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 ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
As of May 14, 2023, there were outstanding shares of the Company’s Class A Common Stock, $0.0001 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
| March 31, | December 31, | |||||||
2023 (Unaudited) | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable – trade | ||||||||
| Contract assets | ||||||||
| 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 PARENT-ENTITY NET INVESTMENT AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Contract liabilities | ||||||||
| Lease liabilities – current | ||||||||
| Senior secured promissory note – current portion | ||||||||
| Deferred consideration – current portion | ||||||||
| Due to seller - current portion | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Warrant liability | ||||||||
| Deferred consideration – long term portion | ||||||||
| Forward purchase derivative liability | ||||||||
| Due to seller – long term portion | ||||||||
| Senior secured promissory note—long term portion | ||||||||
| Lease liabilities – long term | ||||||||
| Deferred underwriter fee | ||||||||
| Indemnity liability | ||||||||
| Total Liabilities | ||||||||
| Commitment and Contingencies (Note 15) | ||||||||
| Parent-Entity Net Investment and Stockholders’ Equity | ||||||||
| Convertible preferred stock, $ par value, shares authorized, shares issued and outstanding on March 31, 2023, and Convertible preferred stock, $ par value, shares authorized, shares issued and outstanding on December 31, 2022, respectively | ||||||||
| Class A common stock, $ par value, shares authorized issued and outstanding on March 31, 2023, and Class A common stock, $ par value, shares authorized, issued and outstanding on December 31, 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Retained earnings | ( | ) | ( | ) | ||||
| Total Parent-Entity Net Investment and Stockholders’ Equity | ||||||||
| Total Liabilities and Parent-Entity Net Investment and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 1 |
SHF Holdings, Inc.
CONDENSED CONOLDIATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | $ | ||||||
| Operating Expenses | ||||||||
| Compensation and employee benefits | $ | $ | ||||||
| General and administrative expenses | ||||||||
| Professional services | ||||||||
| Rent expense | ||||||||
| Provision for credit losses | ||||||||
| Total operating expenses | $ | $ | ||||||
| Operating (loss)/ income | ( | ) | ||||||
| Other (income) expenses | ||||||||
| Interest expense | ||||||||
| Change in fair value of warrant liability | ( | ) | ||||||
| Total other expenses | $ | $ | ||||||
| Net (loss) / income before income tax | ( | ) | ||||||
| Income tax benefit | $ | ( | ) | $ | ||||
| Net (loss)/income | ( | ) | ||||||
| Weighted average shares outstanding, basic | ||||||||
| Basic net loss per share | $ | ( | ) | $ | ||||
| Weighted average shares outstanding, diluted | ||||||||
| Diluted loss per share | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 2 |
SHF Holdings, Inc.
Condensed Consolidated Statements of Parent-Entity Net Investment and Stockholders’ Equity
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
| Preferred Stock | Class A Common Stock | Additional Paid-in | Parent-Entity Net | Retained | Total Shareholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Investment | Earnings | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||
| Cumulative effect from adoption of CECL | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Conversion of PIPE shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock option conversion | - | |||||||||||||||||||||||||||||||
| Issuance of shares to PCCU (net of tax) | - | |||||||||||||||||||||||||||||||
| Reversal of deferred underwriting cost | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| 3 |
SHF Holdings, Inc.
Condensed Consolidated Statements of Parent-Entity Net Investment and Stockholders’ Equity
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
Preferred Stock | Class A Common Stock | Additional Paid-in | Parent-Entity Net | Retained | Total Shareholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Investment | Earnings | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Contribution from parent | - | - | ||||||||||||||||||||||||||||||
| Net profit | - | - | ||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
SHF Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) / income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock compensation expense | ||||||||
| Interest expense | ||||||||
| Provision for credit losses | ||||||||
| Lease expense | ||||||||
| Income tax benefit | ( |
) | ||||||
| Change in fair value of warrant | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Accrued interest receivable | ( | ) | ||||||
| Deferred underwriting payable | ( | ) | ||||||
| Other current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Contract liabilities | ( | ) | ||||||
| Security deposit | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Issuance of new loans (net of repayment) | ||||||||
| Net cash provided by investing activities | ||||||||
| CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
| Net change in parent funding, allocations, and distributions to parent | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents – beginning of period | ||||||||
| Cash and cash equivalents – end of period | $ | $ | ||||||
| Non-Cash transactions: | ||||||||
| Shares issued for the settlement of PCCU debt obligation | $ | $ | ||||||
| Cumulative effect from adoption of CECL | $ | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
SHF Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Organization and Business Operations
Business Description
The Company originated as business operations conducted through Partner Colorado Credit Union (“PCCU”), which were transferred to SHF LLC (“SHF”), then an indirect wholly owned subsidiary of PCCU.
SHF Holdings, Inc. (the “Company”), formerly known as Northern Lights Acquisition Corp. (“NLIT”), acquired all of the outstanding membership interests of SHF in a transaction that closed on September 28, 2022 (the “Business Combination”). The Business Combination was consummated pursuant to a Unit Purchase Agreement dated February 11, 2022 (the “Business Combination Agreement”) among SHF, SHF Holding Co., LLC (the direct parent of SHF and a wholly owned subsidiary of PCCU), PCCU, NLIT, a special purpose acquisition company, and its sponsor, 5AK, LLC. Subsequent to the completion of the Business Combination, NLIT changed its name to “SHF Holdings, Inc.” In this quarterly report on Form 10-Q (the “Quarterly Report”), we use the terms “we,” “us,” “our” and the “Company” to refer to the business and operations of SHF Holdings, Inc. following the closing of the Business Combination. (Refer to Note 3 to the Condensed Consolidated Financial Statements.)
SHF was formed by PCCU following the approval of the contribution of certain assets and operating activities associated with operations from both certain branches and Safe Harbor Services, a wholly-owned subsidiary of PCCU, to SHF Holding, Co., LLC. SHF Holding, Co., LLC then contributed the same assets and related operations to SHF, with PCCU’s investment in SHF maintained at the SHF Holding, Co., LLC level (the “reorganization”). The reorganization effectively occurred July 1, 2021. In conjunction with the reorganization, all of the employees engaged in the operations and certain PCCU employees were terminated from PCCU and hired as SHF employees. Collectively, Oldco, the relevant operations of the PCCU branches, and SHF, represent the “Carved-Out Operations.” After the reorganization, the entirety of the Carved-Out Operations were owned by SHF and Oldco was dissolved. In addition, effective July 1, 2021, SHF entered into an Account Servicing Agreement and Support Services Agreement with PCCU, which memorialized the operational relationship between SHF and PCCU and which were subsequently amended and restated and are discussed in Note 9 to the Condensed Consolidated Financial Statements.
On
September 28, 2022, the parties consummated the Business Combination, resulting in NLIT acquiring all of the issued and outstanding membership
interests of SHF in exchange for an aggregate of $
The
Business Combination Agreement was amended to provide for the deferral of a portion of the cash due to PCCU at the closing of the Business
Combination. The purpose of this deferral was to provide the Company with additional cash to support its post-closing activities. Furthermore,
PCCU also agreed to defer $
On October 26, 2022, SHF Holdings, Inc., entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA Inc. (“Luminous”), an affiliate of the sponsor of NLIT. Under the Forbearance Agreement, PCCU has agreed to defer all payments owed by the Company pursuant to the Business Combination Agreement for a period of six months from the date of the Forbearance Agreement while the parties engage in good faith efforts to renegotiate the payment terms of the deferred obligations.
| 6 |
The Company generates both interest income and fee income through providing a variety of services to financial institutions desiring to service the cannabis industry including, among other things, the origination, onboarding, and servicing of cannabis-related deposit business for and on behalf of those partner institutions; Bank Secrecy Act and other regulatory compliance and reporting related to these accounts; onboarding these accounts and responding to account and customer service inquiries; and sourcing, underwriting, and servicing, and administering loans issued to cannabis businesses and related entities. In addition to PCCU, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided to other financial institutions under the Safe Harbor Master Program Agreement.
On October 31, 2022, the Company entered into an Agreement and Plan of Merger (the “Abaca Merger Agreement”) by and among the Company, SHF Merger Sub I, a Delaware corporation and a direct wholly-owned subsidiary of the Company (“Merger Sub I”), SHF Merger Sub II, LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of the Company (“Merger Sub II” and, together with Merger Sub I, the “Merger Subs”), Rockview Digital Solutions, Inc., a Delaware corporation, d/b/a Abaca (“Abaca”) and Dan Roda, solely in such individual’s capacity as the representative of the security holders of Abaca (the “Abaca Stockholders’ Representative”). On November 11, 2022, the parties to the Abaca Merger Agreement entered into an amendment to the Abaca Merger Agreement to modify the number of shares of the Company’s Class A Common Stock to be issued as consideration thereunder. On November 15, 2022, the parties consummated the transactions contemplated by the Abaca Merger Agreement, as amended. Pursuant to the Abaca Merger Agreement, as amended, (a) Merger Sub I merged with and into Abaca, with Abaca surviving as a direct wholly-owned subsidiary of the Company (“Merger I”) and (b) immediately following the effective time of the Merger I, Abaca merged with and into Merger Sub II (“Merger II” and, collectively with Merger I, the “Mergers”), with Merger Sub II surviving Merger II as a direct wholly-owned subsidiary of the Company.
Pursuant
to the Abaca Merger Agreement, as amended, the Company acquired Abaca together with its proprietary financial technology platform in
exchange for $
On
March 29, 2023, the Company and PCCU entered into a definitive transaction to settle and restructure the deferred obligations, including
$
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
| i. | Use of Estimates |
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the 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.
| 7 |
| 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” or “GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (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 months ended March 31, 2023, are not necessarily indicative of the results that may be expected for the current year ending December 31, 2023. The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the years ended December 31, 2022, and 2021 included in the Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).
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. | Liquidity and Going Concern |
As
of March 31, 2023, the Company had $
Based upon these factors, management of the Company has determined that there is a risk of substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the date these condensed consolidated financial statements have been issued.
At December 31, 2022, a
significant component of the working capital deficit was $
The accompanying 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 |
| iv. | Cash and Cash Equivalents |
Cash and cash equivalents include cash on hand, amounts due from financial institutions, and investments with maturities of three months or less.
| v. | 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 is 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.
Currently the Company only services the cannabis industry. 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. As of this time, substantially all of the Company’s revenue is generated by deposits and loans hosted by its PCCU pursuant to various services agreements.
The
Company had only one loan on its balance sheet as of March 31, 2023, which comprises
| vi. | Accounts Receivable-PCCU and Allowance for Doubtful Accounts |
Accounts
receivable are recorded based on account fee schedules. While fees are generated from individual CRB related accounts, amounts are initially
collected by the financial institutional partners and remitted in the subsequent month. As of March 31, 2023, and December 31, 2022,
At
March 31, 2023 and December 31, 2022, there were
| vii. | Loans Receivable |
PCCU underwrites mortgage, commercial and consumer loans to members and other businesses. Commercial CRB loans originated by the Company and funded by PCCU are typically managed by the Company, inclusive of originated and funded loans that are on the PCCU balance sheet only. Certain CRB Loans were contributed to the Carved-out Operations. Such loans where the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at principal balance outstanding, net of an allowance for credit losses and net deferred loan origination fees and costs when applicable. Interest income on loans is recognized over the term of the loan and is calculated using the simple-interest method on principal amounts outstanding.
Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired, or payments are past due ninety days or more. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts are satisfied to where the loan is less than ninety days past due and future payments are reasonably assured.
| 9 |
Loans are evaluated for charge-off on a case-by-case basis and are typically charged off at the time of foreclosure.
Past-due status is based on the contractual terms of the loans. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if the collection of principal and interest is considered doubtful.
| viii. | Allowance for Credit Losses (ACL) |
In 2023, the Company adopted Accounting Standards Codification Topic 326 - Financial Instruments - Credit Losses (ASC Topic 326), which replaced the incurred loss methodology for estimated probable credit losses with an expected credit loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.
The ACL is a valuation account that is deducted from the amortized cost basis of financial assets carried at their amortized cost, including loans held for investment, to present the net amount that is expected to be collected throughout the life of the financial asset. The estimated ACL is recorded through a provision for credit losses charged against operations. Management periodically evaluates the adequacy of the ACL to maintain it at a level it believes to be reasonable. The Company uses the same methods used to determine the ACL to assess any reserves needed for off-balance sheet credit risks such as unfunded loan commitments including Indemnified loans to PCCU. These reserves for off-balance sheet credit risks are presented in the liabilities section in the condensed consolidated balance sheets as an “Indemnity liability.”
The ACL consists of two components: an asset-specific component for estimating credit losses for individual loans that do not share similar risk characteristics with other loans; and a pooled component for estimating credit losses for pools of loans that share similar risk characteristics. The ACL for the pooled component is derived from an estimate of expected credit losses primarily using an expected loss methodology that incorporates risk parameters such as probability of default (“PD”) and loss given default (“LGD”) which are derived from various vendor models and/or internally developed model estimation approaches for smaller homogenous loans.
PD is projected in these models or estimation approaches using economic scenarios, whose outcomes are weighted based on the Company’s economic outlook and are developed to incorporate relevant information about past events, current conditions, and reasonable and supportable forecasts. The Company considers relevant current conditions and reasonable and supportable forecasts that relate to its lending practices and environment and the specific borrower and determines that the significant factor affecting the loan’s performance is the fact that these borrowers are involved in the cannabis business. Despite being legal at the state level in certain jurisdictions, cannabis remains federally illegal in the United States as of the date of this filing. As cannabis related lending is a new practice in the United States, there is very little historical or industry data on which to base a loss forecast. Therefore, significant judgement is required in creating a reasonable loss estimate, using similar non-MRB loans as a baseline and adjusting for the inherent risks in the cannabis industry. While the Company considers other qualitative factors, including national macroeconomic conditions, in its overall risk analysis, it has determined that they are not significant inputs to the overall loss estimate calculations.
The ACL estimation process also applies an economic forecast scenario, or a composite of scenarios based on management’s judgment and expectations around the current and future macroeconomic outlook. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term of a loan excludes expected extensions, renewals, and modification under certain conditions.
Recoveries on loans represent collections received on amounts that were previously charged off against the ACL. Recoveries are credited to the ACL when received, to the extent of the amount previously charged off against the ACL on the related loan. Any amounts collected in excess of this limit are first recognized as interest income, then as a reduction of collection costs, and then as other income.
| 10 |
| ix. | Allowance for Loan Losses |
Prior to the adoption of CECL in 2023, the Company recognized an allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the required allowance for loan losses balance using past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
Due to the nature of uncertainties related to any estimation process, management’s estimate of loan losses inherent in the loan portfolio may change in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
A loan is considered impaired when, based on current information and events, full payment under the loan terms is not expected. Impairment is generally evaluated in total for smaller-balance loans of similar nature such as commercial lines of credit, but may be evaluated on an individual loan basis if deemed necessary. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
The loans SHF originates are secured by various types of assets of the borrowers, including real property and certain personal property, including value associated with other assets to the extent permitted by applicable laws and the regulations governing the borrowers. The documents governing the loans also include a variety of provisions intended to provide remedies against the value associated with licenses. Collection procedures are designed to ensure that neither SHF nor its financial institution clients who provide funding for a loan, nor a third-party agent engaged to assist with the liquidation or foreclosure process, will take possession of cannabis inventory, cannabis paraphernalia, or other cannabis-related assets, nor will they take title to real estate used in cannabis-related businesses. Upon default of a loan, a third-party agent will be engaged to work with the borrower to have the borrower sell collateral securing the loan to a third party or to institute a foreclosure proceeding to have such collateral sold to generate funds towards the payoff of the loan. Applicable regulations under state law that govern CRBs generally do not permit the taking of title to real estate involved in commercial sales of cannabis, whether through foreclosure or otherwise, without prior regulatory approval. The sale of a license or other realization of the value of licenses also requires the approval of state and local regulatory authorities. A defaulted loan may also be sold if such a sale would yield higher proceeds or that a sale could be accomplished more quickly than a foreclosure proceeding while yielding proceeds comparable to what would be expected from a foreclosure sale. Such sale of the loan would be conducted through a third-party administrative agent. However, SHF can provide no assurances that a sale of such loans would be possible or that the sales price of such loans would be sufficient to recover the outstanding principal balance, accrued interest, and fees.
| x. | Net Deferred Loan Origination Fees and Cost |
When included with a new loan origination, the Company receives loan origination fees in conjunction with new loans funded and any indemnified liabilities which are not recorded on the balance sheet from our financial institution partners. Where applicable, the loan origination fee is netted with loan origination costs associated with originating a specific loan. These loan origination costs are typically incremental direct costs (non-reimbursed) paid to third parties. Net loan origination fees are initially deferred and recognized as interest income utilizing the interest method.
| 11 |
| xi. | Indemnity Liability |
Under
the Loan Servicing Agreement, PCCU, in exchange for a fee at an annual rate of
In addition to default-related credit losses, the Company continuously monitors all other circumstances pursuant to the agreement and identifies events that may necessitate a loss contingency under the Loan Servicing Agreement. A loss contingency is reported when it is both probable that a future event will confirm that a loss had been incurred on or before the related balance sheet date and the loss is reasonably estimable.
On March 29, 2023, The Company and PCCU entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Loan Servicing Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement.
| xii. | Property and Equipment, net |
Property
and equipment are recorded at historical cost, net of accumulated depreciation. Depreciation is provided over the assets’ useful
lives on a straight-line basis -
Management periodically assesses the estimated useful life over which assets are depreciated or amortized. If the analysis warrants a change in the estimated useful life of property and equipment, management will reduce the estimated useful life and depreciate or amortize the carrying value prospectively over the shorter remaining useful life.
The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the period of disposal and the resulting gains and losses are included in the results of operations during the same period.
We capitalize certain costs related to software developed for internal-use, primarily associated with the ongoing development and enhancement of our technology platform. Costs incurred in the preliminary development and post-development stages are expensed. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally five years.
| 12 |
| xiii. | Right of use assets and lease liability |
The Company has entered into lease agreements for a certain facility and certain items of equipment, which provide the right to use the underlying asset and require lease payments over the term of the lease. At inception of the lease agreement, the Company assesses whether the agreement conveys the right to control the use of an identified asset for a period in exchange for consideration, in which case it is classified as a lease. Each lease is further analyzed to check whether it meets the classification criteria of a finance or operating lease. All identified leases are recorded on the consolidated balance sheet with a corresponding lease right-of-use asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease. The Company has elected not to recognize lease assets and lease liabilities for short-term leases (leases with a term of 12 months or less) and leases of low-value assets. Lease right-of-use assets, net and lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available as of the lease commencement date.
Lease expense for operating leases is recorded on a straight-line basis over the lease term and variable lease costs are recorded as incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Finance lease interest expense is recognized based on an effective interest method and depreciation of assets is recorded on a straight-line basis over the shorter of the lease term and useful life of the asset. Both operating and finance lease right of use assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After a right of use asset is impaired, any remaining balance of the asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life.
| xiv. | Impairment of Long-Lived Assets |
The
Company evaluates the recoverability of tangible assets periodically by taking into account events or circumstances that may warrant
revised estimates of useful lives or that indicate the asset may be impaired. There were
| xv. | Goodwill and Other Intangible Assets |
The Company’s methodology for allocating the purchase price of an acquisition is based on established valuation techniques that reflect the consideration of a number of factors, including a valuation performed by a third-party appraiser. Goodwill is measured as the excess of the cost of an acquired business over the fair value assigned to identifiable assets acquired and liabilities assumed. Goodwill is considered impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized based on that difference, not to exceed the carrying amount of goodwill. A reporting unit is an operating segment or a component of an operating segment provided that the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.
Finite-lived intangible assets are amortized over their estimated useful life, which is the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the Company. Intangible assets should be tested for impairment at the time of a triggering event, if one were to occur. Finite-lived intangible assets may be impaired when the estimated undiscounted future cash flows generated from the assets are less than their carrying amounts.
| 13 |
| xvi. | Stock-based Compensation |
The Company measures all equity-based payment arrangements to employees and directors in accordance with ASC 718, Compensation–Stock Compensation. The Company’s stock-based compensation cost is measured based on the fair value at the grant date of the stock-based award. It is recognized as expense on a straight-line basis over the requisite service period for the entire award. Forfeitures are recognized as they occur. The Company estimates the fair value of each stock-based award on its measurement date using either the current market price of the stock or Black-Scholes option valuation model, whichever is most appropriate. The Black-Scholes valuation model incorporates assumptions such as expected term of the instrument, volatility of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date, by reference to the underlying terms of the instrument, and the Company’s experience with similar instruments. Changes in assumptions used to estimate fair value could result in materially different results.
The shares of the Company were listed on the Nasdaq stock exchange for a limited period of the time and also the stock price has dropped significantly from the date of listing, based on which the Company has considered the expected volatility at % for the purpose of stock compensation. The risk-free interest rates are based on quoted U.S. Treasury rates for securities with maturities approximating the awards’ expected lives. 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 expected dividend yield is zero as the Company has never paid dividends and does not currently anticipate paying any in the foreseeable future.
| xvii. | Fair Value Measurements |
The Company utilizes the fair value hierarchy to apply fair value measurements. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair values that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The basis for fair value measurements for each level within the hierarchy is described below:
Level 1 — Quoted prices for identical assets or liabilities in active markets.
Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 —Valuations derived from valuation techniques in which one or more significant inputs to the valuation model are unobservable.
| xviii. | Revenue Recognition |
SHF recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which SHF expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
Revenue is recorded at a point in time when the performance obligation is satisfied, and no contingencies exist. Revenue consists primarily of fees earned on deposit accounts held at PCCU but serviced by SHF such as bank account charges, onboarding income, account activity fee income and other miscellaneous fees.
| 14 |
In addition, SHF recognizes revenue from the Master Program Agreement. The Master Program Agreement is a non-exclusive and non-transferable right to implement and utilize the Safe Harbor Program. The Safe Harbor Program has two performance obligations; an implementation fee recognized when the contract is effective and a service fee recognized ratable over the contract term as the compliance program is executed.
Lastly, SHF also records revenue for interest on loans and investment income allocated by PCCU based on specific customer balances.
Amounts received in advance of the service being provided is recorded as a liability under deferred revenue on the consolidated balance sheets. Typical Safe Harbor Program contracts are three-year contracts with amounts due monthly, quarterly or annually based on contract terms.
Customers consist of financial institutions providing services to CRBs. Revenues are concentrated in the United States of America.
| xix. | Contract Assets / Contract Liabilities |
A contract asset is the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer. Conversely, the Company recognizes a contract liability if the customer’s payment of consideration precedes the reporting entity’s performance.
As
of March 31, 2023, the Company reported contract assets and contract liabilities of $
| xx. | Warrants Liability |
The Company accounts for the warrants assumed in the business combination in accordance with the guidance contained in ASC Topic 815, “Derivatives and Hedging” (“ASC 815”), under which warrants that do not meet the criteria for equity classification must be recorded as derivative liabilities. Accordingly, the Company classifies the warrants as liabilities carried at their fair value and adjusts the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expire, and any change in fair value is recognized in the condensed consolidated statement of operations.
| xxi. | Forward purchase derivative |
The Company accounts for the forward purchase derivative assumed in the business combination in accordance with the guidance contained in ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The Company classifies the forward purchase derivatives as liabilities carried at their fair value and adjusts the forward purchase derivatives to fair value at each reporting period. This derivative asset or liability is subject to re-measurement at each balance sheet date until the conditions under the forward purchase agreement are exercised or expire, and any change in fair value is recognized in the condensed consolidated statement of operations.
| 15 |
| xxii. | Earnings Per Share |
Basic and diluted earnings per share are computed and disclosed in accordance with ASC Topic 260, Earnings Per Shares. The Company utilizes the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent dividend distributions, in substance, to the noncontrolling interest holder as the holders have contractual rights to receive an amount upon redemption other than the fair value of the applicable shares. As a result, earnings are adjusted to reflect this in substance distribution that is different from other common shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a non-forfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders (Refer to Note 17). Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
| xxiii. | Income Tax |
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are adjusted through the provision for income taxes as changes in tax laws or rates are enacted.
Prior to the merger, the Company was a pass-through entity for tax purposes. Effective September 28, 2022, the Company complies with the accounting and reporting requirements of ASC Topic 740, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
PCCU was exempt from most federal, state, and local taxes under the provisions of the Internal Revenue Code and state tax laws. However, PCCU was subject to unrelated business income tax. The Carved-Out Operations were wholly owned by PCCU and therefore, were exempt from most federal and state income taxes. ASC Topic 740, “Income Taxes,” under US GAAP clarifies accounting for uncertainty in income taxes reported in the financial statements. The interpretation provides criteria for assessment of individual tax positions and a process for recognition and measurement of uncertain tax positions. Tax positions are evaluated on whether they meet the “more likely than not” standard for sustainability on examination by tax authorities. The Company’s Management has determined there are no material uncertain tax positions.
ASC
740-270-25-2 requires that an annual effective tax rate be determined and such annual effective rate applied to year to date income in
interim periods. If management is unable to estimate a portion of its ordinary income, but is otherwise able to reliably estimate the
remainder, ASC 740-270-25-3 provides that the tax applicable to that item be reported in the interim period in which the item occurs.
The tax (or benefit) related to ordinary income (or loss) shall be computed at an estimated annual effective tax rate and the tax (or
benefit) related to all other items shall be individually computed and recognized when the items occur. Management is unable to estimate
a portion of its ordinary income and as a result had computed the company’s tax provision in accordance with ASC 740-270-25-3.
The Company’s effective tax rate was
ASC
Topic 740 also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized
tax benefits, if any, as income tax expense. There were
| xxiv. | Offering Costs |
Offering costs consisted of legal, accounting, underwriting fees and other costs incurred that were directly related to the PIPE offering. Offering costs are allocated to the separable financial instruments issued based on a relative fair value basis, compared to total proceeds received. Offering costs associated with warrant liabilities are expensed as incurred, presented as offering costs allocated to warrants in the statements of operations. Offering costs associated with the Public Shares were charged to Parent-Entity Net Investment and Stockholders’ Equity upon the completion of the Initial Public Offering.
| 16 |
| xxv. | 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
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium.
ASU 2020-06 was effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. The Company early adopted the new standard during fiscal year 2021.
Current Expected Credit Losses
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 | ( | ) | ( | ) | ( | ) | ||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Lease Accounting
FASB ASU 2016-02, Leases, (“ASC 842”) and related amendments, require lessees to recognize a right-of-use asset and a lease liability for substantially all leases and to disclose key information about leasing arrangements and aligns certain underlying principles of the lessor model with the revenue standard. The Company adopted this guidance during fiscal year 2022 using the optional transition method, which allows entities to apply the guidance at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings, if any, in the period of adoption with no restatement of comparative periods. At January 1, 2022 adoption date, there were no leases outstanding that met criteria for recognition. The Company has since recognized any leases in accordance with ASC 842 by recording right-of-use assets and operating lease liabilities on the balance sheet.
| 17 |
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 did not adopt ASU 2022-02 as of December 31, 2022; however, it has adopted this standard as of January 1, 2023 and the ASU has not had a material impact on the Company’s condensed consolidated financial statements.
Standards Pending to be Adopted
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 does not expect this ASU to have a material impact on its 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. The Company does not expect this ASU to have a material impact on its condensed consolidated financial statements.
Note 3. Business Combination
During the year 2022, the Business Combination detailed in Note 1 above was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, NLIT was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a recapitalization. The net assets of NLIT were recognized at fair value (which was consistent with carrying value), with no goodwill or other intangible assets recorded.
Other related events in connection with the Business Combination are summarized below:
| ● | The of Founder Class B Stock converted at the closing to an equal number of shares of Class A stock. |
| ● | Upon closing of the Business Combination, shares of Class A Stock were issued to the Seller as set forth in and pursuant to the terms of the Purchase Agreement. |
The
Seller was due to receive a cash payment of $
| ● | Offering
costs consisted of legal, accounting, underwriting fees and other costs incurred that were
directly related to the business combination was approximately $ |
| 18 |
| ● | Approximately
$ |
| ● | The
Parent-Entity Net Investment appearing in the balance sheet of SHF amounting to $ |
| ● | Immediately
prior to the Closing, shares of Series A Convertible Preferred were purchased by the
PIPE Investors pursuant to the PIPE Securities Purchase Agreements for an aggregate value
of $ |
| ● | For
tax purposes, the transaction is treated as a taxable asset acquisition, resulting in an
estimated tax basis Goodwill balance of $ |
| ● | 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 December 31, 2022, there were
preferred shares issued or outstanding. 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 $ |
| ● | Class A 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 December 31, 2022, there were shares, respectively, of Class A Common Stock issued or outstanding. As of December 31,2022, 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. |
| 19 |
| ● | The fair value of net assets on September 28, 2022 in the books of NLIT are as follows: |
| Cash & Cash Equivalents | $ | |||
| Prepaid Expense | ||||
| Cash held in Trust | ||||
| Deferred offering cost | ||||
| Accounts Payable | ( | ) | ||
| Accrued Expense | ( | ) | ||
| Advance from sponsor | ( | ) | ||
| Deferred underwriter payable | ( | ) | ||
| Forward purchase derivative | ( | ) | ||
| Warrant Liability | ( | ) | ||
| Class A Common Stock subject to possible redemption | ( | ) | ||
| Fair value of net assets acquired |
| ● | The following table summarizes the total fair value of consideration: |
| Company’s Class A common stock comprises of shares | ||||
| Cash consideration | ||||
| Deferred cash consideration | ||||
| Total fair value of consideration |
Parent-Entity Net Investment: Parent-Entity Net Investment balance in the consolidated balance sheets represents PCCU’s historical net investment in the Carved-Out Operations. For purposes of these condensed consolidated financial statements, investing requirements have been summarized as “Parent-Entity Net Investment” and represent equity as no cash settlement with PCCU is required. No separate equity accounts are maintained for SHS, SHF or the Branches.
On March 29, 2023, the Company and PCCU entered into
a definitive transaction to settle and restructure the deferred obligations, including $
Note 4. Acquisition
On
November 15, 2022, the Company and its subsidiary entered into a series of merger and acquisition transactions resulting in the acquisition
of
The acquisition increases the Company’s customer base to include more than 1,000 unique depository accounts across 40 states and U.S. territories; adds Abaca’s fintech platform to the Company’s existing technology; increases the Company’s financial institution client relationships and access to balance sheet capacity to five unique financial institutions strategically located across the United States; increases the Company’s lending capacity; and nearly doubles the Company’s team, adding to the existing talent pool of the cannabis industry’s foremost financial services and financial technology experts.
| 20 |
Pursuant
to the Abaca merger agreement, as amended, the Company acquired Abaca in exchange for $
| (a) |
| (b) |
The Company measures the deferred cash consideration and future stock consideration at fair value on the acquisition date based on a report received from an independent valuation firm.
The following table summarizes the purchase price allocation:
| Property, plant & equipment | $ | |||
| Software | ||||
| Cash & cash equivalents | ||||
| Prepaid expense | ||||
| Security deposit | ||||
| Accounts receivables | ||||
| Accounts Payable | ( | ) | ||
| Accrued Expense | ( | ) | ||
| Fair value of net assets acquired | $ | |||
| Other intangibles | ||||
| Goodwill | ||||
| Deferred tax liabilities | ( | ) | ||
| Total purchase consideration | $ |
The following table summarizes the total fair value of consideration:
| Cash paid | $ | |||
| Deferred cash payment | ||||
| Share issued – common stock ( shares) | ||||
| Settlement of pre-existing notes along with accrued interest | ||||
| Future consideration settled in common stock | ||||
| Fair value of consideration | $ | |||
At the date of acquisition, management allocated the initial purchase price based on the estimated fair value of the identifiable assets and liabilities assumed on the acquisition date. The pre-existing relationships settled were the Company’s notes and related accrued interest with Abaca. Subsequently, the Company finalized the purchase price allocation and has adjusted the provisional values retrospectively to reflect changes to the assets and liabilities at the acquisition date. For the fair value of the identifiable intangible assets acquired, the Company used an income-based approach, which involves estimating the future net cash flows and applies an appropriate discount rate to those future cash flows.
| 21 |
Intangible assets were recorded at estimated fair value, as determined by management based on available information which includes a valuation prepared by an independent third party. The fair values assigned to identifiable intangible assets were determined through the use of the income approach and multi-period excess earnings methods. The major assumptions used in arriving at the estimated identifiable intangible asset values included management’s estimates of future cash flows, discounted at an appropriate rate of return which is based on the weighted average cost of capital for both the company and other market participants. The useful lives of intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. The estimated fair value of intangible assets and related useful lives as included in the purchase price allocation include:
| Amount | Useful life in Years | |||||||
| Market related intangible assets | $ | |||||||
| Customer relationships | ||||||||
| Developed technology | ||||||||
| Fair value of consideration | $ | |||||||
Goodwill has been recognized as a result of the specialized assembled workforce at Abaca.
Had
the acquisition of Abaca occurred on January 1, 2022, there would not have been a significant impact on the consolidated operating sales
revenues and net earnings for the three months ended March 31, 2022. Acquisition costs of $
Note 5. Goodwill and other intangibles
Goodwill
acquired in connection with the acquisition on November 16, 2022, is not amortized, but instead evaluated for impairment on an
annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that impairment may be more
likely than not. During the year ended December 31, 2022,
The change in the carrying amount of goodwill from December 31, 2022, to March 31, 2023, is as follows:
| December 31, 2022 | $ | |||
| Acquisition of Abaca | ||||
| March 31, 2023 | $ |
The
Company has elected November 15 as the date for annual impairment testing or as necessary for triggering events. The management believes
that there has been no change in the circumstances which could cause any indicators to impairment hence
The Company’s finite lived intangible assets are amortized on a straight-line basis over their estimated useful lives.
The following is a summary of the Company’s finite-lived intangible assets as of March 31, 2023:
| Remaining Useful life in Years | December 31, | Acquired in acquisition | Amortization | March
31, | ||||||||||||||||
| Market related intangible assets | ||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||
| Developed technology | ||||||||||||||||||||
| Total intangible assets | ||||||||||||||||||||
Following is a summary of the Company’s finite-lived intangible assets as of December 31, 2022.
| Remaining Useful life in Years | December 31, 2021 | Acquired in acquisition | Amortization | December 31, 2022 | ||||||||||||||||
| Market related intangible assets | $ | $ | $ | |||||||||||||||||
| Customer relationships | ||||||||||||||||||||
| Developed technology | ||||||||||||||||||||
| Total intangible assets | $ | $ | $ | |||||||||||||||||
| 22 |
Note 6. Loans Receivable
Commercial real estate loans receivable, net consist of the following:
March
31, | December
31, | |||||||
| Commercial real estate loans receivable, gross | $ | $ | ||||||
| Less: loan origination charges | ( | ) | ( | ) | ||||
| Commercial real estate loans receivable, net | ||||||||
| 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 allowance is provided based upon management’s analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment.
The allowance may consist of specific and general components. While the allowance may consist of general and specific components, the allowance is general in nature and is available for the loan portfolio in its entirety.
The allowance for credit losses consist of the following activity for the three months ended March 31, 2023 and year ended March 31, 2022:
March
31, | March
31, | |||||||
| Allowance for credit losses | ||||||||
| Beginning balance | $ | $ | ||||||
| Cumulative effect from adoption of CECL | ||||||||
| Charge-offs | ||||||||
| Recoveries | ( | ) | ||||||
| Provision | ||||||||
| Ending balance | $ | $ | ||||||
| Loans receivable: | ||||||||
| Individually evaluated for impairment | $ | $ | ||||||
| Collectively evaluated for impairment | ||||||||
| $ | $ | |||||||
| Allowance for credit losses: | ||||||||
| Individually evaluated for impairment | $ | $ | ||||||
| Collectively evaluated for impairment | ||||||||
| $ | $ | |||||||
| 23 |
At March 31, 2023 and December 31, 2022, no loans were past due, classified as non-accrual or considered impaired.
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. All the loans outstanding on March 31, 2023, are evaluated based on their payment status, which is considered as the most meaningful indicator of credit quality.
Note 7. Indemnification liability
As
discussed at Note 9 to the condensed consolidated financial statements, and pursuant to PCCU Agreements, 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
March
31, | December
31, | |||||||
| Secured term loans | $ | $ | ||||||
| Unsecured loans and lines of credit | ||||||||
| Total loans funded by Parent | $ | $ | ||||||
Secured loans contained an interest rate ranging from
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. Management uses a disciplined process and methodology to establish the liability, and the estimates are sensitive to risk ratings assigned to individual loans covered by the agreement as well as economic assumptions driving the estimation model. Individual loan risk ratings are evaluated at least a quarterly based on each situation by SHF management. Given the Company’s limited lending history, the estimate is based on risk adjusted national charge off rates as published by the US Federal Reserve.
The indemnity liability activity are as follows:
Three Months March 31, 2023 | Three Months March 31, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Cumulative effect from adoption of CECL | ||||||||
| Charge-offs | ||||||||
| Recoveries | ||||||||
| Provision | ||||||||
| Ending balance | $ | $ | ||||||
All loans were current and considered performing at March 31, 2023 except one loan which was identified pursuant to potential default on January 5, 2023. The Company’s management was informed that an indemnified loan, having an outstanding balance of $3.1MM, was past due pursuant to its December 2022 payment. The guarantor on the loan stated to management that the borrower is out of money due to business losses. The guarantor noted that the borrower is attempting to sell the building prior to the end of Q2 of 2023. The Company is discussing workout options with the borrower. In addition, further to the aforementioned attempt to sell, the loan has sufficient collateral.
The above-mentioned loan is now greater than 120 days delinquent and considered impaired. The Company’s CECL methodology has reserved management’s best estimate of credit losses in relation to this loan and the overall loan portfolio on a collective basis.
| 24 |
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. All the indemnified loans outstanding on March 31,2023 are evaluated based on their payment status, which is considered as the most meaningful indicator of credit quality.
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.
The provision for credit losses on the statement of operations consists of the following activity for the three months ended March 31, 2023 and year ended December 31, 2022:
March 31, 2023 | March 31, 2022 | |||||||||||||||||||||||
| Commercial real estate loans | Indemnity liability | Total | Commercial real estate loans | Indemnity liability | Total | |||||||||||||||||||
| Provision (benefit) | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||
Note 8. Property and equipment, net
Property and equipment consist of the following:
March 31, 2023 | December 31, | |||||||
| Equipment | $ | $ | ||||||
| Software | ||||||||
| Improvement | ||||||||
| Office furniture | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| 25 |
Note 9. Related party transactions
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 assumes 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 agrees to pay SHF all revenue generated from CRB accounts. Amounts due to SHF are due
monthly in arrears and upon receipt of invoice.
Pursuant to this agreement, SHF reported revenue of $ and $ for the three months ended March 31, 2023 and March 31, 2022, respectively.
Support Services Agreement
Effective
July 1, 2021, SHF entered into a Support Services Agreement with PCCU. In connection with PCCU hosting the depository accounts and the
related loans and providing certain infrastructure support, PCCU receives (and SHF pays) a monthly fee per depository account. In addition,
Pursuant to these agreements and as amended and restated, the Company reported expenses of $ and $ for the three months ended March 31, 2023 and March 31, 2022, respectively.
Significant terms of the Amended and Restated Accounting Servicing Agreement and Support Services Agreement are as follows:
● Pursuant to the Account Servicing Agreement, the Company’s fees for such services equal all cannabis-related income, including all lending-related income (such as loan origination fees, interest income on CRB-related loans, participation fees and servicing fees), investment income, interest income, account activity fees, processing fees, flat fees, and other revenue generated from cannabis and multi-state hemp accounts that are hosted on PCCU’s core system. The Account Servicing Agreement and Support Services Agreement are for an initial term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of non-renewal, provided that PCCU may not provide notice of non-renewal until 30 months following the signing date. The Account Servicing Agreement will also terminate within 60 days of the Company no longer qualifying as a “credit union service organization” (a “CUSO”) or within 60 days of the assumption by a third party of all CRB-related accounts. On May 23, 2022, the Company and PCCU entered into the Second Amended and Restated Account Servicing Agreement and Support Services Agreement, which agreement amended and restated the Amended and Restated Account Servicing and Support Services Agreements to remove the provision providing for the termination of the agreements within 60 days of the Company no longer qualifying as a “credit union service organization,” as the Company will cease to qualify as a CUSO following the closing of the Business Combination.
●
Pursuant to the Support Services Agreement, as amended, PCCU will continue to provide to the Company certain operational and
administrative services relating to, among other things, human resources, employee benefits, IT and systems, accounting and
marketing and capacity for CRB depository accounts for a monthly fee equal to $
| 26 |
March 31, 2023 | December
31, | |||||||
| PCCU total assets | $ | $ | ||||||
| Capacity at 65% | ||||||||
| CRB related deposits | ||||||||
| Incremental capacity | $ | $ | ||||||
PCCU
policy also requires they maintain an internal ratio of net worth to total assets of at least
Loan Servicing Agreement
Effective
February 11, 2022, SHF entered into a Loan Servicing Agreement with PCCU. The agreement sets forth the application, underwriting and
approval process for loans from PCCU to CRB customers and the loan servicing and monitoring responsibilities provided by both PCCU
and SHF. PCCU receives a monthly servicing fee at the annual rate of
SHF’s
loan program currently depends on PCCU as SHF’s largest funding source for new loans to CRBs. Under PCCU’s loan policy for
loans to CRBs, PCCU’s Board of Directors has approved aggregate lending limits at the lessor of 1.3125 times PCCU’s net worth
or
The below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits at March 31, 2023 and December 31, 2022.
March
31, | December
31, | |||||||
| 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 | $ | $ | ||||||
| 27 |
Pursuant to this agreement, the Company reported expenses of $ and $ for the three months ended March 31, 2023 and March 31, 2022.
Issuance of shares to PCCU
On March 29, 2023, the Company and PCCU entered into the following definitive transaction documents to settle and restructure the deferred obligation:
| ● | A
-year Senior Secured Promissory Note (the “Note”) in the principal amount
of $ |
| ● | A
Securities Issuance Agreement, pursuant to which the Company issued shares
of the Company’s Class A Common Stock to PCCU. Following the issuance of the Shares,
PCCU will own |
| ● | The Registration Rights Agreement requires the Company to register the Shares for resale pursuant to the Securities Act of 1933, as amended (the “Securities Act”); and the Lock-Up Agreement restricts PCCU from transferring the Shares until the earlier of (i) six (6) months after the date of the Securities Issuance Documents or (ii) the consummation of a transaction with an unaffiliated third party in which all of the Company’s stockholders have the right to exchange their shares of Class A Common Stock for cash, securities, or other property; and |
| ● | A Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU which supersedes the Loan Servicing Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement. |
Operating leases
Effective
July 1, 2021, SHF entered into a one-year gross lease with PCCU to lease space in its existing office at a monthly rent of $
Advance from Sponsor
On June 27, 2022, Luminous Capital Inc., an affiliate of the Sponsor provided a non-interest-bearing advance (the “Advance”) amounting to $ to fund the operation of NLIT. The amount remains outstanding at March 31, 2023 and December 31, 2022 and is presented within “accounts payable” in the condensed consolidated balance sheets.
Note 10. Due to Seller
Amounts due to seller were as follows:
March
31, | December
31, | |||||||
| Due to Seller-Current (Unsecured) | $ | $ | ||||||
| Due to Seller-long term (Unsecured) | ||||||||
| Total loans funded by Parent | $ | $ | ||||||
As
contemplated by the Unit Purchase Agreement, related to reverse acquisition of NLIT, the consideration paid to the seller parent (PCCU)
in connection with the Business Combination consisted of an aggregate of $
The
Deferred Cash Consideration was to be paid in one payment of $
On October 26, 2022, SHF Holdings, Inc., entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA Inc. (“Luminous”). As per the terms of the agreement, PCCU has agreed to defer all payments owed by the Company pursuant to the Purchase Agreement for a period of six (6) months from the date hereof while the Parties engage in good faith efforts to renegotiate the payment terms applicable to the Deferred Obligation (the “Forbearance Period”).
The
loan included
On
March 29, 2023, the Company and PCCU entered into a definitive transaction to settle and restructure the deferred obligations,
including $
| Due to Seller | $ | |||
| Cash payment obligation under business combination | ||||
| Business combination expense payable to seller | ||||
| Interest accrued but not paid | ||||
| Total deferred obligation | ||||
| Less: Senior secured promissory note | ||||
| Less: Change in deferred tax | ||||
| Amount charged to Stockholders’ Equity towards issuance of common stock | $ |
| 28 |
Note 11. Senior Secured Promissory Note
March
31, | December
31, | |||||||
| 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 related to business Combination (Refer to Note 3) under which the Company has issued the five-year
Senior Secured Promissory Note (the “Note”) in the principal amount of $
The Note amount will be paid in 54 equal installments
of $
The repayment schedule of the outstanding amount on March 31, 2023 is as follows:
| Year of payment | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Grand total | $ |
Note 12. 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
| 29 |
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 months ended March 31, 2023 and for the year ended December 31, 2022, included in Condensed Consolidated Statements of Operations, is detailed in the table below:
Three months ended March 31, 2023 | Year ended December 31, 2022 | |||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Total Lease Cost | $ | $ | ||||||
| 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 March 31, 2023, and December 31, 2022, are as follows:
| Year | ||||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total future minimum lease payments | $ | $ | ||||||
| Less: Imputed interest | ||||||||
| Operating lease liabilities | ||||||||
| Less: Current portion | ||||||||
| Non-current portion of lease liabilities | $ | $ | ||||||
Note 13. Revenue
Disaggregated revenue
Revenue by type are as follows:
Three months ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| Deposit, activity, onboarding income | $ | $ | ||||||
| Safe Harbor Program income | ||||||||
| Investment income | ||||||||
| Loan interest income | ||||||||
| Total Revenue | $ | $ | ||||||
Account fee income consists of deposit account fees, activity fees and onboarding income, which are recognized on periodic basis as per the fee schedule pursuant to deposit servicing agreement with PCCU. Safe Harbor Program income consists of outsourced support to other financial institutions providing banking to the cannabis industry whose income is recognized on the basis of usage as per the agreements. Investment income consist of interest earned on deposits with the Federal Reserve Bank pursuant to an investment servicing agreement with PCCU. Loan interest income consist of interest earned on both direct and indemnified loans pursuant to a Commercial Alliance Agreement with PCCU.
| 30 |
Note 14. Deferred underwriter fee
In
connection with the business combination (refer to Note 3), the Company executed a note on September 28, 2022 with EF Hutton related to
PIPE financing under which the Company was obligated to pay the principal sum of $
The Company made the payment of its first
installment of $
Note 15. Commitments and contingencies
| ● | The
Company has issued an irrevocable Letter of Credit in favor of AFCO Credit Corporation (“AFCO”),
for an aggregate amount of US $ |
| ○ | The Company continues to be in default, after 10 days’ written notice, in the payment of any sums due to AFCO under a premium finance agreement dated on or about October 20, 2022, or |
| ○ | A case concerning the Company has been filed under title 11 of the United States Code and that, not more than 95 days before that case commenced, AFCO received loan payments amounting to not less than (total of payments received in the 95-day period prior to filing of the bankruptcy case), and AFCO is drawing an amount equal to the stated sum of the loan payments so received. |
| ○ | 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. |
| 31 |
| ● | In connection with the Company’s initial public offering (“IPO”), the Company entered into a registration rights agreement dated June 23, 2021 with the Sponsor and the individuals serving as directors and executive officers of the Company at the time of the IPO. Pursuant to this registration rights agreement, the Company has agreed to register for resale upon the expiration of the applicable lock-up period the Company securities acquired by the Sponsor and such individuals in connection with the organization of the Company and the IPO. |
| ● | For a period beginning on June 28, 2021 and ending 12 months from the closing of the Business Combination, the Company has granted the underwriters a right of first refusal to act as lead-left book running manager and lead left manager for any and all future private or public equity, convertible and debt offerings during such period. In accordance with FINRA Rule 5110(f)(2)I(i), such right of first refusal shall not have a duration of more than three years from the effective date of our Registration Statement. |
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.
As the Business Combination and related transactions are being reflected as if they had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net income per share assumes that the shares issued in connection with the Business Combination have been outstanding for the entire period presented.
Three months ended March 31, 2023 | ||||
| Net loss | $ | ( | ) | |
| Weighted average shares outstanding – basic | ||||
| Basic net loss per share | $ | ( | ) | |
| Weighted average shares outstanding – diluted | ||||
| Diluted net loss per share | $ | ( | ) | |
| Weighted average shares calculation | As on March 31, 2023 | |||
| Company public shares | ||||
| Company initial stockholders | ||||
| PCCU stockholders | ||||
| Shares issued for abaca acquisition | ||||
| Restricted stock units issued | ||||
| Conversion of preferred stock | ||||
| Weighted average shares outstanding | ||||
| 32 |
Certain share-based equity awards were excluded from the computation of dilutive loss per share because inclusion of these awards would have had an anti-dilutive effect. The following table reflects the awards excluded.
March
31, | ||||
| Warrants | ||||
| Share based payments | ||||
| Shares to be issued to Abaca acquisition | ||||
| Conversion of preferred stock | ||||
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
In the 2022, before the date of business combination, SHF was a single member limited liability company with no shareholders hence the disclosure related to earning per share is not applicable.
Note 17. Forward Purchase Agreement
On June 16, 2022, NLIT entered into a Forward Purchase Agreement with Midtown East Management NL, LLC (“Midtown East”). Subsequent to entering into the Forward Purchase Agreement, the Company, NLIT, and Midtown East entered into assignment and novation agreements with Verdun Investments LLC (“Verdun”) and Vellar Opportunity Fund SPV LLC – Series 1 (“Vellar”), pursuant to which Midtown East assigned its obligations as to shares of the shares of Class A Stock to be purchased under the Forward Purchase Agreement to each of Verdun and Vellar. As contemplated by the Forward Purchase Agreement:
| ● | Prior to the closing, Midtown East, Verdun and Vellar purchased approximately million shares of NLIT Class A common stock directly from investors at market price in the public market. Midtown East and other counter parties waived their redemption rights with respect to the acquired shares; |
| ● | One
business day following the closing, NLIT paid approximately $ |
| ● |
| ● | At any time prior to the Maturity Date (defined as the earlier of i) the third anniversary of the Closing of the Business Combination, ii) the shares are delisted from The Nasdaq Stock Market or (iii) during any 30 consecutive Scheduled Trading Day-period following the closing of the Business Combination, the Volume Weighted Average Share Price (VWAP) Price for 20 Scheduled Trading Days during such period shall be less than $ per share), Midtown East, Verdun and Vellar may elect an optional early termination to sell some or all of the shares (the “Terminated Shares”) of Class A Stock in the open market. If Midtown East, Verdun and Vellar sell any shares prior to the Maturity Date, the pro-rata portion of the Reset Price will be released from the escrow account and paid to SHF. Midtown East, Verdun and Vellar shall retain any proceeds in excess of the Reset Price that is paid to SHF. |
| 33 |
| ● | The
trading value of the common stock combined with preferred shareholders electing to convert
their preferred shares to common stock triggered a lower reset price embedded in the forward
purchase agreement, or FPA. As of December 31, 2022, the Company had already called a special
meeting to lower the make-whole price under the preferred share purchase agreement to $/share.
The Company, majority common shareholders and the preferred investors had entered into a
voting agreement whereby the vote to approve the $/share make-whole price was secured.
Knowing the Company would ultimately be issuing shares to the preferred stockholders with
a make whole issuance at $/share compelled the company has recognized a reset price under
the terms of the FPA of $/share. These events significantly reduced the FPA receivable
to approximately $ |
| ● | The reconciliation statement of the common stock held by the parties are as follows: |
On the date of (September 28, 2022) | Share sold during September 29, 2022 | As at December 31, 2022 | ||||||||||||||||||||||||||||
| S.no | Name of the party | Opening (a) | Amount | Shares (b) | Amount | Shares (c=a-b) | Rest (iii) | Amount (c x iii) | ||||||||||||||||||||||
| 1 | Vellar | $ | $ | $ | ||||||||||||||||||||||||||
| 2 | Midtown East | |||||||||||||||||||||||||||||
| 3 | Verdun | |||||||||||||||||||||||||||||
| Grand total | $ | $ | $ | |||||||||||||||||||||||||||
As at December 31, 2022 | Share sold during the three months | As at March 31, 2023 | ||||||||||||||||||||||||||||
| Opening Shares | Shares | Shares | Rest price | Amount | ||||||||||||||||||||||||||
| S.no | Name of the party | (a) | Amount | (b) | Amount | (c=a-b) | (iii) | (c x iii) | ||||||||||||||||||||||
| 1 | Vellar | $ | $ | |||||||||||||||||||||||||||
| 2 | Midtown East | |||||||||||||||||||||||||||||
| 3 | Verdun | |||||||||||||||||||||||||||||
| Grand total | $ | $ | ||||||||||||||||||||||||||||
Note 18. Warrant Liability
Public and Private Placement Warrants
As
of March 31, 2023, and December 31, 2022, the Company has
The Public and Private Placement Warrants may only be exercised for a whole number of shares.
| 34 |
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. If the Company is unable to complete a Business Combination within the Combination Window and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.
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 until 30 days after the completion of a Business Combination, 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 March 31, 2023 and December 31, 2022, the Company has
The
PIPE Warrants have an exercise price of $
| 35 |
Note 19. 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 dealer quotes, 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. The Company value these derivatives based on third party reports for Level 3 inputs. Level 3 inputs, based on observable data to value these derivatives.
PIPE Warrants
PIPE Warrants are recorded at fair value on a recurring basis. The Company value these derivatives based on third party reports for Level 3 inputs. Level 3 inputs, based on observable data to value these derivatives.
Forward purchase option derivatives:
Forward purchase option derivatives 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, based on observable data to value these derivatives.
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 March 31, 2023 and December 31,2022:
March 31, 2023:
| Total Fair Value | Quoted Prices in Active Markets (Level 1) | Significant (Level 3) | ||||||||||
| Description | ||||||||||||
| Liabilities: | ||||||||||||
| Public warrants | $ | |||||||||||
| Private placement warrants | ||||||||||||
| PIPE Warrants | ||||||||||||
| Forward purchase option derivative | ||||||||||||
December 31, 2022:
| Total Fair Value | Quoted Prices in Active Markets (Level 1) | Significant Other Unobservable Inputs (Level 3) | ||||||||||
| Description | ||||||||||||
| Liabilities: | ||||||||||||
| Public warrants | $ | |||||||||||
| Private placement warrants | ||||||||||||
| PIPE Warrants | ||||||||||||
| Forward purchase option derivative | ||||||||||||
| 36 |
Assets Measured at Fair Value on a Nonrecurring Basis
There
were
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.
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 March 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 | ||||||||||||||||||||
| Indemnity liability | ||||||||||||||||||||
| Public warrants | ||||||||||||||||||||
| Private placement warrants | ||||||||||||||||||||
| PIPE Warrants | ||||||||||||||||||||
| Forward purchase derivative | ||||||||||||||||||||
| 37 |
As on December 31, 2022 | ||||||||||||||||||||
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 | ||||||||||||||||||||
| Due to seller - current portion | ||||||||||||||||||||
| Due to seller - long term position | ||||||||||||||||||||
| Deferred underwriter fee payable | ||||||||||||||||||||
| Indemnity liability | ||||||||||||||||||||
| Public warrants | ||||||||||||||||||||
| Private placement warrants | ||||||||||||||||||||
| PIPE Warrants | ||||||||||||||||||||
| Forward purchase derivative | ||||||||||||||||||||
The change in the assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value are presented in the following table:
For the three months ended March 31, 2023 | ||||||||||||
| PIPE Warrants | Private Placement Warrants | Forward purchase derivative | ||||||||||
| Balance at the beginning of the period | $ | |||||||||||
| Fair value adjustment | ( | ) | ( | ) | ||||||||
| Balance at the end of the period | $ | |||||||||||
The private placement warrants and PIPE warrants are measured at fair value using a Black-Scholes model and Black-Scholes-Merton model, respectively. As of March 31, 2023, these warrants were valued based on third party reports for Level 3 inputs. Level 3 inputs, based on observable data to value these derivatives.
The fair value of the forward purchase derivative was estimated using a Monte-Carlo Simulation in a risk-neutral framework (a special case of the Income Approach). Specifically, the future stock price is simulated assuming a Geometric Brownian Motion (“GBM”). For each simulated path, the forward purchase value is calculated based on the contractual terms and then discounted at the term-matched risk-free rate. Finally, the value of the forward is calculated as the average present value over all simulated paths. The Company measured the fair value of the forward purchase option derivative upon execution of the Forward Purchase Agreement and as of December 31, 2022, with the respective fair value adjustments recorded within its Statements of Operations. 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.
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:
As on March 31, 2023 | PIPE Warrants | Private placement warrants | ||||||
| Exercise price | $ | $ | ||||||
| Share Price | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
| As on December 31,2022 | PIPE Warrants | Private placement warrants | ||||||
| Exercise price | $ | $ | ||||||
| Share Price | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
| 38 |
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 March 31,2023 and December 31,2022:
March 31, 2023 | ||||
| Reset Price | $ | |||
| Expected term (years) | ||||
| Additional maturity consideration per share | $ | |||
| Volatility | % | |||
| Risk-free rate | % | |||
| Risk-adjusted discount rate | % | |||
| December 31, 2022 | ||||
| Reset Price | $ | |||
| Expected term (years) | ||||
| Additional maturity consideration per share | $ | |||
| Volatility | % | |||
| Risk-free rate | % | |||
| Risk-adjusted discount rate | % | |||
Note 20. Tax
For the three months ended March
31, 2023, the Company recorded income tax benefit of $
The Company recognizes income tax benefits from uncertain tax positions where the realization of the ultimate benefit is uncertain. As of both March 31, 2023, and December 31, 2022, the Company has no unrecognized income tax benefits.
Note 21. 401(k) Plan
The
Company offers to all employees a tax-qualified retirement contribution plan, with the Company’s
| 39 |
2022 Equity Incentive Plan
Share-based compensation expense recognized for the three months ended March 31, 2023 and March 31, 2022 totaled $ million and $ respectively.
The 2022 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 three months ended March 31, 2023 and March 31, 2022. In conjunction with the 2023 Plan, as of March 31, 2023, the Company had granted stock options and restricted stock units which are described in more detail below.
Stock options
Stock options are awarded to encourage ownership of the Company’s 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.
| 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 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 the 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 | Aggregate Fair Value | |||||||||
| December 31, 2022 | ||||||||||||
| Granted | $ | |||||||||||
| Exercised | ||||||||||||
| Expired | ||||||||||||
| Cancelled / Forfeited | ( | ) | ( | ) | ||||||||
| March 31, 2023 | $ | |||||||||||
On March 31, 2023, there were no unrecognized compensation costs related to non-vested stock options to be recognized. Share based compensation did not impact on Company’s cash flow in three months ended March 31, 2023 or year ended December 31, 2022.
| 40 |
Restricted Stock Units (“RSUs”)
| Restricted Stock Units | No. of RSU | Weighted- Average Grant Date Fair Value Per RSU | Aggregate Fair Value | |||||||||
| December 31, 2022 | ||||||||||||
| Granted | $ | |||||||||||
| Exercised | ||||||||||||
| Expired | ||||||||||||
| Cancelled / Forfeited | ||||||||||||
| March 31, 2023 | $ | |||||||||||
The fair value as of the respective vesting dates of RSUs that vested during the three months ended March 31, 2023 and 2022 was $ and $. As of March 31, 2023, there is $404,692 of unrecognized share-based compensation expense related to RSU awards.
Note 23. Subsequent events
There were not any material subsequent events that occurred after the balance sheet date of March 31, 2023 through the date of this report.
| 41 |
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 (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 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
Founded in 2015 by PCCU (please see “Business Reorganization” below for a description of SHF’s organization), SHF’s mission is to provide access to reliable and compliant financial services for the legal cannabis industry. Through that mission and as an early leader with over seven years of experience, SHF is a leading provider of access to reliable and compliance driven banking, lending and other financial services to financial institutions desiring to provide those services to the cannabis industry.
Through our proprietary platform and on a multi-state level, SHF provides access to the following banking related services through PCCU and other financial institutions:
| ● | Business checking and savings accounts |
| ● | Cash management accounts |
| ● | Savings and investment options |
| ● | Commercial lending |
| ● | Courier services (via third party relationships) |
| ● | Remote deposit services |
| ● | Automated Clearing House (ACH) payments and origination |
| ● | Wire payments |
Our services allow Cannabis Related Businesses (herein referred to as “CRBs”) to obtain services from financial institutions that allow them to run their business more efficiently and effectively with improved financial insight into their business and access to resources to help them grow. Due to limited availability of payment and other banking solutions for the cannabis industry, most businesses transact with high volumes of cash. Our fintech platform benefits CRBs and financial institutions by providing CRBs with access to financial institutions and financial institutions access to increased deposits with the comfort of knowing that those deposits have been compliantly monitored and validated. By facilitating the daily deposits of cash receipts between CRBs and financial institutions, the risks associated with high cash on hand are mitigated, creating a safer atmosphere for the CRB’s employees and the financial institutions at which the deposit accounts are held. Because SHF is not a financial institution, SHF does not hold customer deposits. All deposit accounts are held by SHF’s financial institution clients and all transmissions of funds to and from deposit accounts are handled directly by the financial institutions. In an industry with limited capital and financing options, we offer access to loan options at what we believe to be competitive rates, often with less punitive terms than the current industry average. Our financial institution clients offer loan options including senior secured debt and operating lines of debt. Collateral types include real estate, equipment, and other business assets. We also provide access to lending options for ancillary service providers serving the cannabis industry as these businesses also can have difficulty finding reliable financial services.
| 42 |
To ensure access to consistent and dependable banking access to CRBs, we provide our compliance, validation and monitoring services to financial institutions in a compliance driven environment ensuring strict adherence to the Bank Secrecy Act/FinCEN guidance and related anti money laundering provisions. Since inception, SHF has assisted PCCU in processing more than $12 billion in cannabis related funds and, through its relationship with PCCU and other financial institutions, SHF has successfully navigated 16 state and federal banking exams.
In strategically selected geographic areas, SHF licenses to other financial institutions its proprietary software and Safe Harbor Program (the “Program”) to provide compliance-related services to CRBs. As part of the Program, we provide the following to financial institutions interested in licensing the Program to assist in compliant cannabis banking:
| ● | Initial customer due diligence – Know Your Customer |
| ● | Customer application management |
| ● | Program management support |
| ● | Compliance monitoring |
| ● | Regulatory exam assistance |
Business Reorganization
PCCU’s Board of Directors approved the contribution of certain assets and operating activities associated with operations from both the Branches and Safe Harbor Services (“SHS” or “Oldco”), a wholly-owned subsidiary of PCCU, to SHF Holding, Co., LLC. SHF Holding, Co., LLC then contributed the same assets and related operations to SHF, LLC with PCCU’s investment in SHF, LLC maintained at the SHF Holding, Co., LLC level (the “reorganization”). The reorganization effectively occurred July 1, 2021. In conjunction with the reorganization, all of Branches’ employees and certain PCCU employees were terminated from PCCU and hired as SHF, LLC employees. Collectively, Oldco, the Branches and SHF, LLC represent the “Carved-Out Operations.” After the reorganization, SHF, LLC contains the entirety of the Carved-Out Operations and Oldco was dissolved. In addition, effective July 1, 2021, the entity entered into an Account Servicing Agreement and Support Servicing Agreement which were subsequently amended and restated.
On February 11, 2022, SHF, LLC and SHF Holding Co., LLC, the sole member of SHF, LLC, and Partner Colorado Credit Union (“PCCU”), the sole member of SHF Holding, Co., LLC, entered into a definitive Unit Purchase Agreement (herein referred to as the “Business Combination”) with Northern Lights Acquisition Corp. (“NLIT”), a special purpose acquisition company, and its sponsor, 5AK, LLC. Subsequent to the completion of the transaction, NLIT changed its name to “SHF Holdings, Inc.” (herein referred to as the “Company”). On September 19, 2022, the parties entered into the first amendment to the Unit Purchase Agreement to extend the date by which the closing had to occur from August 31, 2022 until September 28, 2022 and provide for the deferral of $30 million of the $70 million in cash due at the closing. On September 22, 2022, the parties entered into the second amendment to the Unit Purchase Agreement to provide for the deferral of a total of $50 million of the $70 million due at the closing. On September 28, 2022, the parties entered into the third amendment to the Unit Purchase Agreement to provide for the deferral of a total of $56,949,800 of the $70,000,000 due at the closing.
Pursuant to the Unit Purchase Agreement, upon the closing of the transaction, NLIT purchased all of the issued and outstanding membership interests of SHF in exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares of the entity’s Class A common stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash. At transaction close, 1,831,683 shares of the Class A Common Stock were deposited with an escrow agent to be held in escrow for a period of 12 months following the closing date to satisfy potential indemnification claims of the parties. In addition, $3,143,388 in cash and cash equivalents representing the amount of cash on hand at July 31, 2021, less accrued but unpaid liabilities, were paid to PCCU at the final transaction close.
| 43 |
Effective February 11, 2022, the Company 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 the Company. For the loans subject to this agreement, the Company underwrites the loans and performs all compliance analysis, credit analysis of the potential borrower, due diligence and underwriting and all administration, including hiring and incurring the costs of all related personnel or third-party vendors necessary to perform these services. PCCU receives a monthly servicing fee at an annual rate of 0.25% of the then-outstanding principal balance of each loan funded by PCCU. Under the Loan Servicing Agreement, the Company has agreed to indemnify PCCU from all claims related to default-related credit losses as defined in the Loan Servicing Agreement. The agreement is for an initial term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of non-renewal or there is a termination for cause, provided that PCCU may not provide notice of non-renewal until 30 months following the signing date. Pursuant to this agreement, the Company reported expenses of $378,730 for the three months ended March 31, 2023, and $83,807 for the three months ended March 31, 2022. On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Loan Servicing Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement.
The Company’s lending services program currently depends on PCCU as its largest funding source for new loans to CRBs. Under PCCU’s loan policy for loans to CRBs, PCCU’s board of directors has approved aggregate lending limits at the lessor of 1.3125 times PCCU’s net worth or 60% of total CRB deposits. Concentration limits for the deployment of loans are further categorized as (i) real estate secured, (ii) construction, (iii) unsecured and (iv) mixed collateral with each category limited to a percentage of PCCU’s net worth. In addition, loans to any one borrower or group of associated borrowers are limited by applicable National Credit Union Association regulations to the greater of $100,000 or 15% of PCCU’s net worth.
On September 28, 2022, the parties consummated the Business Combination, resulting in NLIT, consistent with the aforementioned parameters, purchasing all of the issued and outstanding membership interests of SHF in exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares of the Company’s Class A common stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash, $56,949,801 of which will be paid on a deferred basis.
Subsequent to the completion of the business combination, the status of PCCU has changed from Parent to majority shareholder of the Company pursuant to its ownership of 60.8% of the Company.
The Company generates both interest income and fee income through providing a variety of services to financial institutions desiring to service the cannabis industry 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 depository accounts held at PCCU, and sourcing and managing loans. In addition to PCCU, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided to other financial institutions under the Safe Harbor Master Program Agreement.
Pursuant to the Unit Purchase Agreement, the Company entered into the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement under similar terms as the July 2021 agreements. In addition, in conjunction with the Unit Purchase Agreement, the Company and PCCU entered into a Loan Servicing Agreement. On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Amended and Restated Support Services Agreement, the Amended and Restated Account Servicing Agreement, and the Loan Servicing Agreement.
| 44 |
The purpose of the $56,949,800 deferral is to provide the Company with additional cash to support its post-closing activities. Pursuant to the third amendment to the Unit Purchase Agreement, the deferred consideration shall be paid in one payment of $21,949,801 on or before December 15, 2022, and the $35,000,000 balance in six equal installments of $6,416,667, payable beginning on the first business day following April 1, 2023, and on the first business day of each of the following five fiscal quarters, for a total of $38,500,002, including interest of $3,500,002. Furthermore, PCCU agreed to defer $3,143,388, representing certain excess cash of SHF, LLC due to the Seller under the definitive unit purchase agreement, and the reimbursement of certain reimbursable expenses under the definitive unit purchase agreement.
On October 26, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA Inc. (“Luminous”). As per the terms of the agreement, PCCU has agreed to defer all payments owed pursuant to the Purchase Agreement for a period of six (6) months from the date hereof while the Parties engage in good faith efforts to renegotiate the payment terms applicable to the Deferred Obligation (the “Forbearance Period”).
On March 29, 2023, the Company and PCCU entered into a definitive transaction to settle and restructure the deferred obligations, including $56,949,800 into a five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25%; a Security Agreement pursuant to which the Company has granted, as collateral for the Note, a first priority security interest in substantially all of the assets of the Company; and a Securities Issuance Agreement, pursuant to which the Company has issued 11,200,000 shares of the Company’s Class A Common Stock to PCCU
Purchase Agreement and Public Company Costs
The Business Combination detailed above was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, NLIT was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination is treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a recapitalization. The net assets of NLIT are recognized at fair value (which is expected to be consistent with carrying value), with no goodwill or other intangible assets recorded.
Other related events in connection with the Business Combination are summarized below:
| ● | The 2,875,000 of Class B Common Stock converted at the closing to an equal number of shares of Class A Common stock. |
| ● | Upon closing of the Business Combination, 11,386,139 shares of Class A Common Stock were issued to PCCU as set forth in and pursuant to the terms of the Purchase Agreement. |
PCCU was due to receive a cash payment of $3.1 million at the consummation of the Business Combination, which represented the amount of SHF’s cash on hand at July 31, 2021, less accrued but unpaid liabilities. In addition, pursuant to the terms of the purchase agreement, the Company is responsible for reimbursing the Seller for its transaction expenses.
| ● | Approximately $56.9 million of the $70.0 million of cash proceeds due to PCCU was deferred and is due to the Seller. Approximately $21.9 million of the amount was due to PCCU beginning December 15, 2022. The residual $35.0 million is due in six quarterly installments of $6.4 million thereafter. Interest accrues at an effective annual rate of approximately 4.71%. A sum of 1,200,000 shares of Class A Common Stock were escrowed until the amount is paid in full. |
| ● | The Parent-Entity Net Investment appearing in the balance sheet of the Company amounting to $9,124,297 on the date of business combination was transferred to additional paid in capital. |
| 45 |
| ● | Immediately prior to the Closing, 20,450 shares of Series A Convertible Preferred were purchased by the PIPE Investors pursuant to the PIPE Securities Purchase Agreements for an aggregate value of $20,450,000. The shares of Series A Convertible Preferred were converted into 2,045,000 shares of Class A Common Stock at a purchase price of $10.00 per share of Class A Common Stock. Twenty (20) percent of the aggregate value was deposited into a third party escrow account for purposes of paying the PIPE Investors any required Registration Delay Payments. Upon the filing of the registration statement 10 calendar days subsequent to closing, 17.5% of the escrow amount was released with the remaining amount once all securities were included in an effective registration statement. |
| ● | For tax purposes, the transaction is treated as a taxable asset acquisition, resulting in an estimated tax basis Goodwill balance of $ 44,102,572, creating a deferred tax asset reported as Additional Paid-in Capital in the equity section of the balance sheet as of the date of the business combination. There is not any goodwill for book reporting purposes as no goodwill or other intangible assets are to be recorded in accordance with GAAP. |
| ● | Preferred Stock: The Company is authorized to issue 1,250,000 preferred shares with a par value of $0.00001 per share with such designation rights and preferences as may be determined from time to time by the Company’s Board of Directors. As of March 31, 2023, there were 10,896 preferred shares issued or outstanding and 14,616 preferred shares issued or outstanding on December 31, 2022. |
| ● | Class A Common Stock: The Company is authorized to issue up to 130,000,000 shares of Class A Common Stock with a par value of $0.00001 per share. Holders of the Company’s Class A Common Stock are entitled to one vote for each share. As of March 31, 2023, and December 31, 2022, there were 39,659,089 and 20,815,912 shares, respectively, of Class A Common Stock issued or outstanding. As of March 31, 2023, and December 31, 2022, 3,669,504 Class A Common Stock are held by the purchasers under forward purchase agreement dated June 16, 2022, by and among the Company and such purchasers. |
| ● | Parent-Entity Net Investment: Parent-Entity Net Investment balance in the consolidated balance sheets represents PCCU’s historical net investment in the Carved-Out Operations. For purposes of these condensed consolidated financial statements, investing requirements have been summarized as “Parent-Entity Net Investment” and represent equity as no cash settlement with PCCU is required. No separate equity accounts are maintained for SHS, SHF or the Branches. |
Key Metrics
In addition to the measures presented in our condensed consolidated financial statements, our management regularly monitors certain measures in the operation of our business. These key metrics are discussed below.
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) and Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed EBITDA and Adjusted EBITDA, both of which are non-GAAP financial measures that we calculate as net income before taxes and depreciation and amortization expense in the case of EBITDA and further adjusted to exclude non-cash, unusual and/or infrequent costs in the case of Adjusted EBITDA. Below we have provided a reconciliation of net income (the most directly comparable GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.
We present EBITDA and Adjusted EBITDA because these metrics are a key measure used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of investment capacity. Accordingly, we believe that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.
| 46 |
EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:
| ● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and both EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| ● | EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and |
| ● | EBITDA and Adjusted EBITDA do not reflect tax payments that may represent a reduction in cash available to us. |
Because of these limitations, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results.
A reconciliation of net income to non-GAAP EBITDA and Adjusted EBITDA is as follows:
Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net (loss)/income | $ | (1,413,447 | ) | $ | 501,600 | |||
| Interest expense | 834,203 | - | ||||||
| Depreciation and amortization | 396,314 | 817 | ||||||
| Taxes | (609,277 | ) | - | |||||
| EBITDA | $ | (792,207 | ) | $ | 502,417 | |||
| Other adjustments – | ||||||||
| Provision for credit losses | 66,666 | 68,191 | ||||||
| Change in the fair value of warrants | (433,148 | ) | - | |||||
| Stock option conversion | 1,570,782 | - | ||||||
| Loan origination fees and costs | (2,175 | ) | 1,373 | |||||
| Adjusted EBITDA | $ | 409,918 | $ | 571,981 | ||||
The decrease in our income on an EBITDA and Adjusted EBITDA basis for the three months ended March 31, 2023, is due to increase in professional fees on account increase in compliances as well as increases in compensation, employee benefits, marketing, insurance, and additional items, as discussed under “Discussion of our Results of Operations” below. Other adjustments include estimated future credit losses not yet realized, including amounts indemnified to PCCU for loans funded by them. The Company had entered into a Loan Servicing Agreement with PCCU, pursuant to which the Company agreed to indemnify PCCU for claims associated with CRB activities including any loan default related losses for loans funded by PCCU; the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement. Deferred loan origination fees and costs represent the change in net deferred loan origination fees and costs. When included with a new loan origination, we receive an upfront loan origination fee in conjunction with new loans funded by our financial institution partners and incur costs associated with originating a specific loan. For accounting purposes, the cash received for loan origination fees and costs is initially deferred and recognized as interest income utilizing the interest method.
| 47 |
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.
Three months Ended March 31 |
2023 | 2022 | Change ($) | Change (%) | |||||||||||||
| Average monthly ending deposit balance | (1) | $ | 222,857,256 | 141,840,884 | 81,016,372 | 57.12 | % | ||||||||||
| Account fees | (2) | $ | 2,120,187 | 1,427,487 | 692,700 | 48.53 | % | ||||||||||
| Average active accounts | (3) | 1,018 | 581 | 437 | 75.22 | % | |||||||||||
| Average account balance | (4) | $ | 218,917 | 244,132 | (25,215 | ) | (10.33 | %) | |||||||||
| Average fees per account | (4) | $ | 2,083 | 2,457 | (374 | ) | (15.23 | %) | |||||||||
| (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. |
While the average number of accounts increased for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, the average account size and account fees decreased as we experienced some churn of larger clients replaced by smaller business. 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 to facilitate its banking services to CRBs including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding to account inquiries, responding to customer service inquiries relating to CRB deposit accounts held at financial institution clients, and sourcing and originating loans. In addition, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided under the Safe Harbor Master Program Agreement.
| 48 |
Operating expenses
Operating expenses consist of compensation and benefits, professional services, rent expense, parent allocations, provisions for credit losses and other general and administrative expenses.
Compensation and benefits consist of employee wages and associated benefits while professional services consist of legal, general consulting and accounting fees.
The Company reports a provision for credit losses both as it relates to loans funded internally and those carried by PCCU or other financial institutions. The Company indemnifies PCCU for losses on loans to borrowers sourced by the Company and funded by PCCU. The Company anticipates comparable arrangements with other financial institutions that fund loans to borrowers sourced by the Company.
Other general and administrative expenses consist of various miscellaneous items including account hosting fees, insurance expense, advertising and marketing, travel meals and entertainment and other office and operating expense.
Discussion of our Results of Operations —2023 Compared to 2022 (Three Months Ended March 31)
Revenue
| Three Months Ended March 31, | 2023 | 2022 | Change ($) | Change (%) | ||||||||||||
| Deposit, activity, onboarding income | $ | 2,245,831 | $ | 1,466,869 | 778,962 | 53.10 | % | |||||||||
| Safe Harbor Program income | 51,103 | 43,019 | 8,084 | 18.79 | % | |||||||||||
| Investment income | 1,417,152 | 93,986 | 1,323,166 | 1407.83 | % | |||||||||||
| Loan interest income | 466,293 | 67,236 | 399,057 | 593.52 | % | |||||||||||
| Total Revenue | $ | 4,180,379 | $ | 1,671,110 | 2,509,269 | 150.16 | % | |||||||||
Account fee income consists of deposit account fees, activity fees and onboarding income. Historically, the Company has charged fees based on cannabis related deposit account activity. During 2023, we reduced our fee percentage for cannabis specific accounts in order to ensure we were competitive with the market and for many accounts implemented a flat fee structure for certain CRB accounts based on historical and anticipated deposit levels. In addition, we receive a flat fee and lower rates for ancillary accounts, which are accounts provided to businesses servicing the cannabis industry in general but do not manufacture, possess, distribute or transport cannabis. The ratio of ancillary accounts to cannabis specific accounts increased during 2023.
The Company provides similar account services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided under the Safe Harbor Master Program Agreement. Revenue has decreased as we narrow the financial institutions and states we allow under this program and instead focus on servicing CRBs directly.
We have an investment servicing agreement with PCCU (related party) where our financial institution clients invest their customer deposits into short term US treasury instruments. The investment income in our income statement reflects our share of that investment income. Investment income earned on deposits with the Federal Reserve Bank increased as a result of recent interest rate increases.
We have 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 credit. Loan interest earned on the Company’s direct loans and the indemnified loans increased as the Company increases its focus on lending. For the three months ended March 31, 2023, SHF serviced eight loans, as compared to seven loans in the three months ended March 31, 2022.
| 49 |
Operating expenses
As discussed in the reverse recapitalization section above, PCCU allocations were discontinued effective July 1, 2022, and SHF entered into both an account servicing agreement and support service agreement. There is no impact on revenue as a result of implementing these agreements.
| Three months Ended March 31, | 2023 | 2022 | Change ($) | Change (%) | ||||||||||||
| Compensation and employee benefits | $ | 3,659,520 | $ | 722,525 | $ | 2,936,995 | 406.49 | % | ||||||||
| General and administrative expenses | 1,538,874 | 222,953 | 1,315,921 | 590.22 | % | |||||||||||
| Professional services | 449,246 | 130,816 | 318,430 | 243.42 | % | |||||||||||
| Rent expense | 87,742 | 25,025 | 62,717 | 250.62 | % | |||||||||||
| Provision for credit losses | 66,666 | 68,191 | (1,525 | ) | (2.24 | )% | ||||||||||
| Total operating expenses | $ | 5,802,048 | $ | 1,169,510 | $ | 4,632,538 | 396.11 | % | ||||||||
Compensation and employee benefits increased on account of stock-based compensation and also the increase in the head count in anticipation of growth.
Professional services expense increased primarily due to the increase in the legal fees, audit fees, and consulting fees towards SEC filing and other ancillary reporting’s.
Provision for credit losses has increased due to increase in the loss rate and with increase in the absolute value of the loans.
General and administrative expenses increased across various categories including: i) approximately $390,659 in account and hosting fees as a result of the reorganization, ii) approximately $76,879 in increased advertising and marketing as we focus on growth, iii) $387,132 in amortization and depreciation, and iv) $208,813 in business insurance.
Financial Condition
Cash and cash equivalents
Cash and cash equivalents totaled $8,628,752 and $8,390,195 as of March 31, 2023, December 31, 2022, respectively.
Cash flows
For the three months ended March 31, 2023, the Company’s cash used in operations was ($210,737) compared to cash provided by $506,455, for the three months ended March 31, 2022. This was mainly due to reduced net income from operations with an additional amount resulting from changes across operating assets and liabilities. See discussion under “Discussion of our Results of Operations” above for more information.
Contract assets and liabilities
Deferred revenue is primarily related to contract liabilities associated with the Company agreements. As of March 31, 2023, SHF reported a contract asset and liability of $34,189 and $79,612 and on December 31, 2022, SHF reported a contract asset and liability of $21,170 and $996, respectively.
| 50 |
Liquidity and going concern
As of March 31, 2023, the Company had $8,628,752 in cash and net working capital of deficit of $8,998,880, as compared to $8,390,195 in cash and net working capital deficit of $39,340,020 at December 31, 2022. Included in the working capital deficit at March 31, 2023 and December 31, 2022 are $11,685,419 and $11,622,831, respectively, which represent the equity consideration payable towards the Abaca acquisition. The Company has also incurred an operating loss of $1,621,669 for the period ended March 31, 2023.
At December 31, 2022, a significant component of the working capital deficit was $25,973,017 as current portion of due to PCCU. As outlined above, the Company restructured the due to PCCU issuing equity and a long-term payable. As a result, this risk factor that the Company may not be able to continue as a going concern which existed at December 31, 2022 was alleviated. Despite the restructuring of the due to PCCU, at March 31, 2023, the working capital deficit substantially includes an equity commitment equity commitment towards the Abaca acquisition, which is a non-cash liability amounting to $11,685,419. Based upon these factors, management of the Company has determined that there is a risk of substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the date these condensed consolidated financial statements have been issued.
The Company also hired an experienced Chief Financial Officer in October 2022, who has immediately begun to institute certain cost-cutting measures across the Company, including expense reduction measures and negotiating reduced amounts and extended terms for certain payables. These factors, however, do not fully remove substantial doubt regarding the Company’s ability to continue as a going concern that has been identified. 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 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.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as disclosure of contingent assets and liabilities. An appreciation of our critical accounting policies is necessary to understand our financial results. In some cases, we could reasonably use different accounting policies and estimates, and changes in our estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates, and our financial condition or results of operations could be affected. We base our estimates on our experience and other assumptions that we believe are reasonable, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.
Revenue recognition
SHF recognized revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which SHF expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
Revenue is recorded at a point in time when the performance obligation is satisfied, and no contingencies exist. Revenue consists primarily of fees earned on deposit accounts held at PCCU but serviced by SHF such as bank account charges, onboarding income, account activity fee income and other miscellaneous fees.
| 51 |
In addition, SHF recognizes revenue from the Master Program Agreement. The Master Program Agreement is a non-exclusive and non-transferable right to implement and utilize the Safe Harbor Program. The Safe Harbor Program has two performance obligations; an implementation fee recognized when the contract is effective and a service fee recognized ratable over the contract term as the compliance program is executed.
Lastly, SHF also records revenue for interest on loans and investment income allocated by PCCU based on specific customer balances.
Amounts received in advance of the service being provided is recorded as a liability under deferred revenue on the consolidated balance sheets. Typical Safe Harbor Program contracts are three-year contracts with amounts due monthly, quarterly or annually based on contract terms.
Customers consist of financial institutions providing services to CRBs. Revenues are concentrated in the United States.
Indemnity liability
The indemnification component of the Loan Servicing Agreement is accounted for in accordance with ASC 460 Guarantees. In determining the applicability of ASC 460, we considered that the agreement outlines a broad indemnification of all claims related to the cannabis-related business. The most immediate and potentially significant of these are potential default-related credit losses. In the lending industry, it is inherently anticipated future credit losses will result from currently issued debt. SHF’s indemnity obligation is subordinate to PCCU’s and other financial institution clients’ other means of collecting on the loans including foreclosure of the collateral, recourse against personal and/or corporate guarantors and other default remedies available in the loan agreements. Since borrowers are not party to the agreement between SHF and PCCU, any indemnity payments do not relieve borrowers of their obligation to PCCU nor would such payments preclude PCCU’s right to future recoveries from the debtor. Therefore, as defined in ASC 460, the indemnification clause represents a general loss contingency in that it is an existing condition, situation or set of circumstances involving uncertainty as to possible loss to the Company that will ultimately be resolved when one or more future events occur or fail to occur. SHF’s indemnity liability reflects SHF management’s estimate of probable credit losses inherent under the agreement at the balance sheet date. Management uses a disciplined process and methodology to establish the liability, and the estimates are sensitive to risk ratings assigned to individual loans covered by the agreement as well as economic assumptions driving the estimation model. Individual loan risk ratings are evaluated quarterly by SHF management based on each situation.
In addition to default-related credit losses, SHF continuously monitors all other circumstances pursuant to the agreement and identifies events that may necessitate a loss contingency under the Loan Servicing Agreement. A loss contingency is reported when it is both probable that a future event will confirm that a loss had been incurred on or before the related balance sheet date and the loss is reasonably estimable.
Stock-based compensation
The 2022 Plan (“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 years 2023 and 2022. In conjunction with the 2022 Plan, as of March 31, 2023, the Company had granted stock options and restricted stock units which are described in more detail below.
Stock options
Stock options are awarded to encourage ownership of the Company’s 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 10-year contractual term.
The Company measures all equity-based payment arrangements to employees and directors in accordance with ASC 718, Compensation–Stock Compensation. The Company’s stock-based compensation cost is measured based on the fair value at the grant date of the stock-based award. It is recognized as expense on a straight-line basis over the requisite service period for the entire award. Forfeitures are recognized as they occur. The Company estimates the fair value of each stock-based award on its measurement date using either the current market price of the stock or Black-Scholes option valuation model, whichever is most appropriate. The Black-Scholes valuation model incorporates assumptions such as expected term of the instrument, volatility of the Company’s future share price, risk free rates, future dividend yields and estimated forfeitures at the initial grant date, by reference to the underlying terms of the instrument, and the Company’s experience with similar instruments. Changes in assumptions used to estimate fair value could result in materially different results.
| 52 |
The shares of the Company were listed on the stock exchange for a limited period of the time and also the stock price has dropped significantly from the date of listing, based on which the Company has considered the expected volatility at 100% for the purpose of stock compensation. The risk-free interest rates are based on quoted U.S. Treasury rates for securities with maturities approximating the awards’ expected lives. 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 expected dividend yield is zero as the Company has never paid dividends and does not currently anticipate paying any in the foreseeable future.
Forward purchase agreement
On June 16, 2022, NLIT entered into a Forward Purchase Agreement with Midtown East Management NL, LLC (“Midtown East”). Subsequent to entering into the Forward Purchase Agreement, the Company, NLIT, and Midtown East entered into assignment and novation agreements with Verdun Investments LLC (“Verdun”) and Vellar Opportunity Fund SPV LLC – Series 1 (“Vellar”), pursuant to which Midtown East assigned its obligations as to 1,666,666 shares of the shares of Class A Stock to be purchased under the Forward Purchase Agreement to each of Verdun and Vellar. As contemplated by the Forward Purchase Agreement:
| ● | Prior to the business combination, Midtown East, Verdun and Vellar purchased approximately 3.8 million shares of NLIT Class A common stock directly from investors at market price in the public market. Midtown East and other counter parties waived their redemption rights with respect to the acquired shares; |
| ● | One business day following the Closing, NLIT paid approximately $39.3 million from the cash held in its trust account to Midtown East; Verdun and Vellar for the shares purchased and approximately $0.3 million in related expense amounts. |
| ● | At any time prior to the Maturity Date (defined as the earlier of i) the third anniversary of the Closing of the Business Combination, ii) the shares are delisted from The Nasdaq Stock Market or (iii) during any 30 consecutive Scheduled Trading Day-period following the closing of the Business Combination, the Volume Weighted Average share Price (VWAP) Price for 20 Scheduled Trading Days during such period shall be less than $3.00 per share), Midtown East, Verdun and Vellar may elect an optional early termination to sell some or all of the shares (the “Terminated Shares”) of Class A Stock in the open market. If Midtown East, Verdun and Vellar sell any shares prior to the Maturity Date, the pro-rata portion of the Reset Price will be released from the escrow account and paid to SHF. Midtown East, Verdun and Vellar shall retain any proceeds in excess of the Reset Price that is paid to SHF. |
| ● | At the Maturity Date, Midtown East, Verdun and Vellar shall be entitled to (1) the product of the shares then held by them multiplied by the Forward Price, and (2) an amount, in cash or shares at the sole discretion of NLIT, equal to (a) in the case of cash, the product of(i)(x) 3.8 million shares less (y) the number of Terminated Shares and (ii) $2.00 (the “Maturity Cash Consideration”) and (b) in the case of shares, (i) the Maturity Cash Consideration divided by (ii) the VWAP Price for the 30 Scheduled Trading Days prior to the Maturity Date. |
| ● | The trading value of the common stock combined with preferred shareholders electing to convert their preferred shares to common stock triggered a lower reset price embedded in the forward purchase agreement, or FPA. As of December 31, 2022, the Company had already called a special meeting to lower the make-whole price under the preferred share purchase agreement to $1.25/share. The Company, majority common shareholders and the preferred investors had entered into a voting agreement whereby the vote to approve the $1.25/share make-whole price was secured. Knowing the Company would ultimately be issuing shares to the preferred stockholders with a make whole issuance at $1.25/share compelled the company to recognize a reset price under the terms of the FPA of $1.25/share. These events significantly reduced the FPA receivable to approximately $4.6 million, from approximately $37.9 million reported at the end of the September 2022 quarter. The loss in value resulted not only in a compression of the balance sheet, but also $42.3 million charge to other expense on the statement of operations. |
| 53 |
Forward purchase derivative
The Company accounts for the forward purchase derivative assumed in the business combination in accordance with the guidance contained in ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The Company classifies the forward purchase derivatives as liabilities carried at their fair value and adjusts the forward purchase derivatives to fair value at each reporting period. This derivative asset or liability is subject to re-measurement at each balance sheet date until the conditions under the forward purchase agreement are exercised or expire, and any change in fair value is recognized in the condensed consolidated statement of operations. The fair value of the forward purchase derivative was estimated using a Monte-Carlo Simulation in a risk-neutral framework (a special case of the Income Approach). Specifically, the future stock price is simulated assuming a Geometric Brownian Motion (“GBM”). For each simulated path, the forward purchase value is calculated based on the contractual terms and then discounted at the term-matched risk-free rate. Lastly, the value of the forward is calculated as the average present value over all simulated paths. The Company measured the fair value of the forward purchase option derivative upon execution of the Forward Purchase Agreement and as of March 31, 2023, with the respective fair value adjustments recorded within its Statements of Operations. 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.
Allowance for Credit Losses (ACL)
In 2023, the Company adopted Accounting Standards Codification Topic 326 - Financial Instruments - Credit Losses (ASC Topic 326), which replaced the incurred loss methodology for estimated probable credit losses with an expected credit loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.
The ACL is a valuation account that is deducted from the amortized cost basis of financial assets carried at their amortized cost, including loans held for investment, to present the net amount that is expected to be collected throughout the life of the financial asset. The estimated ACL is recorded through a provision for credit losses charged against operations. Management periodically evaluates the adequacy of the ACL to maintain it at a level it believes to be reasonable. The Company uses the same methods used to determine the ACL to assess any reserves needed for off-balance sheet credit risks such as unfunded loan commitments including Indemnified loans to PCCU. These reserves for off-balance sheet credit risks are presented in the liabilities section in the consolidated balance sheets as an “Indemnity liability.”
The ACL consists of two components: an asset-specific component for estimating credit losses for individual loans that do not share similar risk characteristics with other loans; and a pooled component for estimating credit losses for pools of loans that share similar risk characteristics. The ACL for the pooled component is derived from an estimate of expected credit losses primarily using an expected loss methodology that incorporates risk parameters such as probability of default (“PD”) and loss given default (“LGD”) which are derived from various vendor models and/or internally developed model estimation approaches for smaller homogenous loans.
PD is projected in these models or estimation approaches using economic scenarios, whose outcomes are weighted based on the Company’s economic outlook and are developed to incorporate relevant information about past events, current conditions, and reasonable and supportable forecasts. The Company considers relevant current conditions and reasonable and supportable forecasts that relate to its lending practices and environment and the specific borrower and determines that the significant factor affecting the loan’s performance is the fact that these borrowers are involved in the cannabis business. Despite being legal at the state level in certain jurisdictions, cannabis remains federally illegal in the United States as of the date of this memorandum. As cannabis related lending is a new practice in the United States, there is very little historical or industry data on which to base a loss forecast. Therefore, significant judgement is required in creating a reasonable loss estimate, using similar non-MRB loans as a baseline and adjusting for the inherent risks in the cannabis industry. While the Company considers other qualitative factors, including national macroeconomic conditions, in its overall risk analysis, it has determined that they are not significant inputs to the overall loss estimate calculations.
The ACL estimation process applies an economic forecast scenario, or a composite of scenarios based on management’s judgment and expectations around the current and future macroeconomic outlook. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term of a loan excludes expected extensions, renewals, and modification under certain conditions.
| 54 |
Recoveries on loans represent collections received on amounts that were previously charged off against the ACL. Recoveries are credited to the ACL when received, to the extent of the amount previously charged off against the ACL on the related loan. Any amounts collected in excess of this limit are first recognized as interest income, then as a reduction of collection costs, and then as other income.
Emerging Growth Company Status
SHF is an emerging growth company (“EGC”), as defined in the JOBS Act. Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued until such time as those standards apply to private companies. In electing this relief, the JOBS Act does not preclude an EGC from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. SHF has elected to use this relief and will do so until the earlier of the date that it (a) is no longer an emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result of the elected JOBS Act relief, these combined and condensed consolidated financial statements may not be comparable to companies that do not elect JOBS Act relief or choose to early adopt different accounting pronouncements than SHF.
Internal Control Over Financial Reporting
In connection with our management assessment of internal control over financial reporting as of and for the three months ended March 31, 2023, the Company has identified Four (4) material weaknesses within our internal controls over financial reporting related to its Deferred Tax Asset, Revenue Recognition, Complex Financial Instruments and Credit Losses. Refer to Item 9A of this document for additional details.
Related Party Relationships
Account Servicing Agreement
Effective July 1, 2021, SHF entered into an Account Servicing Agreement with PCCU. SHF provides services as per the agreement to CRB accounts at PCCU. In addition to providing the services, SHF assumes the costs associated with the CRB accounts. These costs include employees to manage account onboarding, monitoring and compliance, rent and office expense, insurance and other operating expenses necessary to service these accounts. Under the agreement, PCCU agrees to pay SHF all revenue generated from CRB accounts. Amounts due to SHF are due monthly in arrears and upon receipt of invoice. The agreement is for an initial term of 3 years from the effective date. It shall renew thereafter for 1-year terms until either SHF or PCCU provide sixty days prior written notice. Pursuant to this agreement, SHF reported revenue of $3,261,284 for the three months ended March 31, 2023, and $1,628,091 for the three months ended March 31, 2022.
As described elsewhere in this document, on February 11, 2022, SHF and PCCU entered into the Amended and Restated Account Servicing Agreement, pursuant to which SHF provides services including, among other things, Bank Secrecy Act compliance and reporting, onboarding, responding to account inquiries, and responding to customer service inquiries relating to accounts at PCCU held for cannabis-related businesses (“CRBs”). Pursuant to the Amended and Restated Account Servicing Agreement, SHF’s fees for such services will equal all cannabis-related income, including all lending-related income (such as loan origination fees, interest income on CRB-related loans, participation fees and servicing fees), investment income, interest income, account activity fees, processing fees, flat fees, and other revenue generated from cannabis and multi-state hemp accounts that are hosted on PCCU’s core system. The Amended and Restated Account Servicing Agreement is for an initial term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of non-renewal, provided that PCCU may not provide notice of non-renewal until 30 months following the signing date. The Amended and Restated Account Servicing Agreement initially provided that the agreement would terminate within 60 days of SHF no longer qualifying as a “credit union service organization” or within 60 days of the assumption by a third party of all CRB-related accounts; however, on May 23, 2022, SHF and PCCU entered into the Second Amended and Restated Account Servicing Agreement, which agreement amended and restated the Amended and Restated Account Servicing Agreement to remove the provision providing for the termination of the agreement within 60 days of SHF no longer qualifying as a “credit union service organization,” as SHF will cease to qualify as a CUSO following the closing of the Business Combination.
| 55 |
Support Services Agreement
Effective July 1, 2021, SHF entered into a Support Services Agreement with PCCU. In connection with PCCU hosting the depository accounts and the related loans and providing certain infrastructure support, PCCU receives (and SHF pays) a monthly fee per depository account. In addition, 25% of any investment income associated with CRB deposits is paid to PCCU. The respective duties and obligations as per the agreement commenced on the effective date and continue unless terminated by either SHF or PCCU upon giving sixty days prior written notice. Pursuant to these agreements and as amended and restated on February 11, 2022, the Company reported expenses of $378,730 for the three months ended March 31, 2023, and $83,807 for the three months ended March 31, 2022.
As described elsewhere in this document, on February 11, 2022, SHF and PCCU entered into the Amended and Restated Support Services Agreement, pursuant to which PCCU will continue to provide to SHF certain operational and administrative services relating to, among other things, human resources, employee benefits, IT and systems, accounting and marketing for a monthly fee equal to $30.96 per account in 2022 and $25.32 per account in 2023 and 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 SHF. SHF will also reimburse PCCU for any of its out-of-pocket expenses relating to the services provided to SHF. The Amended and Restated Support Services Agreement also sets forth certain agreements of PCCU to limit bonus distributions to its members to $30,000,000 during any 12-month period following the effective date of the agreement and to allow its ratio of CRB-related deposits to total assets to equal at least 65% unless otherwise dictated by regulatory, regulator or policy requirements. The Amended and Restated Support Services Agreement has the same term and termination provisions as the Amended and Restated Account Servicing Agreement, including a provision providing for the termination of the agreement within 60 days of SHF no longer qualifying as a “credit union service organization.” On May 23, 2022, SHF and PCCU entered into the Second Amended and Restated Support Services Agreement, which agreement amended and restated the Amended and Restated Support Services Agreement to remove the provision providing for the termination of the agreement within 60 days of SHF no longer qualifying as a “credit union service organization,” as SHF will cease to qualify as a CUSO following the closing of the Business Combination.
Loan Servicing Agreement
Effective February 11, 2022, SHF entered into a Loan Servicing Agreement with PCCU. The agreement sets forth the application, underwriting and approval process for loans from PCCU to CRB customers and the loan servicing and monitoring responsibilities provided by both PCCU and SHF. PCCU will receive a monthly servicing fee at the annual rate of 0.25% of the then-outstanding principal balance of each loan funded 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. The agreement is for an initial term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of non-renewal or there is a termination for cause, provided that PCCU may not provide notice of non-renewal until 30 months following the signing date.
Pursuant to this agreement, the Company reported expenses of $ 11,929 for the three months ended March 31, 2023, and $1,373 for the three months ended March 31, 2022.
On March 29, 2023, The Company and PCCU entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Loan Servicing Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement.
Operating leases
Effective July 1, 2021, SHF entered into a one-year gross lease with the Parent to lease space in its existing office at a monthly rent of $5,400. Effective July 1, 2022, the Company amended its existing lease to a month-to-month lease and therefore no asset or liability amounts are reported pursuant to ASC 842.
Issuance of shares to PCCU
On March 29, 2023, the Company and PCCU entered into the following definitive transaction documents to settle and restructure the deferred obligation:
| ● | A five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25% and a Security Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all of the assets of the Company. |
| ● | A Securities Issuance Agreement, pursuant to which the Company will issue 11,200,000 shares of the Company’s Class A Common Stock to PCCU. Following the issuance of the Shares, PCCU will own 54.93% of the outstanding Class A Common Stock. In connection with the Securities Issuance Agreement, the parties also entered into a Registration Rights Agreement and a Lock-Up Agreement. |
| ● | The Registration Rights Agreement requires the Company to register the Shares for resale pursuant to the Securities Act of 1933, as amended (the “Securities Act”); and the Lock-Up Agreement restricts PCCU from transferring the Shares until the earlier of (i) six (6) months after the date of the Securities Issuance Documents or (ii) the consummation of a transaction with an unaffiliated third party in which all of the Company’s stockholders have the right to exchange their shares of Class A Common Stock for cash, securities, or other property; and |
| ● | A Commercial Alliance Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between the Company and PCCU which supersedes the Loan Servicing Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement. |
| 56 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
SHF Holdings, Inc. is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise required with respect to market risk.
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 March 31, 2023 due to the material weaknesses described below. In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the 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 March 31, 2023.
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. As of September 30, 2022, the Company had failed to document an analysis to identify the substantial doubt about the ability to continue as a going concern; evaluate whether the substantial doubt was alleviated by management’s plans; and disclose the going concern in the September 30, 2022 10-Q. To remediate this material weakness, the Company implemented a quarterly process with enhanced management review controls to perform and review a going concern analysis and the adequacy of disclosures within the consolidated financial statements, as applicable based on the results. The Company proceeded to collectively perform these tasks during the fourth quarter of 2022 and first quarter of 2023 by continuing to retain a CPA firm (onboarded during the latter part of the third quarter of 2022) to assist with the preparation of the analysis pursuant to the Company’s ability to continue as a going concern and prepare applicable disclosures. The analysis and disclosures are then assessed by senior management of the Company performing review of the documentation and disclosures. As such, the Company has remediated this material weakness as of March 31, 2023.
| 57 |
We consider the following material weaknesses as of March 31, 2023:
Deferred Tax Asset: A deferred tax asset was created as a result of the business combination occurring on September 28, 2022. The deferred tax asset was initially calculated prior to consummation of the business combination using projected amounts. The Company had failed to update the calculation as of September 30, 2022 using actual amounts from the business combination due to ineffective management review controls over the income tax provision.
To alleviate this material weakness, the Company has implemented a quarterly control to calculate and review the deferred tax asset, evaluate the necessity for any valuation allowance, and reconcile it to the general ledger. The Company proceeded to collectively perform these tasks during the fourth quarter of 2022 by retaining a Top 50 CPA firm in the United States to assist in the preparation of the tax provision and tax compliance work along with management’s independent review of the quarterly income tax provision and valuation of deferred tax assets.
Revenue Recognition: During fiscal year 2022, the Company’s revenue was primarily 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 alleviate this material weakness, the Company will implement a monthly process with enhanced management review controls to perform and review revenue recognition. The analysis and disclosures are then assessed by senior management of the Company performing review of the documentation and disclosures.
Complex Financial Instruments: During fiscal year 2022 and the three months ending March 31, 2023, the Company had a material weakness with regard to the ineffectiveness in management review controls of the accounting and valuation of complex financial instruments (warrants, Forward Purchase Agreement, and stock-based compensation).
To alleviate this material weakness, the Company will implement a quarterly process with enhanced management review controls to perform and review complex financial instruments. The analysis and disclosures are then assessed by senior management of the Company performing review of the documentation and disclosures.
Credit Losses: During the three months ending March 31, 2023, the Company identified a material weakness with regard to the initial implementation of CECL. This included initially not having supporting documentation of the model aligning to the calculations recorded, and incorrectly applying the modified retrospective adoption through the Condensed Unaudited Consolidated Statements of Operations only, as opposed to the Condensed Unaudited Consolidated Statements of Parent-Entity Net Investment and Stockholders’ Equity on January 1, 2023.
To alleviate this material weakness, the Company enhanced the allowance model documentation prior to the March 31, 2023, 10-Q filing, and will implement a quarterly process with enhanced management review controls to perform and review CECL. The analysis and disclosures are then assessed by senior management of the Company performing review of the documentation and disclosures.
Changes in Internal Control over Financial Reporting
Other than as noted above in the March 31, 2023 material weaknesses, there was no change in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2023 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, with the exception of the below.
The Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation 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.
| 58 |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our final prospectus dated June 23, 2021 filed with the SEC, the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the Company’s Form 8-K/A filed with the SEC on April 15, 2022, the Company’s definitive proxy statement filed with the SEC on June 10, 2022, and the Company’s Current Report on Form 8-K filed with the SEC on September 19, 2022, except 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.
| 59 |
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. |
| † | 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. |
| 60 |
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 | May 15, 2023 | ||
| Sundie Seefried | ||||
| /s/ James H. Dennedy | Chief Financial Officer | May 15, 2023 | ||
| James H. Dennedy |
| 61 |