SHF Holdings Inc
For the period ended Jun 30, 2024. Filed Aug 14, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 14, 2024
SHFS$0.03-1.1%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-13.
0001493152-24-018878
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-14.
0001493152-24-032185
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 106 previous paragraphs and 98 current paragraphs.
45 unchanged; 35 reworded; 12 added; 26 removed; 0 previous and 6 current paragraphs rearranged.
Tables are not compared: 16 previous and 18 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (12)
Current report
Stringent collateral package requirements with substantial loan-to-value coverage;
Current report
Rigorous underwriting of collateral and borrower creditworthiness;
Current report
In-depth knowledge of the industry, borrowers’ operations, and the cannabis industry business cycle.
Current report
Non-GAAP Measures
Current report
We use certain non-GAAP measures, referenced in this MD&A. These measures are not recognized measures under GAAP and do not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation from nor as a substitute for our financial information reported under GAAP. We use non-GAAP measures including EBITDA, Adjusted EBITDA and Adjusted EBITDA margin which may be calculated differently by other companies. These non-GAAP measures and metrics are used to provide investors with supplemental measures of our operating performance and liquidity and thus highlight trends in our business that may not otherwise be apparent when relying solely on GAAP measures. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. We also recognize that securities analysts, investors and other interested parties frequently use non-GAAP measures in the evaluation of companies within our industry.
Current report
Compensation and employee benefits decreased in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 on account of stock-based compensation and also related to a reduction in force.
Current report
(Benefit)/ Provision for credit losses decreased in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 due to a decrease in the estimated loss rate.
Current report
For the six months ended June 30, 2024, general and administrative expenses decreased across various categories including: i) approximately $632,675 in investment hosting fees due to a reduction in investment income and ii) approximately $407,165 in amortization and depreciation due to the reduction in the gross value of intangible assets from impairment recorded in 2023.
Current report
Rent expenses decreased in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due to reduction in the number of lease properties.
Current report
For the three months ended June 30, 2024, general and administrative expenses decreased across various categories including: i) approximately $345,271 in investment hosting fees due to a reduction in investment income , and (ii) approximately $206,560 in amortization and depreciation due to the reduction in the gross value of intangible assets from impairment recorded in 2023.
Current report
As of June 30, 2024, there were no significant changes in the application or the nature of accounting estimates that are considered critical in nature from those presented in our Annual Report on Form 10-K.
Current report
If the loans funded by PCCU exceed the limiting capacity, the CAA specifies that PCCU will be unable to fund additional loans until the incremental capacity is positive.
Removed paragraphs (26)
Previous report
Revenue
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Operating expenses
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Revenue
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Operating expenses
Previous report
General and administrative expenses decreased across various categories including: (i) approximately $163,204 in investment hosting fees, (ii) approximately $54,169 in advertising and marketing, (iii) $198,056 in amortization and depreciation, and (iv) $46,378 in business insurance.
Previous report
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with U.S GAAP. Preparing unaudited 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 the following accounting estimates as critical accounting estimates, based on their importance to the financial reporting and potential for changes in future periods:
Previous report
Revenue recognition
Previous report
The company records revenue when it meets its service obligations, which include various fees charged for financial services such as account maintenance and transaction fees, along with other miscellaneous fees. When determining transaction prices, the company considers potential variations in these fees, which may fluctuate based on customer usage and specific contract terms. This is in line with ASC 606 standards, which require the allocation of transaction prices to the specific services provided within a contract, such as setup and ongoing fees for certain programs. The company also earns revenue from interest on loans, which includes those directly issued and those backed by a partnership with PCCU under a commercial alliance agreement. Investment income consist of interest earned on the daily deposits balance with financial institution. A strategic change in the fourth quarter of 2023 saw the company adopt a new method for calculating interest on customer deposit balances, excluding certain amounts. The company’s customer base mainly consists of financial institutions that serve cannabis-related businesses (CRBs), with revenue primarily generated in the United States. Under the terms of its Commercial Alliance Agreement with PCCU, the company is obligated to pay PCCU various fees, including a loan servicing fee of 0.35% of the current loan balance, and monthly service fees based on account balances, with rates varying for balances below and above $1 million. Additionally, the company must pass on 25% of its investment hosting fees to PCCU, which are calculated from the returns on PCCU-related deposits.
Previous report
Indemnity liability
Previous report
The indemnification component of the Loan Servicing Agreement is accounted for in accordance with ASC 460 Guarantees, which follows guidance in ASC 326 – Financial Instruments – Credit Losses (ASC Topic 326), for estimating expected credit losses under the current expected credit loss (“CECL”) methodology, presented in the liabilities section in the consolidated balance sheets as an” Indemnity liability”. The Company accounts for the indemnification component of the Commercial Alliance Agreement for claims related to cannabis-related businesses, with a particular emphasis on default-related credit losses. The Company’s indemnity is secondary to other recovery methods like foreclosure or guarantor recourse. Indemnity payments don’t absolve borrowers of their obligations, maintaining PCCU’s rights to recoveries. The indemnification is considered a general loss contingency under ASC 460 due to uncertainties that could lead to losses, resolved by future events. The Company’s liability for indemnity is based on management’s estimation of probable credit losses at the balance sheet date, influenced by individual loan risk ratings and economic assumptions in the estimation model. These risk ratings are re-evaluated quarterly. The indemnity liability 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 internally developed model estimation approaches for smaller homogenous loans. The PD is quantified by analyzing historical data to determine the rate at which loans have defaulted within the portfolio, relative to the total outstanding loans as of the end of the reporting period. This rate is expressed as a percentage and serves as a key indicator of the likelihood of default across the loan pool. LGD assessments are conducted to estimate the potential loss amount in the event of a default, considering the recoverable value from the collateral liquidation against the remaining loan balance. This involves a detailed analysis of two primary components: the loss on principal, which arises from the gap between the collateral’s liquidation value and the unpaid principal balance of the loan; and the loss associated with various ancillary costs to recover, including, but not limited to, foregone interest, transaction costs, legal and administrative fees, and expenses related to the maintenance and renovation of the property. Changes in the PD and LGD directly affect the estimated indemnity liability. An increase in PD, indicating a higher likelihood of defaults, necessitates a larger indemnity liability to cover potential losses, impacting the company’s financial reserves. Conversely, a decrease in PD would lower the required indemnity liability, reflecting a more favorable risk outlook. Similarly, a rise in LGD, due to reduced collateral values or higher recovery cost…
Excerpt shortened here; the source contains the full paragraph.
Previous report
Stock-based compensation
Previous report
In conjunction with the 2022 Plan, as of March 31, 2024, the Company had granted stock options and restricted stock units which are described in more detail below:
Previous report
Stock options
Previous report
The Company awards stock options to incentivize employee ownership and performance, applying ASC 718 for equity-based payments. Options, with a 10-year term with their fair value determined at the grant date, considering either market price or the Black-Scholes model. This model factors in expected option term, stock price volatility (set at 100% due to significant price fluctuations since listing), risk-free interest rates (aligned with U.S. Treasury rates), and an assumed zero dividend yield, given the Company’s history of not paying dividends. The expected option term is derived using the simplified method, averaging the contractual term and vesting period. Compensation cost is recognized over the service period on a straight-line basis, with immediate recognition of forfeitures. Changes in valuation assumptions could significantly alter fair value estimates.
Previous report
Restricted Stock Units / Restricted Stock Awards
Previous report
The Company values equity-based payments under ASC 718, using fair value at grant date for stock awards, recognizing expenses over the service period. Fair value is estimated via the market price or Black-Scholes model, considering variables like expected term, stock volatility, risk-free rates, and forfeiture rates. Given the stock’s limited listing period and significant price drop, volatility is presumed at 100%. Risk-free rates align with U.S. Treasury rates matching the awards’ lifespans. The options’ expected term merges the contractual and vesting durations. The Company assumes zero dividend, reflecting the Company’s history and future dividend outlook, impacting the valuation of stock-based compensation. Changes in valuation assumptions could significantly alter fair value estimates.
Previous report
Forward Purchase Agreement
Previous report
The Company, under a Forward Purchase Agreement (FPA) with Midtown East, which was later reassigned to Verdun and Vellar, involved complex transactions around Class A common stock. Initially, about 3.8 million shares were acquired from the market. Post-business combination, the Company disbursed $39.6 million for these shares and associated costs. The FPA allows for an early termination sale of shares by the assignees, with proceeds above the reset price going to them and the rest to the Company. The final settlement at the Maturity Date includes a cash or share payment based on the Forward Price and a Maturity Cash Consideration. In 2022, the reset price adjustment, influenced by the common stock’s trading value and preferred share conversions, significantly reduced the FPA receivable from $37.9 million to $4.6 million. No further transactions or value changes were noted for the period ended March 31, 2024 and year ended December 31, 2023, maintaining the FPA receivable’s value. The value of the forward purchase agreement could diminish if the Company issues any securities at a price below the reset price of $1.25 per share before the agreement expires.
Previous report
Forward Purchase Derivative
Previous report
The Company records the forward purchase derivative from a business combination as per ASC 815, marking it as an asset or liability at fair value, adjusted each reporting period. Fair value adjustments are recognized in the consolidated statement of operations. The Monte-Carlo Simulation, applying Geometric Brownian Motion for stock price projections, was utilized for valuation in the year ended December 31, 2022. In 2022, the company fully accounted for the maximum contractual liability. Through March 31, 2024, there were no notable shifts in risk factors that would impact the values of FPA derivatives.
Previous report
Warrants Liabilities
Previous report
The Company’s accounting for warrants, including Public, Private Placement, PIPE, and Abaca warrants, constitutes a critical accounting estimate due to the significant judgments and assumptions involved in their valuation and the potential impact on our financial statements. These warrants are recorded at fair value on a recurring basis, requiring the use of observable market data and valuation techniques that involve significant estimates and assumptions. For Public warrants, the Company utilizes Level 1 inputs, relying on exchange-traded prices which provide a transparent and observable market valuation. This approach minimizes the level of estimation uncertainty associated with these warrants. For the fiscal year ending December 31, 2023, and the first quarter ending March 31, 2024, the Company shifted its approach to valuing Private Placement and PIPE (Private Investment in Public Equity) Warrants from relying on external third-party reports to conducting in-house evaluations. This internal assessment strategy utilizes Level 3 inputs, which are based on data that is not observable in the market, contrasting with the method used in the quarter ending March 31, 2023, where the valuation was grounded on third-party reports. This shift aims to enhance the precision of the valuation process, allowing for adjustments reflective of the unique characteristics of these warrants and prevailing market conditions. Key assumptions in this valuation include the expected volatility of our stock, the risk-free interest rate, the expected life of the warrants, and the dividend yield. Variability in these assumptions could significantly impact the fair value estimates of these warrants. For Abaca Warrants, the Company also utilizes an internal assessment approach with Level 3 inputs. The valuation assumptions include, but are not limited to, the exercise price, the fair market value of the underlying Class A Common Stock, the expected term of the warrants, and the risk-free interest rate. Future variations in these critical assumptions could arise from changes in market conditions, such as fluctuations in the volatility of the Company’s stock, alterations in the risk-free interest rate reflecting broader economic shifts, or adjustments in the expected life of the warrants due to changes in the holders’ exercise behavior. Additionally, regulatory changes or shifts in the market perception of the Company could also necessitate adjustments to these assumptions. Changes in these assumptions could lead to significant variations in the recorded fair value of the warrants, impacting the Company’s financial position and results of operations. The Company closely monitors these assumptions and market conditions to ensure that the warrant valuations accurately reflect their fair market value on reporting date.
Previous report
Deferred consideration
Previous report
The Company’s accounting for the deferred consideration arising from the acquisition of Abaca represents a critical accounting estimate, consistent with ASC Topic 815, “Derivatives and Hedging” (“ASC 815 “). This consideration, due to its failure to meet the equity classification criteria under ASC 815, is accounted for as a derivative liability. This approach necessitates the recognition of this obligation on the balance sheet at its fair value, with subsequent adjustments to fair value reflected at each reporting period end. The determination of fair value involves significant judgments and assumptions, particularly in light of the complex terms outlined in the Abaca merger agreement and its amendments. The deferred consideration includes cash payments scheduled at various anniversaries of the merger closing, the issuance of common stock based on specified conditions, and the introduction of additional consideration and stock warrants as per the latest amendments to the agreement. The fair value assessment of these components is influenced by several factors, including the Company’s stock price, the volatility of the stock, the risk-free interest rate, and the specific terms of the deferred and stock considerations as amended. Future variations in the fair value of this derivative liability could arise from changes in the Company’s stock price, fluctuations in market volatility, alterations in the risk-free interest rate, or changes in the terms of the agreement as negotiated with the Abaca stockholders. Such changes could be prompted by evolving business strategies, market conditions, or regulatory environments that impact the financial and operational aspects of the agreement. These estimates and assumptions are subject to inherent uncertainties and the exercise of management’s judgment. Changes in these critical assumptions could lead to significant adjustments in the recorded fair value of the derivative liability associated with the Abaca acquisition’s deferred consideration. These adjustments could materially impact the Company’s financial position and results of operations, emphasizing the importance of the estimates and assumptions used in the valuation of this complex financial instrument. The Company closely monitors related developments and market conditions to ensure the derivative liability is accurately valued, providing transparency and reliability on the reporting date**.**
Previous report
Loan Servicing Agreement
Previous report
On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement. This Agreement sets forth the terms and conditions of the lending and account-related services, governing the relationship between the Company and PCCU. The Commercial Alliance Agreement replaces and supersedes, in their entirety, the following agreements entered into between the aforementioned parties: the Amended and Restated Loan Servicing Agreement (the “Loan Servicing Agreement”, dated September 21, 2022); the Second Amended and Restated Account Servicing Agreement (“the “Account Servicing Agreement,” dated May 23, 2022, effective February 11, 2022) and the Second Amended and Restated Support Services Agreement (the “Support Agreement,” dated May 23, 2022, effective February 11, 2022).
Reworded paragraphs (35)
Previous wording
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 unaudited condensed consolidated financial statements.
Current wording
References in this section to “we,” “us,” or “our” refer to SHF Holdings, Inc and subsidiaries (herein referred to as the “Company”). References to “management” refer to our officers and board of managers. The following discussion and analysis of our financial performance and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements.
Previous wording
We provide services to a variety of cannabis-industry participants in 41 states, including financial institutions desiring to provide business banking, private banking and commercial banking services to their customers, particularly those customers conducting business in or adjacent to the cannabis industry. Our services include, among other things:
Current wording
We provide services to a variety of cannabis-industry participants in 41 states, including financial institutions that support business banking, private banking and commercial banking services to their customers, particularly those customers conducting business in or adjacent to the cannabis industry. Our services include, among other things:
Previous wording
The Company has developed and commercialized a fully compliant financial services platform for financial institutions providing banking services to cannabis-related businesses (“CRBs”) to access and maintain reliable financial services as long as both the financial institution client and the CRB meet regulatory requirements. Our platform has been streamlined and finetuned for the past nine years which enables the Company’s staff to efficiently guide financial institution clients and the CRBs desiring banking services through the onboarding, validation and monitoring process. Our automated platform provides for an efficient and effective management tool allowing our employees to provide continuity of service while enabling compliance staff to monitor BSA activities.
Current wording
The Company has developed and commercialized a software based services platform for financial institutions providing banking services to cannabis-related businesses (“CRBs”). Our software enabled services access and maintain reliable financial information to enable both our financial institution clients and our the CRB clients to meet regulatory requirements. Our platform has been streamlined and fine-tuned for the past nine years which enables the Company’s staff to efficiently guide financial institution clients and the CRBs desiring banking services through the onboarding, validation and monitoring process. Our automated platform provides for an efficient and effective management tool allowing our employees to provide continuity of service while enabling compliance staff to monitor BSA activities.
Previous wording
Through the Company’s platform, our financial institution clients have the ability to provide CRBs with access to traditional financial services including wires, debit, ACH, remote deposit capture, business checking and savings accounts, courier and vaulting services, cash management accounts and commercial lending. We believe our services have been implemented consistent with applicable law and regulations, ensuring our financial institution clients will be able to provide CRBs with reliable access to these services. We feel our history of developing processes that satisfy regulatory standards has resulted in a solid reputation with related authorities and solidifies our ability to continue to grow existing services and reduces barriers in expanding into new service offerings.
Current wording
Through the Company’s financial services platform, our financial institution clients have the ability to provide CRBs with access to traditional financial services including wires, debit, ACH, remote deposit capture, business checking and savings accounts, courier and vaulting services, cash management accounts and commercial lending. We believe our services have been implemented consistent with applicable law and regulations, ensuring our financial institution clients will be able to provide CRBs with reliable access to these services. We feel our history of developing processes that satisfy regulatory standards has resulted in a solid reputation with related authorities and solidifies our ability to continue to grow existing services and reduces barriers in expanding into new service offerings.
Previous wording
The Company maintains relationships with Partner Colorado Credit Union (“PCCU”) and other financial institutions in which the CRB funds are deposited and monetary transactions are performed. The Company’s agreements with the financial institution allow the Company’s platform to interface with the financial institution’s core banking systems and extract data necessary to monitor the deposit accounts onboarded by the Company’s transactions, such as funds transmissions to or from the accounts, occur through PCCU’s and other financial institution client’s infrastructure.
Current wording
The Company maintains relationships with PCCU and other financial institutions in which CRBs’ funds are deposited and monetary transactions are performed. The Company’s agreements with the financial institution allow the Company’s platform to interface with the financial institution’s core banking systems and extract data necessary to monitor the deposit accounts onboarded by the Company’s transactions, such as funds transmissions to or from the accounts, occur through PCCU’s and other financial institution client’s infrastructure.
Previous wording
When a CRB or ancillary service provider approaches PCCU or other financial institution for which the Company provides its onboarding services, an initial onboarding fee is assessed based on the type and complexity of the business. Onboarding is an important part of the KYC requirements set forth in federal guidance. The onboarding process can require a great deal of time depending on the business complexity and the fee we assess is based upon the complexity and required time to complete the process. Additionally, the Company assesses monthly deposit and activity fees, which have historically been the majority of our revenue. These fees are also based on business type and size. Monitoring and validating deposit activity is paramount to the success of the Company’s platform. We believe our compliance-first focus reassures regulators and law enforcement that the Company continues to focus on the safety and soundness of the financial system.
Current wording
The Company earns income on deposit activity and onboarding fees, which have historically been the majority of our revenue, based on CRB client’s initial onboarding and continuing deposit activity we facilitate between the CRB and our financial institution clients. When we help establish a new relationship between a CRB or ancillary service provider with our financial institution clients for which the Company provides its onboarding services, an initial onboarding fee is assessed based on the type and complexity of the business. Onboarding is an important part of the KYC requirements set forth in federal guidance. The onboarding process can require a great deal of time depending on the business complexity and the fee we assess is based upon the complexity and required time to complete the process. Additionally, the Company assesses fees monthly based on the frequency and amount of deposit activity fees of our CRB client.. These fees are also based on business type and size. Monitoring and validating deposit activity is paramount to the success of the Company’s platform. We believe our compliance-first focus reassures regulators and law enforcement that the Company continues to focus on the safety and soundness of the financial system.
Previous wording
Investment income is also generated when PCCU or other financial institution clients invest CRB deposits. Under our Commercial Alliance Agreement with PCCU, the Company pays 25% of the investment income as a hosting fee to PCCU based on this income. Through its relationship with PCCU, depository amounts invested are typically restricted to low-risk assets with high liquidity and low returns. The investment income is significantly influenced by the levels of CRB deposits and the prevailing interest rate environment for cash and similar assets. We believe that fees based on deposits that we onboard and interest on the daily balance less cash used to collateralize our loan portfolios maintained with financial institutions will represent a significant portion of our revenue by 2024.
Current wording
The Company earns investment income based on the balances maintained on deposit by our CRB clients with our financial institution clients. Our financial institution clients invest the deposits of our CRB clients principally in US Treasury Federal Overnight Securities. We recognize revenue pursuant to the interest earned on these deposit balances and incur a cost of revenue we owe to the financial institution for facilitating the investment activity. Under our Commercial Alliance Agreement with PCCU, the Company pays 25% of the investment income as a hosting cost of revenue fee to PCCU based on the earned investment income from the CRB deposit balances maintained at PCCU. Through its relationship with PCCU, depository amounts invested are typically restricted to low-risk assets with high liquidity and modest returns. The investment income is significantly influenced by the levels of CRB deposits and the prevailing interest rate environment for cash and similar assets. We believe that fees based on deposits that we onboard and interest on the daily balance less cash used to collateralize our loan portfolios maintained with financial institutions will represent a significant portion of our revenue by 2024.
Previous wording
The level of CRB deposits onboarded by the Company and held at PCCU allows for robust lending capacity. During 2020, the Company implemented a commercial lending program, which will be a strong pillar for future revenue and profit growth. The focus will primarily include senior secured lending with smaller loans considered for unsecured lending. Collateral types would include real estate, equipment, and other business assets. The Company’s commercial lending program is built on:
Current wording
We earn interest income from lending activity we facilitate between our CRB clients and our financial institution clients. The robust CRB deposits onboarded by the Company and held at PCCU provide a strong foundation for lending capacity. In 2020, the Company launched a commercial lending program, that has developed to be our largest revenue component by value and percentage. The program focuses on senior secured lending, with smaller unsecured loans also being considered. Collateral types include real estate, equipment, and other business assets. The commercial lending program is built on:
Previous wording
Currently, lending is primarily funded through PCCU using the funds from CRB deposit accounts onboarded by the Company. The Company is currently seeking relationships with additional financial institutions that would fund the Company’s loans and other sources of working capital with which the Company could fund the loans directly. The Company has created a lending program tailored specifically to the unique needs of CRBs while also achieving strong returns on quality loans. While third parties are presently used to provide loan underwriting and servicing, the Company plans on building out a full-service internal lending function to improve the efficiency of our lending process and to increase future profitability.
Current wording
Currently, lending is primarily funded through PCCU using CRB deposits balances onboarded by the Company. The Company is seeking relationships with additional financial institutions and other sources of working capital to directly fund the loans. The Company’s lending program is tailored to the unique needs of CRBs, achieving strong returns on high-quality loans. The Company in collaboration with third parties manages loan underwriting and loan servicing. As the program develops, the Company intends to establish a full-service internal lending function to perform a larger percentage of the underwriting and servicing activities, improve efficiency and increase profitability of this revenue element.
Previous wording
We feel we have taken a creative and methodical approach in building the Company’s platform, which has allowed us to nationally scale our business. The platform’s policies, training, monitoring and other processes are well established with talented and expert level knowledge. We also plan to further expand the officer level suite with talent that we believe will further our success. We anticipate this combination will provide a competitive advantage for us as we focus on continued growth.
Current wording
We believe our creative and methodical approach in building the Company’s platform has enabled national business scaling. The platform’s policies, training, monitoring, and processes are well established and supported by expert talent. We anticipate this combination of intellectual property plus human capital talent will provide a competitive advantage as we focus on continued growth.
Previous wording
In addition to the measures presented in our condensed unaudited consolidated financial statements, our management regularly monitors certain measures in the operation of our business. These key metrics are discussed below.
Current wording
In addition to the measures presented in our unaudited condensed consolidated financial statements, our management regularly monitors certain measures in the operation of our business. These key metrics are discussed below.
Previous wording
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 U.S. GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.
Current wording
To provide investors with additional information regarding our financial results, we have disclosed EBITDA and Adjusted EBITDA, both of which are non-GAAP financial measures that we calculate as net income before taxes and depreciation and amortization expense in the case of EBITDA and further adjusted to exclude non-cash, unusual and/or infrequent costs in the case of Adjusted EBITDA. Below we have provided a reconciliation of net (loss)/income (the most directly comparable U.S. GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.
Previous wording
For the period ended March 31, 2024, our EBITDA income improved primarily as a result of lower General and Administrative expenses and reduced stock-based compensation. Additionally, the increase in adjusted EBITDA income during this period was mainly attributed to the decrease in General and Administrative expenses. This reduction was driven by lower investment hosting fees, decreased amortization and depreciation expenses, and reduced business insurance costs. Additionally, there were decreases in compensation, employee benefits, marketing expenses, and other insurance costs. These factors contributing to our financial performance are further discussed in the “Discussion of our Results of Operations” section below. Other adjustments include estimated future credit losses not yet realized, including amounts indemnified to PCCU for loans funded by them. The Company had entered into a Commercial alliance agreement with PCCU, pursuant to which the Company agreed to indemnify PCCU for claims associated with CRB activities including any loan default related losses for loans funded by PCCU. Deferred loan origination fees and costs represent the change in net deferred loan origination fees and costs. When included with a new loan origination, we receive an upfront loan origination fee in conjunction with new loans funded by our financial institution partners and incur costs associated with originating a specific loan. For accounting purposes, the cash received for loan origination fees and costs is initially deferred and recognized as interest income utilizing the interest method.
Current wording
For the period six months and three months ended June 30, 2024, our EBITDA income improved primarily as a result of decrease in General and Administrative expenses. This reduction was driven by lower investment hosting fees, decreased amortization and depreciation expenses, and reduced business insurance costs. Additionally, there were decreases in compensation, employee benefits, marketing expenses, and other insurance costs. These factors contributing to our financial performance are further discussed in the “Discussion of our Results of Operations” section below. Other adjustments include estimated future credit losses not yet realized, including amounts indemnified to PCCU for loans funded by them. The Company has entered into a Commercial Alliance Agreement with PCCU, pursuant to which the Company agreed to indemnify PCCU for claims associated with CRB activities including any loan default related losses for loans funded by PCCU. Deferred loan origination fees and costs represent the change in net deferred loan origination fees and costs. When included with a new loan origination, we receive an upfront loan origination fee in conjunction with new loans funded by our financial institution partners and incur costs associated with originating a specific loan. For accounting purposes, the cash received for loan origination fees and costs is initially deferred and recognized as interest income utilizing the interest method.
Previous wording
For the period ending March 31, 2024, there was a decline in the average number of accounts and fees compared to the previous period, primarily due to a decrease in clientele following the termination of an agreement with the Central Bank. We expect this trend to shift as we lead with our lending program typically requiring borrowers to place deposits with financial institutions with which we have relationships.
Current wording
For the six months ended June 30, 2024, there was a decline in the average number of accounts and fees compared to the previous period, primarily due to a decrease in clientele following the termination of an agreement with the Central Bank. We expect this trend to shift as we lead with our lending program typically requiring borrowers to place deposits with financial institutions with which we have relationships.
Previous wording
The Company generates interest and fee income through providing a variety of services to PCCU and other financial institutions to facilitate its banking services to CRBs including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding to account inquiries, responding to customer service inquiries relating to CRB deposit accounts held at financial institution clients, and sourcing and originating loans. In addition, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry. These services are provided under the Safe Harbor Master Program Agreement.
Current wording
The Company generates interest and fee income through providing a variety of services to PCCU and other financial institutions to facilitate its banking services to CRBs including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding to account inquiries, responding to customer service inquiries relating to CRB deposit accounts held at financial institution clients, and sourcing and originating loans. In addition, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis industry.
Previous wording
The decrease in deposit, activity and onboarding income was primarily attributable to the decrease in the number of accounts related to the Abaca acquisition. In period ended March 2024, PCCU accounted for $1,217,675 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $104,259 in account hosting expenses, in accordance with the Commercial Alliance Agreement. In period ended March 2023, PCCU contributed $1,377,839 to the revenue from similar sources, with account hosting expenses amounting to $55,425 as per the Loan Servicing Agreement provisions. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
Current wording
The decrease in deposit, activity and onboarding income was primarily attributable to the decrease in the number of accounts related to the Abaca acquisition. In the six months ended June 30, 2024, PCCU accounted for $2,424,598 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $277,721 in account hosting expenses, in accordance with the Commercial Alliance Agreement. In the six months ended June 30, 2023, PCCU contributed $2,763,684 to the revenue from similar sources, with account hosting expenses amounting to $116,258 as per the Loan Servicing Agreement provisions. These expenses were categorized under “General and Administrative Expenses” in the Consolidated Statements of Operations.
Previous wording
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. The reduction in Safe Harbor Program income is a result of the reduction in the number of accounts.
Current wording
The Company provides similar account services and outsourced support to other financial institutions providing banking services to the cannabis industry.
Previous wording
Rent expenses has been decreased due to reduction in the number of lease properties.
Current wording
Rent expenses decreased in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 due to reduction in the number of lease properties.
Previous wording
We have agreements with PCCU (related party) and Five Star Bank (FSB) where our financial institution clients pay us interest on the daily account balance as per the rates in the agreements. Under our Commercial Alliance Agreement with PCCU, we pay 25% of the investment income as a hosting fee based on this income. In period ended March 2024, the income derived from investment income associated with PCCU totaled $731,425. In relation to this income, the Company incurred $160,101 in investment hosting fees, consistent with the stipulations of the Commercial Alliance Agreement. In period ended March 2023, PCCU’s contribution to investment income amounted to $1,417,152, against which the Company recorded investment hosting fees of $323,305, as governed by the terms of the Loan Servicing Agreement. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
Current wording
We have agreements with PCCU (related party) and Five Star Bank (FSB) where our financial institution clients pay us interest on the daily account balance as per the rates in the agreements. Under our Commercial Alliance Agreement with PCCU, we pay 25% of the investment income as a hosting fee based on this income. In the three months ended June 30, 2024, the income derived from investment income associated with PCCU totaled $435,238. In relation to this income, the Company incurred $117,620 in investment hosting fees, consistent with the stipulations of the Commercial Alliance Agreement. In three months ended June 30, 2023, PCCU’s contribution to investment income amounted to $1,420,542, against which the Company recorded investment hosting fees of $381,427, as governed by the terms of the Loan Servicing Agreement. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
Previous wording
We had a Loan Servicing Agreement with PCCU (related party) where our financial institution carries the loan balances on their financial statement; the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement. The loan interest income reflects our share of loan interest on issued loans. We are obligated to pay 0.35% on the total outstanding principal of each loan that is funded and serviced by PCCU. Loan interest earned on the Company’s direct loans and the indemnified loans grew as the Company increased its focus on lending. For the quarter ended March 31, 2024, SHF serviced twenty two loans, as compared to eight loans in the quarter ended March 31, 2023. In quarter ended March 2024, the Company recognized $1,636,756 in loan interest income attributable to PCCU activities. Related expenses for this income included $35,901 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the Commercial Alliance Agreement. In quarter ended March 2023, loan interest income from PCCU operations amounted to $466,293, with associated loan servicing fees totaling $11,929, pursuant to the same agreements. These expenses were categorized under” General and administrative expenses” in the Consolidated Statements of Operations.
Current wording
We had a Loan Servicing Agreement with PCCU (related party) where our financial institution carries the loan balances on their financial statement; the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement. The loan interest income reflects our share of loan interest on issued loans. We are obligated to pay 0.35% on the total outstanding principal of each loan that is funded and serviced by PCCU. Loan interest earned on the Company’s direct loans and the indemnified loans grew as the Company increased its focus on lending. For the quarter ended June 30, 2024, SHF serviced twenty-four loans, as compared to twelve loans in the quarter ended June 30, 2023. In the quarter ended June 30, 2024, the Company recognized $1,836,093 in loan interest income attributable to PCCU activities. Related expenses for this income included $36,156 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the Commercial Alliance Agreement. In the quarter ended June 30, 2023, loan interest income from PCCU operations amounted to $604,831, with associated loan servicing fees totaling $16,741, pursuant to the same agreements. These expenses were categorized under “General and Administrative Expenses” in the Consolidated Statements of Operations.
Previous wording
Compensation and employee benefits decreased on account of stock-based compensation and also the decrease in the head count.
Current wording
Compensation and employee benefits decreased in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 on account of stock-based compensation and the decrease in the headcount.
Previous wording
(Benefit)/ Provision for credit losses has decreased due to decrease in the loss rate.
Current wording
(Benefit)/ Provision for credit losses decreased in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due to a decrease in the loss rate.
Previous wording
Cash and cash equivalents totaled $5,626,362 and $4,888,769 as of March 31, 2024 and December 31, 2023, respectively.
Current wording
Cash and cash equivalents totaled $6,111,982 and $4,888,769 as of June 30, 2024 and December 31, 2023, respectively.
Previous wording
For the three months ended March 31, 2024, the Company generated $1,475,123 in cash from operations, compared to cash used of $232,040 for the three months ended March 31, 2023. This improvement was mainly due to lower operating expenses and the greater number of performing loans at better rates than the previous period.
Current wording
For the six months ended June 30, 2024, the Company generated $2,704,637 in cash from operations, compared to cash used of $964,786 for the six months ended June 30, 2023. This improvement was mainly due to lower operating expenses and the greater number of performing loans at better interest rates than the previous period.
Previous wording
For the three months ended March 31, 2024, the Company generated $3,014 in cash from investing activities, compared to $470,597 for the three months ended March 31, 2023. The decrease was primarily due to the repayment of loans by customers in the previous period.
Current wording
For the six months ended June 30, 2024, the Company generated $6,083 in cash from investing activities, compared to $813,686 for the six months ended June 30, 2023. The decrease was primarily due to the repayment of loans by customers in the previous period.
Previous wording
For the three months ended March 31, 2024, the Company used $740,544 in cash for financing activities, compared to zero cash flow in the corresponding period of 2023. This was mainly due to the repayments on the senior secured promissory note during 2024, which was not in place during the three months ended March 31, 2023.
Current wording
For the six months ended June 30, 2024, the Company used $1,487,507 in cash for financing activities, compared to zero cash flow in the corresponding period of 2023. This was mainly due to the repayments on the senior secured promissory note during 2024, which was not in place during the three months ended June 30, 2023.
Previous wording
Liquidity refers to our capacity to fulfill anticipated cash demands, encompassing obligations to settle debt, sustain assets and operations, distribute earnings to shareholders, and cover other typical business expenditures. Our cash outflows predominantly settle towards repaying debt principal and interest, distributing dividends to shareholders, and financing our operational activities. The main contributors to our liquidity are the cash inflows from our operational performance. As of the end of the fiscal year on March 31, 2024, the Company reports no significant commitments to capital investments.
Current wording
Liquidity refers to our capacity to fulfill anticipated cash demands, encompassing obligations to settle debt, sustain assets and operations, distribute earnings to shareholders, and cover other typical business expenditures. Our cash outflows predominantly settle towards repaying debt principal and interest, distributing dividends to shareholders, and financing our operational activities. The main contributors to our liquidity are the cash inflows from our operational performance. As of June 30, 2024, the Company reports no significant commitments to capital investments.
Previous wording
As of March 31, 2024, the Company had $5,626,362 in cash and net working capital of $318,825, as compared to $4,888,769 in cash and net working capital deficit of $135,355 as at December 31, 2023. The retained deficit was $70,386,394 on March 31, 2024, and $71,569,821 on December 31, 2023. The Company has also generated operating income of $324,941 for the period ended March 31, 2024.
Current wording
As of June 30, 2024, the Company had $6,111,982 in cash and net working capital of $301,738, as compared to $4,888,769 in cash and net working capital deficit of $135,355 as at December 31, 2023. The retained deficit was $69,444,867 on June 30, 2024, and $71,569,821 on December 31, 2023. The Company has also generated operating income of $300,163 and $625,104 for the three months and six months period ended June 30, 2024.
Previous wording
For the period ending March 31, 2024, the Company reported positive operating income and net working capital. However, considering the historical data from the four preceding quarters, where the Company experienced negative operating income and negative net working capital, management acknowledges the need to closely evaluate the financial performance in upcoming quarters to mitigate any going concern risks. As of March 31, 2024, due to these historical trends, there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the date these unaudited condensed consolidated financial statements were issued.
Current wording
For the six months ended June 30, 2024, the Company reported positive operating income and net working capital. However, considering the historical data from the four preceding quarters, where the Company experienced negative operating income and negative net working capital, management acknowledges the need to closely evaluate the financial performance in upcoming quarters to mitigate any going concern risks. As of June 30, 2024, due to these historical trends, there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the date these unaudited condensed consolidated financial statements were issued.
Previous wording
In addition, Section 107 of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period, for as long as it is available. We will remain an EGC until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act and (b) in which we have total annual gross revenue of at least $1.07 billion, (2) the date on which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, and (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning provided in the JOBS Act.
Current wording
In addition, Section 107 of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period, for as long as it is available. We will remain an EGC until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act (June 23, 2026) or (b) in which we have total annual gross revenue of at least $1.07 billion, (2) the date on which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, and (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning provided in the JOBS Act.
Previous wording
In connection with our management assessment of internal control over financial reporting as of and for the three months ended March 31, 2024, the Company has identified two (2) material weaknesses within our internal controls associated with Revenue Recognition and Complex Financial Instrument. Refer to Item 9A of this Quarterly Report on Form 10-Q for additional details.
Current wording
In connection with our management assessment of internal control over financial reporting as of and for the six months ended June 30, 2024, the Company has identified two (2) material weaknesses within our internal controls associated with Revenue Recognition and Complex Financial Instruments. Refer to Item 4 of this Quarterly Report on Form 10-Q for additional details.
Previous wording
The Commercial Alliance Agreement sets forth the application, underwriting, loan approval, and foreclosure process for loans from PCCU to borrowers that are cannabis-related businesses and the loan servicing and monitoring responsibilities provided by the Company and PCCU. In particular, the Commercial Alliance Agreement provides for procedures to be followed upon the default of a loan to ensure that neither the Company nor PCCU will take title to or possession of any cannabis-related assets, including real property, that may be collateral for a loan funded by PCCU pursuant to the Commercial Alliance Agreement. Under the Commercial Alliance agreement, the PCCU has the right to receive monthly fees for managing loans. For SHF-serviced loans, which are CRB loans provided by the PCCU but primarily handled by SHF, a yearly fee of 0.25% of the remaining loan balance is applied. On the other hand, loans both financed and serviced by the PCCU are charged a yearly fee of 0.35% on their outstanding balance. These fees are calculated using the average daily balance of each loan for the preceding month. In addition, the Company’s is obligated by the Commercial Alliance Agreement to indemnify PCCU from certain default-related loan losses (as fully defined in the Commercial Alliance Agreement).
Current wording
On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement. This Agreement sets forth the terms and conditions of the lending and account-related services, governing the relationship between the Company and PCCU. The Commercial Alliance Agreement sets forth the application, underwriting, loan approval, and foreclosure process for loans from PCCU to borrowers that are cannabis-related businesses and the loan servicing and monitoring responsibilities provided by the Company and PCCU. In particular, the Commercial Alliance Agreement provides for procedures to be followed upon the default of a loan to ensure that neither the Company nor PCCU will take title to or possession of any cannabis-related assets, including real property, that may be collateral for a loan funded by PCCU pursuant to the Commercial Alliance Agreement. Under the Commercial Alliance agreement, the PCCU has the right to receive monthly fees for managing loans. For SHF-serviced loans, which are CRB loans provided by the PCCU but primarily handled by SHF, a yearly fee of 0.25% of the remaining loan balance is applied. On the other hand, loans both financed and serviced by the PCCU are charged a yearly fee of 0.35% on their outstanding balance. These fees are calculated using the average daily balance of each loan for the preceding month. In addition, the Company’s is obligated by the Commercial Alliance Agreement to indemnify PCCU from certain default-related loan losses (as fully defined in the Commercial Alliance Agreement).
Previous wording
The below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits on March 31, 2024 and December 31, 2023.
Current wording
The below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits:
Previous wording
The revenue from operation on the statement of operations consists of the following agreement mentioned above for the three months ended March 31, 2024, and March 31, 2023:
Current wording
The revenue from the PCCU Agreements recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:
Previous wording
The operating expense on the statement of operations consists of the following agreement mentioned above for the three months ended March 31, 2024, and March 31, 2023:
Current wording
The operating expense from the PCCU Agreements recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:
Rearranged current paragraphs (6)
Current report — wording carried from elsewhere
Discussion of our Results of Operations —2024 Compared to 2023 (Six Months Ended June 30)
Current report — wording carried from elsewhere
Under our Commercial Alliance Agreement with PCCU, we pay 25% of the investment income as a hosting fee based on this income. In the six months ended June 30, 2024, the income derived from investment income associated with PCCU totaled $1,166,663. In relation to this income, the Company incurred $277,721 in investment hosting fees, consistent with the stipulations of the Commercial Alliance Agreement. In the six months ended June 30, 2023, PCCU’s contribution to investment income amounted to $2,837,694, against which the Company recorded investment hosting fees of $704,732, as governed by the terms of the Loan Servicing Agreement. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
Current report — wording carried from elsewhere
We previously had a Loan Servicing Agreement with PCCU (related party) which has since been superseded by the Commercial Alliance Agreement. The loan interest income reflects our share of loan interest on issued loans. We are obligated to pay 0.35% on the total outstanding principal of each loan that is funded and serviced by PCCU. Loan interest earned on the Company’s direct loans and the indemnified loans grew as the Company increased its focus on lending. For the six months ended June 30, 2024, SHF serviced twenty-four loans, as compared to twelve loans in the six months ended June 30, 2023. In six months ended June 2024, the Company recognized $3,472,848 in loan interest income attributable to PCCU activities. The related expenses for this income included $72,057 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the Commercial Alliance Agreement. In six months ended June 2023, loan interest income from PCCU operations amounted to $1,071,124, with associated loan servicing fees totaling $28,670, pursuant to the same agreements. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
Current report — wording carried from elsewhere
Account fee income consists of deposit account fees, activity fees and onboarding income. We receive a flat fee and lower rates for ancillary accounts, which are accounts provided to businesses servicing the cannabis industry in general but do not manufacture, possess, distribute or transport cannabis.
Current report — wording carried from elsewhere
The decrease in deposit, activity and onboarding income was primarily attributable to the decrease in the number of accounts related to the Abaca acquisition. In the three months ended June 30, 2024, PCCU accounted for $1,206,922 of the revenue generated from deposits, activities, and client onboarding. Related to this revenue, the Company recognized $121,108 in account hosting expenses, in accordance with the Commercial Alliance Agreement. In the three months ended June 30, 2023, PCCU contributed $1,385,845 to the revenue from similar sources, with account hosting expenses amounting to $60,833 as per the Loan Servicing Agreement provisions. These expenses were categorized under “General and administrative expenses” in the Consolidated Statements of Operations.
Current report — wording carried from elsewhere
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.