December 31, 2023 | |||||||
| Reset Price | $ | $ | ||||||
| Expected term (years) | ||||||||
| Additional Maturity Consideration per share | $ | $ | ||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Risk-adjusted discount rate | % | % | ||||||
Note 17. Tax
For
the six months ended June 30, 2024, the Company recorded income tax expense of $
The Company recognizes income tax benefits from uncertain tax positions where the realization of the ultimate benefit is uncertain. As of both June 30, 2024, and December 31, 2023, the Company has no unrecognized income tax benefits.
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Note 18. 401(k) Plan
The
Company offers to all employees a tax-qualified retirement contribution plan, with the Company’s
Note 19. Stockholders’ Equity
Preferred Stock
The
Company is authorized to issue preferred shares with a par value of $ per share with such designation rights and preferences
as may be determined from time to time by the Company’s Board of Directors. As of June 30, 2024, there were Class A preferred
shares issued and outstanding, and Class A preferred shares issued and outstanding on December 31, 2023. The holders of preferred
stock shall be entitled to receive, and the Company shall pay, dividends on shares of preferred stock equal(on an as-if-converted-to-Class-A-Common-Stock
basis) to and in the same form as dividends actually paid on shares of the Class A Common Stock when, as and if such dividends are paid
on shares of the Class A Common Stock. No other dividends shall be paid on the preferred stock. The terms of the preferred stock provide
for an initial conversion price of $
Common Stock
The Company is authorized to issue up to shares of Class A Common Stock with a par value of $ per share. Holders of the Company’s Class A Common Stock are entitled to one vote for each share. As of June 30, 2024 and December 31, 2023, there were and shares of Class A Common Stock issued and outstanding, respectively. As of June 30, 2024 and December 31, 2023, 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.
2022 Equity Incentive Plan
Share-based compensation expense recognized six months ended June 30, 2024 and June 30, 2023 totaled $ and $, respectively.
Share-based compensation expense recognized three months ended June 30, 2024 and June 30, 2023 totaled $ and $, respectively.
The 2022 Equity Incentive Plan was approved by the Company’s stockholders on June 28, 2022. The 2022 Plan permits the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards, and performance compensation awards. The Company has not issued stock appreciation rights, restricted stock, stock bonus awards, or performance compensation awards in the six months ended June 30, 2024 and June 30, 2023.
Stock Options
Stock options are awarded to encourage ownership of the Company’s Class A Common Stock by employees and to provide increased incentive for employees to render services and to exert maximum effort for the success of the Company. The Company’s incentive stock options generally permit net-share settlement upon exercise. The option exercise price, vesting schedule and exercise period are determined for each grant by the administrator (person appointed by board to administer the stock plans) of the applicable plan. The Company’s stock options generally have a -year contractual term.
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| Dividend yield | % | |||
| Risk-free interest rate | % to | % | ||
| Expected volatility (weighted-average and range, if applicable) | % | |||
| Expected term | to years |
The expected term of the options granted is calculated based on the simplified method by taking average of contractual term and vesting period the awards. The shares and the redeemable warrants of the Company were listed on the stock exchange for a limited period of the time and the share price has also dropped significantly from the date of listing. Based on these factors Management has considered the expected volatility at % for the current period. The risk-free interest rate used is the current yield on US Treasury notes with a term equal to the expected term of the options at the grant date. The expected dividend yield is based on annualized dividends on the underlying share during the expected term of the option.
| Stock Option | No. of Stock Option | Weighted- Average Grant Date Fair Value Per Stock Option | Weighted- Average Remaining Contractual Life (in Years) | |||||||||
| December 31, 2023 | $ | |||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Expired | - | |||||||||||
| Cancelled / Forfeited | ( | ) | - | |||||||||
| June 30, 2024 | ||||||||||||
A summary of the Company’s stock option activities and related information for the six months ended June 30, 2023 is as follows:
| Stock Option | No. of Stock Option | Weighted- Average Grant Date Fair Value Per Stock Option | Weighted- Average Remaining Contractual Life (in Years) | |||||||||
| December 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | - | |||||||||||
| Expired | - | |||||||||||
| Cancelled / Forfeited | ( | ) | - | |||||||||
| June 30, 2023 | $ | |||||||||||
| Exercise price options outstanding | June 30, 2024 | June 30, 2023 | ||||||
| $1.56 | ||||||||
| $ 2.58 | ||||||||
| $ 4.00 | ||||||||
| $ 6.67 | ||||||||
| Total | ||||||||
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Restricted Stock Units (“RSUs”)
| Restricted Stock Units | No. of RSU | Weighted- Average Grant Date Fair Value Per RSU | Weighted- Average Remaining Contractual Life (in Years) | |||||||||
| December 31, 2023 | $ | |||||||||||
| Granted | - | |||||||||||
| Vested | ( | ) | - | |||||||||
| Expired | - | |||||||||||
| Cancelled / Forfeited | - | |||||||||||
| June 30, 2024 | $ | |||||||||||
A summary of the Company’s RSU activities and related information for the six months ended June 30, 2023 is as follows:
| Restricted Stock Units | No. of RSU | Weighted- Average Grant Date Fair Value Per RSU | Weighted- Average Remaining Contractual Life (in Years) | |||||||||
| December 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | - | |||||||||||
| Expired | - | |||||||||||
| Cancelled / Forfeited | - | |||||||||||
| June 30, 2023 | $ | |||||||||||
The following RSU were outstanding at their respective vest price:
| Vest price RSU outstanding | June 30, 2024 | June 30, 2023 | ||||||
| $1.31 | ||||||||
| Total | ||||||||
Note 20. Subsequent events
There were not any material subsequent events that occurred after the balance sheet date of June 30, 2024 through the date of this report.
| 31 |
Item 2. 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 and subsidiaries (herein referred to as the “Company”). References to “management” refer to our officers and board of managers. The following discussion and analysis of our financial performance and results of operations should be read in conjunction with our unaudited 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. 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. 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.
Overview
We provide services to a variety of cannabis-industry participants in 41 states, including financial institutions that support business banking, private banking and commercial banking services to their customers, particularly those customers conducting business in or adjacent to the cannabis industry. Our services include, among other things:
| ● | regulatory compliance consulting and software for maintaining “Know Your Customer” (“KYC”) and Bank Secrecy Act (“BSA”) compliance to financial institutions, principally conducted vis-à-vis our proprietary financial services platform; | |
| ● | the origination, onboarding, verification, and servicing of cannabis-related deposit business for and on behalf of our partner financial institutions; and | |
| ● | sourcing, underwriting, servicing, and administering loans issued to cannabis businesses and related entities, which are often also our customers, as well as being customers of our partner financial institutions. |
Financial Services Platform
The Company has developed and commercialized a software based services platform for financial institutions providing banking services to cannabis-related businesses (“CRBs”). Our software enabled services access and maintain reliable financial information to enable both our financial institution clients and our the CRB clients to meet regulatory requirements. Our platform has been streamlined and fine-tuned for the past nine years which enables the Company’s staff to efficiently guide financial institution clients and the CRBs desiring banking services through the onboarding, validation and monitoring process. Our automated platform provides for an efficient and effective management tool allowing our employees to provide continuity of service while enabling compliance staff to monitor BSA activities.
Through the Company’s financial services platform, our financial institution clients have the ability to provide CRBs with access to traditional financial services including wires, debit, ACH, remote deposit capture, business checking and savings accounts, courier and vaulting services, cash management accounts and commercial lending. We believe our services have been implemented consistent with applicable law and regulations, ensuring our financial institution clients will be able to provide CRBs with reliable access to these services. We feel our history of developing processes that satisfy regulatory standards has resulted in a solid reputation with related authorities and solidifies our ability to continue to grow existing services and reduces barriers in expanding into new service offerings.
| 32 |
CRB Deposits
The Company maintains relationships with PCCU and other financial institutions in which CRBs’ funds are deposited and monetary transactions are performed. The Company’s agreements with the financial institution allow the Company’s platform to interface with the financial institution’s core banking systems and extract data necessary to monitor the deposit accounts onboarded by the Company’s transactions, such as funds transmissions to or from the accounts, occur through PCCU’s and other financial institution client’s infrastructure.
The Company earns income on deposit activity and onboarding fees, which have historically been the majority of our revenue, based on CRB client’s initial onboarding and continuing deposit activity we facilitate between the CRB and our financial institution clients. When we help establish a new relationship between a CRB or ancillary service provider with our financial institution clients for which the Company provides its onboarding services, an initial onboarding fee is assessed based on the type and complexity of the business. Onboarding is an important part of the KYC requirements set forth in federal guidance. The onboarding process can require a great deal of time depending on the business complexity and the fee we assess is based upon the complexity and required time to complete the process. Additionally, the Company assesses fees monthly based on the frequency and amount of deposit activity fees of our CRB client.. These fees are also based on business type and size. Monitoring and validating deposit activity is paramount to the success of the Company’s platform. We believe our compliance-first focus reassures regulators and law enforcement that the Company continues to focus on the safety and soundness of the financial system.
The Company earns investment income based on the balances maintained on deposit by our CRB clients with our financial institution clients. Our financial institution clients invest the deposits of our CRB clients principally in US Treasury Federal Overnight Securities. We recognize revenue pursuant to the interest earned on these deposit balances and incur a cost of revenue we owe to the financial institution for facilitating the investment activity. Under our Commercial Alliance Agreement with PCCU, the Company pays 25% of the investment income as a hosting cost of revenue fee to PCCU based on the earned investment income from the CRB deposit balances maintained at PCCU. Through its relationship with PCCU, depository amounts invested are typically restricted to low-risk assets with high liquidity and modest returns. The investment income is significantly influenced by the levels of CRB deposits and the prevailing interest rate environment for cash and similar assets. We believe that fees based on deposits that we onboard and interest on the daily balance less cash used to collateralize our loan portfolios maintained with financial institutions will represent a significant portion of our revenue by 2024.
Commercial Lending Program
We earn interest income from lending activity we facilitate between our CRB clients and our financial institution clients. The robust
CRB deposits onboarded by the Company and held at PCCU provide a strong foundation for lending capacity. In 2020, the Company launched
a commercial lending program, that has developed to be our largest revenue component by value and percentage. The program focuses on
senior secured lending, with smaller unsecured loans also being considered. Collateral types include real estate, equipment, and other
business assets. The commercial lending program is built on:
- Stringent collateral package requirements with substantial loan-to-value coverage;
- Rigorous underwriting of collateral and borrower creditworthiness;
- In-depth knowledge of the industry, borrowers’ operations, and the cannabis industry business cycle.
Currently, lending is primarily funded through PCCU using CRB deposits balances onboarded by the Company. The Company is seeking relationships with additional financial institutions and other sources of working capital to directly fund the loans. The Company’s lending program is tailored to the unique needs of CRBs, achieving strong returns on high-quality loans. The Company in collaboration with third parties manages loan underwriting and loan servicing. As the program develops, the Company intends to establish a full-service internal lending function to perform a larger percentage of the underwriting and servicing activities, improve efficiency and increase profitability of this revenue element.
We believe our creative and methodical approach in building the Company’s platform has enabled national business scaling. The platform’s policies, training, monitoring, and processes are well established and supported by expert talent. We anticipate this combination of intellectual property plus human capital talent will provide a competitive advantage as we focus on continued growth.
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Key Metrics
In addition to the measures presented in our unaudited condensed consolidated financial statements, our management regularly monitors certain measures in the operation of our business. These key metrics are discussed below.
Non-GAAP Measures
We use certain non-GAAP measures, referenced in this MD&A. These measures are not recognized measures under GAAP and do not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation from nor as a substitute for our financial information reported under GAAP. We use non-GAAP measures including EBITDA, Adjusted EBITDA and Adjusted EBITDA margin which may be calculated differently by other companies. These non-GAAP measures and metrics are used to provide investors with supplemental measures of our operating performance and liquidity and thus highlight trends in our business that may not otherwise be apparent when relying solely on GAAP measures. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. We also recognize that securities analysts, investors and other interested parties frequently use non-GAAP measures in the evaluation of companies within our industry.
Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed EBITDA and Adjusted EBITDA, both of which are non-GAAP financial measures that we calculate as net income before taxes and depreciation and amortization expense in the case of EBITDA and further adjusted to exclude non-cash, unusual and/or infrequent costs in the case of Adjusted EBITDA. Below we have provided a reconciliation of net (loss)/income (the most directly comparable U.S. GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.
We present EBITDA and Adjusted EBITDA because these metrics are a key measure used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of investment capacity. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.
EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are as follows:
| ● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| ● | EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and |
| ● | EBITDA and Adjusted EBITDA do not reflect tax payments that may represent a reduction in cash available to us. |
Because of these limitations, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including net loss and our other U.S. GAAP results.
| 34 |
A reconciliation of net income to non-GAAP EBITDA and Adjusted EBITDA is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net (loss)/income | $ | 941,527 | $ | (17,604,567 | ) | $ | 2,991,203 | $ | (19,018,014 | ) | ||||||
| Interest expense | 168,830 | 160,671 | 323,002 | 803,931 | ||||||||||||
| Depreciation and amortization | 194,790 | 401,350 | 390,499 | 797,664 | ||||||||||||
| Taxes | 487,627 | (652,147 | ) | 48,742 | (1,261,424 | ) | ||||||||||
| EBITDA | $ | 1,792,774 | $ | (17,694,693 | ) | $ | 3,753,446 | $ | (18,677,843 | ) | ||||||
| Other adjustments – | ||||||||||||||||
| (Benefit)/ Provision for credit losses | (97,248 | ) | 511,880 | (166,035 | ) | 578,546 | ||||||||||
| Change in the fair value of warrants | (1,086,286 | ) | (9,789 | ) | (2,341,773 | ) | (442,937 | ) | ||||||||
| Change in the fair value of deferred consideration | (211,535 | ) | 193,065 | (396,070 | ) | 384,008 | ||||||||||
| Stock based compensation | 552,137 | 958,260 | 1,164,261 | 2,529,042 | ||||||||||||
| Impairment of goodwill and finite-lived intangible assets | - | 16,888,739 | - | 16,888,739 | ||||||||||||
| Loan origination fees and costs | 23,800 | 2,922 | 47,173 | 747 | ||||||||||||
| Adjusted EBITDA | $ | 973,642 | $ | 850,384 | $ | 2,061,002 | $ | 1,260,302 | ||||||||
For the period six months and three months ended June 30, 2024, our EBITDA income improved primarily as a result of decrease in General and Administrative expenses. This reduction was driven by lower investment hosting fees, decreased amortization and depreciation expenses, and reduced business insurance costs. Additionally, there were decreases in compensation, employee benefits, marketing expenses, and other insurance costs. These factors contributing to our financial performance are further discussed in the “Discussion of our Results of Operations” section below. Other adjustments include estimated future credit losses not yet realized, including amounts indemnified to PCCU for loans funded by them. The Company has entered into a Commercial Alliance Agreement with PCCU, pursuant to which the Company agreed to indemnify PCCU for claims associated with CRB activities including any loan default related losses for loans funded by PCCU. Deferred loan origination fees and costs represent the change in net deferred loan origination fees and costs. When included with a new loan origination, we receive an upfront loan origination fee in conjunction with new loans funded by our financial institution partners and incur costs associated with originating a specific loan. For accounting purposes, the cash received for loan origination fees and costs is initially deferred and recognized as interest income utilizing the interest method.
Other Metrics
For our business operations, we monitor the following key metrics.
Total account balances, number of accounts and average account balances
Our lending capacity is dependent on the size of our managed deposit base and number of active accounts. In addition, fees are generated based on open accounts and account activity. We monitor account activity including deposits, withdrawals and ending account balance daily. Total account balances represent the balance of onboarded and monitored deposits on hand at financial institution clients at period end. Average account balance represents the total account balance divided by the number of accounts at the period end.
Account fees per average active accounts managed
Currently a significant amount of our fees is generated from account openings, active accounts and account activity. As a result, we monitor account openings and closings on a daily, weekly and monthly basis. We strive to meet the appropriate balance between depository balances and fees and therefore review account fees per average number of active accounts managed.
| Six months ended June 30, | 2024 | 2023 | Change ($) | Change (%) | ||||||||||||||||
| Average monthly ending deposit balance | (1 | ) | $ | 125,852,436 | $ | 226,798,931 | (100,946,495 | ) | (44.51 | )% | ||||||||||
| Average account fees | (2 | ) | $ | 432,888 | $ | 717,945 | (285,057 | ) | (39.70 | )% | ||||||||||
| Average active accounts | (3 | ) | 752 | 1,010 | (258 | ) | (25.51 | )% | ||||||||||||
| Average account balance | (4 | ) | $ | 167,283 | $ | 224,553 | (57,270 | ) | (25.50 | )% | ||||||||||
| Average fees per account | (4 | ) | $ | 575 | $ | 711 | (136 | ) | (19.07 | )% | ||||||||||
| Three months ended June 30, | 2024 | 2023 | Change ($) | Change (%) | ||||||||||||||||
| Average monthly ending deposit balance | (1 | ) | $ | 116,237,767 | $ | 230,740,605 | (114,502,838 | ) | (49.62 | )% | ||||||||||
| Average Account fees | (2 | ) | $ | 431,399 | $ | 729,160 | (297,761 | ) | (40.84 | )% | ||||||||||
| Average active accounts | (3 | ) | 760 | 1,002 | (242 | ) | (24.12 | )% | ||||||||||||
| Average account balance | (4 | ) | $ | 152,877 | $ | 230,280 | (77,403 | ) | (33.61 | )% | ||||||||||
| Average fees per account | (4 | ) | $ | 567 | $ | 728 | (161 | ) | (22.06 | )% | ||||||||||
| (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. |
| 35 |
For the six months ended June 30, 2024, there was a decline in the average number of accounts and fees compared to the previous period, primarily due to a decrease in clientele following the termination of an agreement with the Central Bank. We expect this trend to shift as we lead with our lending program typically requiring borrowers to place deposits with financial institutions with which we have relationships.
We are focused on enhancing and growing our lending platform. Incremental lending key metrics will be monitored as this portion of our business grows in volume. Metrics will include average loan balance, average life to repayment, average effective interest rate and loan status, amongst others.
Components of our Results of Operations
Revenue
The Company generates interest and fee income through providing a variety of services to PCCU and other financial institutions to facilitate its banking services to CRBs including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding to account inquiries, responding to customer service inquiries relating to CRB deposit accounts held at financial institution clients, and sourcing and originating loans. In addition, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry.
Operating expenses
Operating expenses consist of compensation and benefits, professional services, rent expense, provisions for credit losses and other general and administrative expenses.
Compensation and benefits consist of employee wages and associated benefits while professional services consist of legal, general consulting and accounting fees.
The Company reports a provision for credit losses both as it relates to loans funded internally and those carried by PCCU or other financial institutions. The Company indemnifies PCCU and other financial institutions for losses on loans to borrowers sourced by the Company and funded by PCCU and other financial institutions. The Company anticipates comparable arrangements with other financial institutions that fund loans to borrowers sourced by the Company.
Other general and administrative expenses consist of various miscellaneous items including account hosting fees, insurance expense, advertising and marketing, travel meals and entertainment and other office and operating expense.
Discussion of our Results of Operations —2024 Compared to 2023 (Six Months Ended June 30)
Revenue
| Six Months Ended June 30, | 2024 | 2023 | Change ($) | Change (%) | ||||||||||||
| Deposit, activity, onboarding income | $ | 3,302,590 | $ | 4,803,241 | (1,500,651 | ) | (31.24 | )% | ||||||||
| Safe Harbor Program income | 38,460 | 40,828 | (2,368 | ) | (5.80 | )% | ||||||||||
| Investment income | 1,274,436 | 2,837,694 | (1,563,258 | ) | (55.09 | )% | ||||||||||
| Loan interest income | 3,472,848 | 1,071,124 | 2,401,724 | 224.22 | % | |||||||||||
| Total Revenue | $ | 8,088,334 | $ | 8,752,887 | (664,553 | ) | (7.59 | )% | ||||||||
Account fee income consists of deposit account fees, activity fees and onboarding income. We receive a flat fee and lower rates for ancillary accounts, which are accounts provided to businesses servicing the cannabis industry in general but do not manufacture, possess, distribute or transport cannabis.
| 36 |
The decrease in deposit, activity and onboarding income was primarily attributable to the decrease in the number of accounts related to the Abaca acquisition. In the six months ended June 30, 2024, PCCU accounted for $2,424,598 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $277,721 in account hosting expenses, in accordance with the Commercial Alliance Agreement. In the six months ended June 30, 2023, PCCU contributed $2,763,684 to the revenue from similar sources, with account hosting expenses amounting to $116,258 as per the Loan Servicing Agreement provisions. These expenses were categorized under “General and Administrative Expenses” in the Consolidated Statements of Operations.
The Company provides similar account services and outsourced support to other financial institutions providing banking services to the cannabis industry.
Under our Commercial Alliance Agreement with PCCU, we pay 25% of the investment income as a hosting fee based on this income. In the six months ended June 30, 2024, the income derived from investment income associated with PCCU totaled $1,166,663. In relation to this income, the Company incurred $277,721 in investment hosting fees, consistent with the stipulations of the Commercial Alliance Agreement. In the six months ended June 30, 2023, PCCU’s contribution to investment income amounted to $2,837,694, against which the Company recorded investment hosting fees of $704,732, as governed by the terms of the Loan Servicing Agreement. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
We previously had a Loan Servicing Agreement with PCCU (related party) which has since been superseded by the Commercial Alliance Agreement. The loan interest income reflects our share of loan interest on issued loans. We are obligated to pay 0.35% on the total outstanding principal of each loan that is funded and serviced by PCCU. Loan interest earned on the Company’s direct loans and the indemnified loans grew as the Company increased its focus on lending. For the six months ended June 30, 2024, SHF serviced twenty-four loans, as compared to twelve loans in the six months ended June 30, 2023. In six months ended June 2024, the Company recognized $3,472,848 in loan interest income attributable to PCCU activities. The related expenses for this income included $72,057 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the Commercial Alliance Agreement. In six months ended June 2023, loan interest income from PCCU operations amounted to $1,071,124, with associated loan servicing fees totaling $28,670, pursuant to the same agreements. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
Operating expenses
| Six months ended June 30, | 2024 | 2023 | Change ($) | Change (%) | ||||||||||||
| Compensation and employee benefits | $ | 4,544,969 | $ | 6,199,851 | $ | (1,654,882 | ) | (26.69 | )% | |||||||
| General and administrative expenses | 1,985,984 | 3,391,463 | (1,405,479 | ) | (41.44 | )% | ||||||||||
| Professional services | 964,677 | 1,069,981 | (105,304 | ) | (9.84 | )% | ||||||||||
| Impairment of goodwill | - | 13,208,276 | (13,208,276 | ) | (100.00 | )% | ||||||||||
| Impairment of finite lived intangible assets | - | 3,680,463 | (3,680,463 | ) | (100.00 | )% | ||||||||||
| Rent expense | 133,635 | 158,743 | (25,108 | ) | (15.82 | )% | ||||||||||
| (Benefit)/provision for credit losses | (166,035 | ) | 578,546 | (744,581 | ) | (128.70 | )% | |||||||||
| Total operating expenses | $ | 7,463,230 | $ | 28,287,323 | $ | (20,824,093 | ) | (73.62 | )% | |||||||
Compensation and employee benefits decreased in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 on account of stock-based compensation and also related to a reduction in force.
Rent expenses decreased in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 due to reduction in the number of lease properties.
(Benefit)/ Provision for credit losses decreased in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 due to a decrease in the estimated loss rate.
For the six months ended June 30, 2024, general and administrative expenses decreased across various categories including: i) approximately $632,675 in investment hosting fees due to a reduction in investment income and ii) approximately $407,165 in amortization and depreciation due to the reduction in the gross value of intangible assets from impairment recorded in 2023.
Discussion of our Results of Operations —2024 Compared to 2023 (Three Months Ended June 30)
Revenue
| Three Months Ended June 30, | 2024 | 2023 | Change ($) | Change (%) | ||||||||||||
| Deposit, activity, onboarding income | $ | 1,681,596 | $ | 2,557,410 | (875,814 | ) | (34.25 | )% | ||||||||
| Safe Harbor Program income | 19,230 | (10,275 | ) | 29,505 | 287.15 | % | ||||||||||
| Investment income | 500,617 | 1,420,542 | (919,925 | ) | (64.76 | )% | ||||||||||
| Loan interest income | 1,836,092 | 604,831 | 1,231,261 | 203.57 | % | |||||||||||
| Total Revenue | $ | 4,037,535 | $ | 4,572,508 | (534,973 | ) | (11.70 | )% | ||||||||
Account fee income consists of deposit account fees, activity fees and onboarding income. We receive a flat fee and lower rates for ancillary accounts, which are accounts provided to businesses servicing the cannabis industry in general but do not manufacture, possess, distribute or transport cannabis.
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The decrease in deposit, activity and onboarding income was primarily attributable to the decrease in the number of accounts related to the Abaca acquisition. In the three months ended June 30, 2024, PCCU accounted for $1,206,922 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $121,108 in account hosting expenses, in accordance with the Commercial Alliance Agreement. In the three months ended June 30, 2023, PCCU contributed $1,385,845 to the revenue from similar sources, with account hosting expenses amounting to $60,833 as per the Loan Servicing Agreement provisions. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
The Company provides similar account services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided under the Safe Harbor Master Program Agreement.
We have agreements with PCCU (related party) and Five Star Bank (FSB) where our financial institution clients pay us interest on the daily account balance as per the rates in the agreements. Under our Commercial Alliance Agreement with PCCU, we pay 25% of the investment income as a hosting fee based on this income. In the three months ended June 30, 2024, the income derived from investment income associated with PCCU totaled $435,238. In relation to this income, the Company incurred $117,620 in investment hosting fees, consistent with the stipulations of the Commercial Alliance Agreement. In three months ended June 30, 2023, PCCU’s contribution to investment income amounted to $1,420,542, against which the Company recorded investment hosting fees of $381,427, as governed by the terms of the Loan Servicing Agreement. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
We had a Loan Servicing Agreement with PCCU (related party) where our financial institution carries the loan balances on their financial statement; the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement. The loan interest income reflects our share of loan interest on issued loans. We are obligated to pay 0.35% on the total outstanding principal of each loan that is funded and serviced by PCCU. Loan interest earned on the Company’s direct loans and the indemnified loans grew as the Company increased its focus on lending. For the quarter ended June 30, 2024, SHF serviced twenty-four loans, as compared to twelve loans in the quarter ended June 30, 2023. In the quarter ended June 30, 2024, the Company recognized $1,836,093 in loan interest income attributable to PCCU activities. Related expenses for this income included $36,156 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the Commercial Alliance Agreement. In the quarter ended June 30, 2023, loan interest income from PCCU operations amounted to $604,831, with associated loan servicing fees totaling $16,741, pursuant to the same agreements. These expenses were categorized under “General and Administrative Expenses” in the Consolidated Statements of Operations.
Operating expenses
| Three months ended June 30, | 2024 | 2023 | Change ($) | Change (%) | ||||||||||||
| Compensation and employee benefits | $ | 2,264,931 | $ | 2,540,331 | $ | (275,400 | ) | (10.84 | )% | |||||||
| General and administrative expenses | 1,001,764 | 1,852,589 | (850,825 | ) | (45.93 | )% | ||||||||||
| Professional services | 503,727 | 620,735 | (117,008 | ) | (18.85 | )% | ||||||||||
| Impairment of goodwill | - | 13,208,276 | (13,208,276 | ) | (100.00 | )% | ||||||||||
| Impairment of finite lived intangible assets | - | 3,680,463 | (3,680,463 | ) | (100.00 | )% | ||||||||||
| Rent expense | 64,198 | 71,001 | (6,803 | ) | (9.58 | )% | ||||||||||
| (Benefit)/provision for credit losses | (97,248 | ) | 511,880 | (609,128 | ) | (119.00 | )% | |||||||||
| Total operating expenses | $ | 3,737,372 | $ | 22,485,275 | $ | (1,859,164 | ) | (83.38 | )% | |||||||
Compensation and employee benefits decreased in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 on account of stock-based compensation and the decrease in the headcount.
Rent expenses decreased in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due to reduction in the number of lease properties.
(Benefit)/ Provision for credit losses decreased in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due to a decrease in the loss rate.
For the three months ended June 30, 2024, general and administrative expenses decreased across various categories including: i) approximately $345,271 in investment hosting fees due to a reduction in investment income , and (ii) approximately $206,560 in amortization and depreciation due to the reduction in the gross value of intangible assets from impairment recorded in 2023.
Financial Condition
Cash and cash equivalents
Cash and cash equivalents totaled $6,111,982 and $4,888,769 as of June 30, 2024 and December 31, 2023, respectively.
| 38 |
Cash flows
For the six months ended June 30, 2024, the Company generated $2,704,637 in cash from operations, compared to cash used of $964,786 for the six months ended June 30, 2023. This improvement was mainly due to lower operating expenses and the greater number of performing loans at better interest rates than the previous period.
For the six months ended June 30, 2024, the Company generated $6,083 in cash from investing activities, compared to $813,686 for the six months ended June 30, 2023. The decrease was primarily due to the repayment of loans by customers in the previous period.
For the six months ended June 30, 2024, the Company used $1,487,507 in cash for financing activities, compared to zero cash flow in the corresponding period of 2023. This was mainly due to the repayments on the senior secured promissory note during 2024, which was not in place during the three months ended June 30, 2023.
Liquidity and going concern
Liquidity refers to our capacity to fulfill anticipated cash demands, encompassing obligations to settle debt, sustain assets and operations, distribute earnings to shareholders, and cover other typical business expenditures. Our cash outflows predominantly settle towards repaying debt principal and interest, distributing dividends to shareholders, and financing our operational activities. The main contributors to our liquidity are the cash inflows from our operational performance. As of June 30, 2024, the Company reports no significant commitments to capital investments.
As of June 30, 2024, the Company had $6,111,982 in cash and net working capital of $301,738, as compared to $4,888,769 in cash and net working capital deficit of $135,355 as at December 31, 2023. The retained deficit was $69,444,867 on June 30, 2024, and $71,569,821 on December 31, 2023. The Company has also generated operating income of $300,163 and $625,104 for the three months and six months period ended June 30, 2024.
For the six months ended June 30, 2024, the Company reported positive operating income and net working capital. However, considering the historical data from the four preceding quarters, where the Company experienced negative operating income and negative net working capital, management acknowledges the need to closely evaluate the financial performance in upcoming quarters to mitigate any going concern risks. As of June 30, 2024, due to these historical trends, there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the date these unaudited condensed consolidated financial statements were issued.
If the Company is not able to sustain its present level of operations, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned expansion programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result should the Company not continue as a going concern as a result of this uncertainty
| 39 |
Critical Accounting Estimates
As of June 30, 2024, there were no significant changes in the application or the nature of accounting estimates that are considered critical in nature from those presented in our Annual Report on Form 10-K.
Emerging Growth Company Status
We are an “emerging growth company,” or “EGC,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
In addition, Section 107 of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period, for as long as it is available. We will remain an EGC until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act (June 23, 2026) or (b) in which we have total annual gross revenue of at least $1.07 billion, (2) the date on which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, and (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning provided in the JOBS Act.
Internal Control Over Financial Reporting
In connection with our management assessment of internal control over financial reporting as of and for the six months ended June 30, 2024, the Company has identified two (2) material weaknesses within our internal controls associated with Revenue Recognition and Complex Financial Instruments. Refer to Item 4 of this Quarterly Report on Form 10-Q for additional details.
Related Party Relationships
Account Servicing Agreement
The Company had an Account Servicing Agreement with PCCU. SHF provides services as per the agreement to CRB accounts at PCCU. In addition to providing the services, SHF assumed the costs associated with the CRB accounts. These costs include employees to manage account onboarding, monitoring and compliance, rent and office expense, insurance and other operating expenses necessary to service these accounts. Under the agreement, PCCU agreed to pay SHF all revenue generated from CRB accounts. Amounts due to SHF were due monthly in arrears and upon receipt of invoice. This agreement was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.
Support Services Agreement
On July 1, 2021, SHF entered into a Support Services Agreement with PCCU. In connection with PCCU hosting the depository accounts and the related loans and providing certain infrastructure support, PCCU receives (and SHF pays) a monthly fee per depository account. In addition, 25% of any investment income associated with CRB deposits is paid to PCCU. This agreement was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.
| 40 |
Effective February 11, 2022, SHF entered into a Loan Servicing Agreement with PCCU. The agreement sets forth the application, underwriting and approval process for loans from PCCU to CRB customers and the loan servicing and monitoring responsibilities provided by both PCCU and SHF. PCCU receives a monthly servicing fee at the annual rate of 0.25% of the then-outstanding principal balance of each loan funded and serviced by PCCU. For the loans that are subject to this agreement, SHF originates the loans and performs all compliance analysis, credit analysis of the potential borrower, due diligence and underwriting and all administration, including hiring and incurring the costs of all related personnel or third-party vendors necessary to perform these services. Under the Loan Servicing Agreement, SHF has agreed to indemnify PCCU from all claims related to default-related credit losses as defined in the Loan Servicing Agreement. This agreement was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.
Commercial Alliance Agreement
On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement. This Agreement sets forth the terms and conditions of the lending and account-related services, governing the relationship between the Company and PCCU. The Commercial Alliance Agreement sets forth the application, underwriting, loan approval, and foreclosure process for loans from PCCU to borrowers that are cannabis-related businesses and the loan servicing and monitoring responsibilities provided by the Company and PCCU. In particular, the Commercial Alliance Agreement provides for procedures to be followed upon the default of a loan to ensure that neither the Company nor PCCU will take title to or possession of any cannabis-related assets, including real property, that may be collateral for a loan funded by PCCU pursuant to the Commercial Alliance Agreement. Under the Commercial Alliance agreement, the PCCU has the right to receive monthly fees for managing loans. For SHF-serviced loans, which are CRB loans provided by the PCCU but primarily handled by SHF, a yearly fee of 0.25% of the remaining loan balance is applied. On the other hand, loans both financed and serviced by the PCCU are charged a yearly fee of 0.35% on their outstanding balance. These fees are calculated using the average daily balance of each loan for the preceding month. In addition, the Company’s is obligated by the Commercial Alliance Agreement to indemnify PCCU from certain default-related loan losses (as fully defined in the Commercial Alliance Agreement).
In addition, the Commercial Alliance Agreement provides for certain fees to be paid to the Company for certain identified account related services to include: all cannabis-related income, including all lending-related income (such as loan origination fees, interest income on CRB-related loans, participation fees and servicing fees), investment income, interest income, account activity fees, processing fees, flat fees, and other revenue generated from cannabis and multi-state hemp accounts that are hosted on PCCU’s core system for a monthly fee equal to $30.96 per account in 2022, $25.32-$27.85 per account in 2023, and $26.08-$28.69 in 2024. In addition, as it pertains to CRB deposits held at PCCU, investment and interest income earned on these deposits (excluding interest income on loans funded by PCCU) will be shared 25% to PCCU and 75% to the Company. Finally, under the Commercial Alliance Agreement, PCCU will continue to allow its ratio of CRB-related deposits to total assets to equal at least 60% unless otherwise dictated by regulatory, regulator or policy requirements. The initial term of the Commercial Alliance Agreement is for a period of two years, with a one-year automatic renewal unless a party provides one hundred twenty days’ written notice prior to the end of the term.
| 41 |
The below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits:
June 30, 2024 | December 31, 2023 | |||||||
| CRB related deposits | $ | 90,562,105 | $ | 129,350,998 | ||||
| Capacity at 60% | 54,337,263 | 77,610,599 | ||||||
| PCCU net worth | 83,299,448 | 81,087,746 | ||||||
| Capacity at 1.3125 | 109,330,526 | 106,670,306 | ||||||
| Limiting capacity | 54,337,263 | 77,610,599 | ||||||
| PCCU loans funded | 54,209,933 | 55,660,039 | ||||||
| Amounts available under lines of credit | 750,000 | 525,000 | ||||||
| Incremental capacity* | $ | (622,670 | ) | $ | 21,425,560 | |||
* If the loans funded by PCCU exceed the limiting capacity, the CAA specifies that PCCU will be unable to fund additional loans until the incremental capacity is positive.
The revenue from the PCCU Agreements recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Account servicing agreement | $ | - | $ | - | $ | - | $ | 3,261,284 | ||||||||
| Commercial alliance agreement | 3,478,251 | 3,411,218 | 7,064,107 | 3,411,218 | ||||||||||||
| Total | $ | 3,478,251 | $ | 3,411,218 | $ | 7,064,107 | $ | 6,672,502 | ||||||||
The operating expense from the PCCU Agreements recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Support services agreement | $ | - | $ | - | $ | - | $ | 378,730 | ||||||||
| Loan servicing agreement | - | - | - | 11,929 | ||||||||||||
| Commercial alliance agreement | 274,884 | 459,001 | 575,145 | 459,001 | ||||||||||||
| Total | $ | 274,884 | $ | 459,001 | $ | 575,145 | $ | 849,660 | ||||||||
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Item 3. 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.
Item 4. Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024 due to the material weaknesses described below. In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, solely due to the below-mentioned material weaknesses, the Company’s disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective as of June 30, 2024.
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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Prior to March 31, 2024, the Company has the following material weakness outstanding which we consider remediated as of and during the period ended March 31, 2024:
Credit Losses: As of March 31, 2023, the Company did not update its provision for credit losses correctly. The initial shortcomings included a lack of supportive documentation for the model used in our calculations and an error in applying the modified retrospective adoption method. Specifically, adjustments were made through the Consolidated Statements of Operations instead of the Consolidated Stockholders’ Equity on January 1, 2023. To address this material weakness, from June 30, 2023, to December 31, 2023, the Company improved the documentation for its allowance model. Additionally, a robust quarterly process was established, featuring enhanced management review controls for performing and reviewing the Current Expected Credit Loss (CECL) calculations. These processes and calculations are now regularly reviewed by senior management, ensuring accuracy in documentation and disclosures. On March 31, 2024, these corrective actions successfully remediated the identified material weakness.
We consider the following material weaknesses to be outstanding as of June 30, 2024:
Revenue Recognition: During the six months ended June 30, 2024 and June 30, 2023, the Company’s revenue was earned through certain related party contracts with PCCU that define contractually the revenue earned by the Company from PCCU for account servicing. The Company has identified a material weakness in our internal control over financial reporting related to the need to enhance the design and operating effectiveness of internal controls over the review of revenue recognition from allocations that occurs on a monthly basis between the Company and PCCU.
To remediate this material weakness, the Company has implemented a monthly process with enhanced management review controls to perform and review revenue recognition. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures.
Complex Financial Instruments: During the six months ended June 30, 2024 and June 30, 2023, the Company had a material weakness with regard to the ineffectiveness in management review controls of the accounting, disclosure and valuation of complex financial instruments (warrants, deferred consideration, forward purchase agreement, and stock-based compensation).
To remediate this material weakness, the Company has implemented a quarterly process with enhanced management review controls to perform and review complex financial instruments. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures.
With the implementation of our remediation plans for each material weakness, we believe, in subsequent periods, these material weaknesses can be remediated.
We plan to continue to assess and improve our internal controls and procedures and to take further action as necessary or appropriate to address any other matters we identify.
Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. A failure to maintain effective internal controls over financial reporting could result in errors in its financial statements that could require the Company to restate past financial statements, cause the Company to fail to meet its reporting obligations and cause investors to lose confidence in the Company’s reported financial information, all of which could materially and adversely affect the Company.
Changes in Internal Control over Financial Reporting
Other than as noted above in the June 30, 2024 material weaknesses, there was no changes in our internal control over financial reporting that occurred during the six months ended June 30, 2024 covered by this Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for their mediation of the material weaknesses and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we have expanded and will continue to improve these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to various other legal proceedings and claims that are routine and incidental to our business. Although some of the legal proceedings set forth herein may result in adverse decisions or settlements, Management believes that the final disposition of such matters will not have a material adverse effect on our business, financial position, results of operations or cash flows.
Item 1A. Risk Factors
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes in the risk factors disclosed under Part I, Item 1A of our Form 10-Q for the period ended March 31, 2024.
With respect to the Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
(a) Unregistered Sales of Equity Securities
None, except as previously disclosed in the Company’s Current Reports on Form 8-K.
(b) Use of Proceeds from the Public Offering
None.
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished herewith. |
| † | Certain of the exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish supplementally a copy of all omitted exhibits and schedules to the SEC upon its request. |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Signature | Title | Date | ||
| /s/ Sundie Seefried | Chief Executive Officer (Principal Executive Officer) |
August 14, 2024 | ||
| Sundie Seefried | ||||
| /s/ James H. Dennedy | Chief Financial Officer (Principal Financial and Accounting Officer) |
August 14, 2024 | ||
| James H. Dennedy |
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