Related Party Transactions

3 Months Ended

Mar. 31, 2025

Related Party Transactions [Abstract]

Related Party Transactions

Note 8. Related Party Transactions

PCCU is considered a related party as it holds a significant ownership interest in the Company, is our most significant financial institution customer, serves as the Company’s sole lending financial institution, is the counterparty to the PCCU Note, and is where we maintain the majority of our deposits. The agreements between PCCU and the Company are as follows:

Commercial Alliance Agreement (the “PCC CAA”)

On March 29, 2023, the Company and PCCU entered into a PCCU CAA, which was subsequently amended and restated on December 31, 2024. This agreement sets forth the terms and conditions of lending and account-related services, governing the relationship between the Company and PCCU. The PCCU CAA outlined the application, underwriting, loan approval, and foreclosure processes for loans issued by PCCU to CRBs (as defined below), as well as the loan servicing and monitoring responsibilities of both parties.

In particular, the PCCU CAA provided procedures to be followed upon the default of a loan to ensure that neither the Company nor PCCU would take title to or possession of cannabis-related assets, including real property that may have served as collateral for loans funded by PCCU pursuant to the agreement.

Under the PCCU CAA, PCCU had the right to receive monthly fees for managing loans. For SHF-serviced loans (CRB loans provided by PCCU but primarily handled by SHF), a yearly fee of 0.25% of the remaining loan balance was applied. For loans both financed and serviced by PCCU, a yearly fee of 0.35% on the outstanding balance was charged. These fees were calculated based on the average daily balance of each loan for the preceding month.

Additionally, until December 31, 2024 the Company was obligated under the PCCU CAA to indemnify PCCU from certain default-related loan losses, as fully defined in the agreement.

Furthermore, the PCCU CAA outlined certain fees to be paid to the Company for specified account-related services, including cannabis-related income such as loan origination fees, interest income on CRB-related loans, participation fees, servicing fees, investment income, account activity fees, processing fees, and other revenue. These fees were set at $30.96 per account in 2022, $25.32-$27.85 per account in 2023, and $26.08-$28.69 in 2024.

Regarding CRB deposits held at PCCU, investment and interest income earned on these deposits (excluding interest income on loans funded by PCCU) was shared at a ratio of 25% to PCCU and 75% to the Company. Additionally, PCCU maintained its CRB-related deposits to total assets ratio at 60%, unless otherwise dictated by regulatory, regulator, or policy requirements. The initial term of the PCCU CAA was two years, with a one-year automatic renewal, unless either party provided a one hundred twenty-day written notice prior to the end of the term.

The Amended PCCU CAA extends the term through December 31, 2028, with automatic renewals every two years unless terminated with 12 months’ notice.

The key modifications under the Amended PCCU CAA include several significant changes:

● The indemnification obligations have been eliminated, meaning the Company is no longer required to indemnify PCCU for any loan-related losses under either the original or future agreements.

● The prior fee structure has been replaced by an asset hosting fee structure. Previously, the Company paid various fees to PCCU, including per-account servicing, investment hosting, and loan servicing fees. Under the new structure, the Company will pay a fixed asset hosting fee calculated as 0.01 multiplied by the average daily balance of account relationships generated by the Company, divided by the number of days in the year, and multiplied by the number of days in the applicable month.

● Provides the Company with all investment income earned on CRB funds invested on its behalf by PCCU, effectively eliminating the investment hosting fees that were previously payable.

● The Company’s interest income on all loans with PCCU are now calculated using a loan yield allocation formula that incorporates the Constant Maturity US Treasury Rate from Standard & Poor’s Capital IQ data service, along with a proprietary risk rating formula to determine the fee split between the Company and PCCU. Before the amendment, the Company received the entire interest income from the loan and was responsible for paying loan servicing fees of 0.25% of the loan balance. The amendment removes the loan servicing fees and indemnification liability, while introducing the interest income split between the Company and PCCU.

● There are penalties charged to the Company if it fails to maintain the agreed Loan-to-Share (LTS) Ratio. If the LTS Maximum (60%) is exceeded for over 90 days, the asset hosting fee increases from 1.00% to 1.10% of the average daily balance (ADB) until compliance is restored. If the LTS Minimum (27.5%) is breached, the Company must pay a quarterly adjustment fee based on the shortfall. Additionally, if the LTS Ratio exceeds 100% for 90 days, the Company incurs an interest charge at the Federal Funds Rate + 120 bps, calculated daily and paid monthly.

The schedule below illustrates the ratio of CRB-related loans funded by PCCU to the corresponding lending limits under the Amended PCCU CAA.:

	March 31, 2025		December 31, 2024
CRB related deposits	$	103,326,396	$	116,064,487
Capacity at 60%		61,995,838		69,638,692
PCCU net worth		63,661,697		82,400,677
Capacity at 1.3125		81,369,537		108,150,889
Limiting capacity		61,995,838		69,638,692
PCCU loans funded		55,585,488		56,794,446
Amounts available under lines of credit		1,291,518		1,131,708
Incremental capacity	$	5,118,832	$	11,712,538

As of March 31, 2025, the Company implemented an improvement to its reporting of business metrics. CRB related deposits historically was computed as of the date reported. As of March 31, 2025, CRB related deposits are being computed using a 30day average. As of December 31, 2024, the incremental capacity if reported using the 30 day average of CRB related deposits of $95,437,402, would have resulted in a shortfall of $663,713.

For the three months ended March 31, 2025, and 2024, the Company recognized revenue of $1,604,278 and $3,585,856, respectively, in the statements of operations related to the PCCU CAA and Amended PCCU CAA. Corresponding operating expenses under the PCCU CAA and Amended PCCU CAA amounted to $303,512 and $300,261 for the same periods, respectively.

The outstanding balances associated with the PCCU disclosed in the balance sheet are as follows:

	March 31, 2025		December 31, 2024
Accounts receivable	$	634,076	$	968,023
Accounts payable		157,828		75,608
Senior Secured Promissory Note (Refer to Note 9 to the financial statements below)		10,748,408		11,004,173

Of the $0.9 million and $2.3 million of cash and cash equivalents on March 31, 2025 and December 31, 2024, respectively, $0.8 million and $2.2 million of the cash and cash equivalents, respectively, were held in deposit accounts at PCCU.