SHF Holdings Inc

Note 1. Organization and Business Operations

Business Description

SHF Holdings, Inc. (the “Company”), based in Golden, Colorado, specializes in financial technology designed to facilitate banking service solutions tailored to the cannabis industry. Initially, the Company’s operations were developed as a credit union service organization, and asset of Partner Colorado Credit Union (“PCCU”). A strategic reorganization on July 1, 2021 consolidated select assets and activities from PCCU into SHF LLC (“SHF”) under SHF Holding Co., LLC. On September 28, 2022, Northern Lights Acquisition Corp. (“NLIT”) acquired SHF, changing its name from Northern Lights Acquisition Corp. to SHF Holdings, Inc., (the “Business Combination”). The Business Combination aimed to enhance the Company’s financial services and market footprint in the cannabis sector.

Further expanding its capabilities, the Company acquired Rockview Digital Solutions, Inc. d/b/a Abaca (“Abaca”) on October 31, 2022. This merger, executed in two steps, positioned Abaca as a wholly-owned subsidiary, bolstering the Company’s fintech offerings and market reach.

The Company facilitates a range of financial services through its financial institution partners using a proprietary technology platform for deposit compliance and ongoing deposit activity compliance with banking regulations and regulators. These include access to business checking and savings accounts, cash management, commercial lending, courier services, remote deposit services, ACH payments, and wire payments. These services enable cannabis businesses to manage their finances effectively while ensuring regulatory compliance. The company generates revenue from fee income, investment income, loan interest income and by offering compliance services to certain financial institutions serving the cannabis industry.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

i. Significant Accounting Policies

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and results of operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”).

Refer to Note 2 to the Company’s Annual Report on Form 10-K for a description of the Company’s significant accounting policies. The Company has included disclosures below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly, (ii) have material changes or (iii) the Company views as critical as of the date of this report.

ii. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the SEC.

The accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, statements of shareholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the three and six months ended June 30, 2024, are not necessarily indicative of the results that may be expected for the current year ending December 31, 2024 or other interim periods. The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2023, included in the Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The Company has made certain immaterial reclassifications to the statements of operations for the three and six months ended June 30, 2023, to conform to the presentation for the three and six months ended June 30, 2024. These reclassifications, totaling $193,065 and $384,008 for the three and six months ended June 30, 2023 respectively, were moved from ‘Interest Expense’ to ‘Change in the Fair Value of Deferred Consideration’. Corresponding adjustments have been made to the statement of cash flows and the applicable notes to the unaudited condensed consolidated financial statements.

The condensed consolidated financial statements include the accounts of SHF Holdings, Inc., its subsidiaries where the Company have controlling financial interests. All intercompany balances and transactions have been eliminated.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.

iii. Concentrations of Risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash. Cash balances are maintained substantially in accounts at PCCU, which are insured by the National Credit Union Share Insurance Fund (“NCUSIF”) up to regulatory limits. From time to time, cash balances may exceed the NCUSIF insurance limit. The Company has not experienced any credit losses associated with its cash balances in the past.

In addition to providing compliance and related services for its financial institution partners, the Company offers services to businesses operating primarily in the cannabis industry as well as businesses offering cannabis adjacent services. Cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability to execute our business plan.

Currently the Company substantially relies on PCCU to hold customer deposits and fund its originated loans. The majority of the Company’s revenue is generated by deposits and loans hosted by PCCU pursuant to a commercial alliance agreement dated March 29, 2023 between PCCU and the Company, as previously disclosed as an exhibit to the Form 10-K for the fiscal year ended December 31, 2023 (the “Commercial Alliance Agreement”).

The Company had only one loan on its balance sheet as of June 30, 2024, which comprises 100% of the total loan balance. The Company also indemnified twenty-four loans as of June 30, 2024; of which three of these indemnified loans were in excess of 10% of the total balance.

iv. Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Material estimates that are particularly subject to change in the near term include the determination of the allowance for credit losses, indemnification liabilities, useful lives of intangibles and the fair value of financial instruments. Actual results could differ from the estimates.

v. Liquidity and Going Concern

As of June 30, 2024, the Company had $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 of 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 and six months ended June 30, 2024 respectively.

For the six months ended June 30, 2024, the Company reported positive operating income and net working capital. However, considering the historical data, where the Company experienced negative operating income and negative net working capital, management acknowledges the need to closely evaluate the financial performance in upcoming quarters to mitigate any going concern risks. As of June 30, 2024, due to these historical trends, there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the date these unaudited condensed consolidated financial statements were issued.

If the Company is not able to sustain its present level of operations, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned expansion programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result should the Company not continue as a going concern as a result of this uncertainty.

vi. Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective are not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

Adopted Standards

Current Expected Credit Losses (“CECL”)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In November 2019, the FASB issued ASU No. 2019-10 Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The update allows the extension of the initial effective date for entities which have not yet adopted ASU No. 2016-02. The standard is effective for annual reporting periods beginning after December 15, 2022 for private companies and SEC filers classified as smaller reporting entities, with early adoption permitted. Entities apply the standard’s provisions by recording a cumulative effect adjustment to retained deficit. The Company has adopted ASU 2016-13 as of January 1, 2023, utilizing the modified retrospective method.

CECL Transition Impact: The table below provides details on the transition impacts of adopting CECL. Other balance sheet lines not presented were not affected by CECL.

CECL Transition Impact:

Troubled Debt Restructurings and Vintage Disclosures

This Accounting Standard Update (ASU 2022-02) eliminates the recognition and measurement guidance on troubled debt restructurings for creditors that have adopted ASC 326 and requires them to make enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. The new guidance also requires public business entities to present current period gross write-offs (on a current year-to-date basis for interim-period disclosures) by year of origination in their vintage disclosures. For entities that have adopted ASU 2016-13, this ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has adopted this standard as of January 1, 2023 and the ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

This Accounting Standard Update (ASU 2022-03) clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered when measuring fair value. Recognizing a contractual restriction on the sale of an equity security as a separate unit of account is not permitted. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company has adopted this standard as of January 1, 2024 and the ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.

Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848

This Accounting Standard Update (ASU 2022-06) defers the Sunset Date of ASC Topic 848, Reference Rate Reform (Topic 848), which provides temporary optional relief in accounting for the impact of Reference Rate Reform. This ASU is effective upon issuance (December 21, 2022) and generally can be applied through December 31, 2024. This ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.

Investments-Equity Method and Joint Ventures

In March 2023, the FASB issued ASU 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures using the Proportional Amortization Method. The FASB issued final guidance allowing entities to apply the proportional amortization method to equity investments in all tax credit programs that meet the conditions in ASC 323-740, rather than just investments in qualified affordable projects that generate low income housing tax credits, as was required under the legacy guidance. The guidance is effective for public business entities for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. This ASU has not had a material impact on the Company’s unaudited condensed consolidated financial statements.

Standards Pending to be Adopted

Business Combinations-Joint Venture Formations

In August 2023, the FASB issued 2023-05, Business Combinations-Joint Venture Formations (Subtopic 805-60); Recognition and Initial Measurement. This ASU contains guidance requiring certain joint ventures to apply a new basis of accounting upon formation by recognizing and initially measuring most of their assets and liabilities at fair value. This guidance is effective for all joint venture formations with a formation date on or after January 1, 2025. Early adoption is permitted. Joint Ventures formed before the effective date have the option to apply it retrospectively, while those formed after the effective date are required to apply it prospectively. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.

Disclosure Improvements, “Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.”

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements, “Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU amends the disclosure or presentation requirements related to various subtopics in the FASB codification.

The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other entities, the amendments will be effective two years later. The amendments in this Update should be applied prospectively. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the codification and will not become effective for any entity. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.

Segment Reporting

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). This ASU requires public entities to provide disclosures of significant segment expenses and other segment items. It also requires public entities to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Public entities with a single reportable segment will have to provide all the disclosures required by ASC 280, including the significant segment expense disclosures. This guidance is applied retrospectively to all periods presented, unless it is impractical. This ASU applies to all public entities and is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.

Income Taxes

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740). This ASU requires public business entities to disclose in their rate reconciliation table additional categories of information about income taxes paid, including certain disclosures that would be disaggregated by jurisdiction and other categories. This ASU is effective for fiscal years after December 15, 2024. Early adoption would be permitted. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.

ASU 2024-01: Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards

ASU 2024-01 clarifies the scope applications of profits interest awards by adding illustrative guidance to ASC 718 “Compensation-Stock Compensation.” The amendments in the ASU apply to all reporting entities that account for profits interest awards as compensation to employees or non-employees in return for goods or services.

The term “profits interest” is not explicitly defined in US GAAP. Rather, an IRS Revenue Procedure (Rev Proc 93-27) defines a “Profits Interest” as a “partnership interest other than a capital interest.” Unlike a capital interest, which provides rights to existing net assets of an entity, a profits interest only provides rights to future profits and/or equity appreciation of an entity. This distinction, along with other terms, conditions and characteristics of profits interests often complicates accounting decisions for profits interests, leading to diversity in practice whether to account for profits interests under ASC 718 or other US GAAP.

The ASU introduces four (4) illustrative examples of fact patterns that demonstrate how an entity would apply the scope guidance in paragraph 718-10-15-3 to a profits interest or similar award with certain features.

The ASUs are effective for public entities for fiscal years beginning after December 15, 2024, including interim periods within those years. For all other entities, adoption is required for fiscal years beginning after December 15, 2025. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.

ASU 2024-02: Codification Improvements—Amendments to Remove References to the Concepts Statements

The ASU contains amendments to the Codification that remove references to various FASB Concepts Statements. The FASB has a standing project on its agenda to address suggestions received from stakeholders on the Accounting Standards Codification and other incremental improvements to US GAAP. This effort facilitates Codification updates for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or the structure of guidance and other minor improvements. In the Board’s view, removing all references to Concept Statements in the guidance will simplify the codification and draw a distinction between authoritative and non-authoritative literature.

The amendments in the Update are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. The Company does not expect this ASU to have a material impact on its unaudited condensed consolidated financial statements.

Note 3. Deferred Consideration

On November 11, 2022, as provided in Exhibit 2.1 of the Current Report of Form 8-K on November 14, 2022, the Company entered into the first Amendment to the Merger Agreement and Plan of Merger to that certain Agreement and Plan of Merger, dated as of October 29, 2022, by and among the Parent, SHF Merger Sub I, a Delaware corporation and a direct wholly-owned subsidiary of Parent (“Merger Sub I”), SHF Merger Sub II, LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Parent (“Merger Sub II” and, together with Merger Sub I, the “Merger Subs”), Rockview Digital Solutions, Inc., a Delaware corporation, d/b/a Abaca and Dan Roda, solely in such individual’s capacity as the representative of the Company Security Holders (collectively with the “Merger Agreement”). The Merger Agreement provided for payment of $30 million through a mix of cash and stock. The payment structure included $9 million in cash, distributed in three equal installments, with the first installment occurring at the merger closing and the other installments being paid on the first and second anniversaries of the merger closing. Additionally, the Class A Common Stock consideration was settled through 2,100,000 Class A Common Stock which represented a monetary equivalent calculated against the closing trading price, alongside deferred stock consideration calculated with a 10-day VWAP formula. Adjustments were made via amendments to redefine the terms and conditions of the deferred stock and cash considerations. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by the Merger Agreement attached as Exhibit 2.1 to the Current Report on Form 8-K.

Under the Second Amendment to Agreement and Plan of Merger, dated October 26, 2023, by and among SHF Holdings, Inc., a Delaware corporation, Merger Sub I, a Delaware corporation, [Merger Sub II], a Delaware limited liability corporation, Rockview Digital Solutions, Inc., a Delaware corporation, d/b/a Abaca and Dan Roda, solely in such individual’s capacity as the representative of the Abaca security holders as referenced in Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on October 27, 2023 (the “Amended Abaca Merger Agreement”)The revised terms, provides for deferred stock consideration of 5,835,822 shares of Class A Common Stock issued at the first anniversary of the Abaca Merger Agreement based on a recalculated value of $2.00 per share. No changes affected the scheduled cash payments. Furthermore, a third-anniversary consideration of $1.5 million was introduced, payable in cash or Class A Common Stock at the Company’s discretion, alongside an issue of 5,000,000 stock warrants at an exercise price of $2.00 per share of Class A Common Stock. The adjustments and additional considerations have been valued and recorded according to ASC 815, reflecting changes in the fair value of deferred consideration in the consolidated statements of operations for the year ended December 31, 2023.

The change in the amount of deferred consideration from January 1, 2023, to June 30, 2024, is as follows:

**Note 4. Goodwill and Finite-lived Intangible Assets **

Goodwill

The Company’s goodwill was derived from the Abaca Merger , where the purchase price exceeded the fair value of the net identifiable assets acquired. Goodwill is tested for impairment at least annually, or more frequently if a triggering event occurs.

In 2023, the Company conducted an interim goodwill and intangible impairment assessment on June 30, 2023, and found that the carrying value of goodwill exceeded its fair value, leading to the recognition of a $13,208,276 non-cash goodwill impairment charge in the Company’s consolidated statements of operations. The December 31, 2023, annual impairment test resulted in no additional impairment change recognized, as the fair value did not surpass the carrying value. As of June 30, 2024, and December 31, 2023, the carrying value of the company’s goodwill was $6,058,000.

As of June 30, 2024, the Company has not conducted an interim impairment assessment of its assets, due to the absence of any triggering events. Therefore, no additional impairment charges have been recognized in this reporting period.

As of June 30, 2024, and December 31, 2023, the Company’s accumulated goodwill impairment was $13,208,276.

Finite-lived intangible assets

The Company reviews its finite-lived intangible assets for impairment at least annually on December 31 unless any events or circumstances indicate it is more likely than not that the fair value of the finite-lived intangible assets is less than its carrying value.

In 2023, following a triggering event in the second quarter, the Company performed an interim goodwill and intangible asset impairment assessment. In accordance with our established policy, an annual review was also conducted on December 31, 2023. The finite-lived intangible assets evaluated include market-related intangibles, customer relationships, and developed technologies. The interim analysis resulted in an impairment charge of $3,680,463, attributed to the carrying values of market-related intangibles and customer relationships surpassing their fair values. The annual review further identified an impairment charge of $2,019,000 related to developed technologies.

As of June 30, 2024, the Company has not conducted an interim impairment assessment of its assets, due to the absence of any triggering events. Therefore, no additional impairment changes have been recognized in this reporting period.

Following is a summary of the Company’s finite-lived intangible assets as of June 30, 2024 and December 31, 2023:

During the six months ended June 30, 2024, amortization expense and impairment of finite-lived intangible assets were $313,708 and $0, respectively, compared to $709,882 and $3,680,463, respectively, for the six months ended June 30, 2023.

Note 5. Loans Receivable

Commercial real estate loans receivable, net consist of the following:

Allowance for Credit Losses

The allowance for credit losses is maintained at a level believed to be sufficient to provide for estimated credit losses based on evaluating known and inherent risks in the loan portfolio. The Company’s estimated the allowance for credit losses on the reporting date in accordance with the credit loss policy described in Note 2 to the 2023 Form 10-K.

The allowance for credit losses consists of the following activity for the three and six months ended June 30, 2024 and June 30, 2023:

On June 30, 2024 and December 31, 2023, no loans were past due or classified as non-accrual.

Credit quality of loans:

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks credit quality indicators based on the loan payment status on monthly basis. The Company continuously evaluates the credit quality of each indemnified loan by assessing the risk factors and assigning a risk rating based on a variety of factors. The detailed breakdown of risk factors are described in Note 6 to the unaudited condensed consolidated financial statements.

The carrying value, excluding the CECL Reserve, of the Company’s loans held at carrying value within each risk rating is as follows:

Note 6. Indemnification Liability

As discussed at Note 8 to the unaudited condensed consolidated financial statements, and pursuant to the Commercial Alliance Agreement with PCCU, PCCU funds loans through a third-party vendor. SHF earns the associated interest and pays PCCU a loan hosting payment at an annual rate of 0.35% of the outstanding loan principal funded and serviced by PCCU and 0.25% of the outstanding loan principle serviced by SHF. The below schedule details outstanding amounts funded by PCCU and categorized as either collateralized loans or unsecured loans and lines of credit.

Secured loans contained an interest rate ranging from 8.00% to 13.00%. Unsecured loans and lines of credit contain an interest rate ranging from 10.00% to 12.50%. Unsecured lines of credit had incremental availability of $231,052 and $996,958 on June 30, 2024 and December 31, 2023, respectively.

SHF has agreed to indemnify PCCU for losses on certain PCCU loans. The indemnity liability reflects SHF management’s estimate of probable credit losses inherent under the agreement at the balance sheet date. The Company’s estimated indemnity liability on the reporting date was calculated in accordance with the allowance for credit loss and indemnity liability policies described in Note 2 to the Company’s 2023 Form 10-K.

The indemnity liability activity are as follows:

As of June 30, 2024, the company’s entire loan portfolio was current and performing. However, as of December 31, 2023, one loan had been classified as nonaccrual. On December 29, 2023, the company successfully negotiated an amendment agreement to the nonaccrual loan agreement, resulting in the payment of all overdue amounts and restoring the loan to current status. During the second quarter of 2024, the company received the full principal amount of the loan, along with all accrued interest.

Credit quality of indemnified loans:

As part of the on-going monitoring of the credit quality of the Company’s indemnified loan portfolio, management tracks credit quality indicators based on the loan payment status on monthly basis. The Company continuously evaluates the credit quality of each indemnified loan by assessing the risk factors and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, projected cash flow, loan structure and exit plan, loan-to-value ratio, fixed charge coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 10-point scale, the Company’s loans are rated “0” through “10,” from less risk to greater risk, which ratings are defined as follows:

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 carrying value, excluding the CECL Reserve, of the Company’s indemnified loans held at carrying value within each risk rating is as follows:

The provision (benefit) for credit losses on the statement of operations consists of the following activity for the three months ended June 30, 2024 and June 30, 2023:

The provision (benefit) for credit losses on the statement of operations consists of the following activity for the six months ended June 30, 2024 and June 30, 2023:

Note 7. Property and Equipment, Net

Property and equipment consist of the following:

Note 8. Related Party Transactions

Commercial Alliance Agreement

On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement. This Agreement sets forth the terms and conditions governing the relationship between the Company and PCCU. The Commercial Alliance Agreement sets forth the application, underwriting, loan approval, and foreclosure process for loans from PCCU to borrowers that are cannabis-related businesses and the loan servicing and monitoring responsibilities provided by the Company and PCCU. In particular, the Commercial Alliance Agreement provides for procedures to be followed upon the default of a loan to ensure that neither the Company nor PCCU will take title to or possession of any cannabis-related assets, including real property, that may be collateral for a loan funded by PCCU pursuant to the Commercial Alliance Agreement. Under the Commercial Alliance agreement, PCCU has the right to receive monthly fees for managing loans. For CRB loans, which are funded by PCCU but primarily managed by the Company, a yearly fee of 0.25% of the remaining loan balance is applied. On the other hand, loans both funded 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 defined in the Commercial Alliance Agreement).

In addition, the Commercial Alliance Agreement provides for certain fees to be paid to the Company for certain identified account related services to include: all cannabis-related income, including all lending-related income (such as loan origination fees, interest income on CRB-related loans, participation fees and servicing fees), investment income, interest income, account activity fees, processing fees, flat fees, and other revenue generated from cannabis and multi-state hemp accounts that are hosted on PCCU’s core system for a monthly fee equal to $30.96 per account in 2022, $25.32-$27.85 per account in 2023, and $26.08-$28.69 in 2024. In addition, as it pertains to CRB deposits held at PCCU, investment and interest income earned on these deposits (excluding interest income on loans funded by PCCU) will be shared 25% to PCCU and 75% to the Company. Finally, under the Commercial Alliance Agreement, PCCU will continue to allow its ratio of CRB-related deposits to total assets to equal at least 60% unless otherwise dictated by regulatory, regulator or policy requirements. The initial term of the Commercial Alliance Agreement is for a period of two years, with a one-year automatic renewal unless a party provides one hundred twenty days’ written notice prior to the end of the term.

The below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits:

The revenue from the Commercial Alliance Agreement recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:

The operating expenses from the Commercial Alliance Agreement recognized in the statements of operations consists of the following for the periods ended June 30, 2024, and June 30, 2023:

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

Of the $6.1 million and $4.89 million of cash and cash equivalents on June 30, 2024 and December 31, 2023, respectively, $5.1 million and $4.6 million of the cash and cash equivalents, respectively, were held in deposit accounts at PCCU as a related party.

Note 9. Senior Secured Promissory Note

On March 29, 2023, the Company and PCCU entered into definitive transaction documents to settle and restructure the deferred obligation following the Business Combination under which the Company has issued the five-year Senior Secured Promissory Note (the “PCCU Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25% and a Security Agreement, as referenced in Exhibit 3 of the Company’s Quarterly Report on Form 10-Q, filed May 15, 2023, pursuant to which the Company will grant, as collateral for the PCCU Note, a first priority security interest in substantially all of the assets of the Company.

The PCCU Note amount will be paid in 54 installments of principal and interest of $295,487 each starting from November 5, 2023 and for the period between March 29, 2023, to October 5, 2023, the Company has paid the interest portion.

The repayment schedule of the outstanding principal amount of the PCCU Note as of June 30, 2024, is as follows:

Note 10. Leases

The Company has non-cancellable operating leases for facility space with varying terms. All of the active leases for facility space qualified for capitalization under FASB ASC 842, Leases. These leases have remaining lease terms betweenone toseven years and may include options to extend the leases for up to ten years. The extension terms are not recognized as part of the right-of-use assets. The Company has elected not to capitalize leases with terms equal to, or less than, one year. As of June 30, 2024, and December 31, 2023, net assets recorded under operating leases were $781,693 and $859,861 respectively, and net lease liabilities were $948,419 and $1,007,993, respectively.

The Company analyzes contracts above certain thresholds to identify leases and lease components. Lease and non-lease components are not separated for facility space leases. The Company uses its contractual borrowing rate to determine lease discount rates when an implicit rate is not available. Total lease cost for the three and six months ended June 30, 2024 and June 30, 2023, included in Unaudited Condensed Consolidated Statements of Operations, is detailed in the table below:

Future minimum lease payments as of June 30, 2024, and December 31, 2023, are as follows:

Note 11. Revenue

Disaggregated revenue

Revenue by type are as follows:

Account fee income to the Company are derived from the businesses holding accounts with our financial institution partners and consists of deposit account fees, account activity fees, and onboarding income, each of which is recognized on a periodic basis as per the fee schedule with financial institution partners. The Company also receives income related to outsourced support of financial institutions providing banking to the cannabis industry whose income is recognized on the basis of usage as per the agreements. Loan interest income consist of interest earned on both direct and indemnified loans pursuant to the Commercial Alliance Agreement. Investment income consists of interest earned on the daily deposits balances of the cannabis businesses held with the Company’s financial institution partners.

Under the Company’s Commercial Alliance Agreement, the Company is obligated to remit 25% of the investment hosting fees to PCCU based on income which is classified as “General and Administrative Expenses” in the Consolidated Statements of Operations. During the three and six months ended June 30, 2024, PCCU’s contributions to the Company’s revenues included $1,206,922 and $2,424,598, respectively from deposits, activities, and client onboarding, $435,238 and $1,166,663, respectively, from investment income, and $1,836,092 and $3,472,848, respectively, from loan interest income. The associated expenses for these revenues were $121,108 and $225,367, respectively, for account hosting, $117,620 and $277,721, respectively, for investment hosting fees, and $36,156 and $72,057, respectively, for loan servicing fees, all in accordance with the Commercial Alliance Agreement, classified as “General and Administrative Expenses” in the Consolidated Statements of Operations. During the three and six month ended June 30, 2023, PCCU’s contributions to the Company’s revenues included $1,385,845 and $2,763,684, respectively, from deposits, activities, and client onboarding, $1,420,542 and $2,837,694, respectively, from investment income, and $604,831 and $1,071,124, respectively, from loan interest income. The related expenses for these revenue streams were $60,833 and $116,258, respectively, for account hosting, $381,427 and $704,732, respectively, for investment hosting fees, and $16,741 and $28,670, respectively, for loan servicing fees, all in compliance with the Loan Servicing Agreement, classified as “General and Administrative Expenses” in the Consolidated Statements of Operations.

Note 12. Commitments and contingencies

Note 13. Earnings Per Share

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.

Certain share-based equity awards and warrants were excluded from the computation of dilutive earnings/ (loss) per share because inclusion of these awards would have had an anti-dilutive effect. The following table reflects the awards excluded.

The holders of Series A Convertible preferred stock shall be entitled to receive, and the Company shall pay, dividends on shares of Series A Convertible preferred stock equal (on an as-if-converted-to-Class-A-common stock basis) to and in the same form as dividends actually paid on shares of the Class A Common Stock when, as and if such dividends are paid on shares of the Class A Common Stock. No other dividends shall be paid on shares of Series A convertible preferred stock.

Note 14. Forward Purchase Agreement

On June 16, 2022, the Company entered into a Forward Purchase Agreement (“FPA”) with Midtown East Management NL, LLC (“Midtown East”), which subsequently assigned obligations to purchase 1,666,666 shares of Class A Stock each to Verdun Investments LLC (“Verdun”) and Vellar Opportunity Fund SPV LLC – Series 1 (“Vellar”) through assignment and novation agreements. The collective acquisition involved 3.8 million Class A shares, with Midtown East, Verdun, and Vellar waiving their redemption rights. The Company incurred costs totaling $39.6 million, comprising $39.3 million for the shares and an additional $0.3 million in related expenses post-closing. At the maturity of the FPA, the parties will receive the value of their shares multiplied by the Forward Price, as referenced in Exhibit 10.1 of the Company’s Report on Form 8-K filed on June 17, 2022. They will also receive an additional amount in cash or shares, at the Company’s discretion. An early termination clause allows for the shares to be sold on the open market, with any proceeds exceeding the Reset Price, as referenced in Exhibit 10.1 of the Company’s Report on Form 8-K filed on June 17, 2022, retained by the sellers. Following a price reset in 2022 to $1.25 per share, the FPA receivable was reduced from $37.9 million to $4.6 million. As of June 30, 2024, there have been no transactions by the FPA holders, and the value of the FPA receivable has remained unchanged. The reconciliation statement of the Class A Common Stock held by the parties are as follows:

Note 15 Warrant Liabilities

Public and Private Placement Warrants

As of June 30, 2024 and December 31, 2023, the Company had 5,750,000 Public Warrants and 264,088 Private Placement Warrants.

The Public and Private Placement Warrants may only be exercised for a whole number of Class A Common Stock.

The Public and Private Placement Warrants became exercisable on September 28, 2022, the date of the Business Combination and will expire on September 28, 2027, or earlier upon redemption or liquidation.

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 $18.00. Once the warrants become exercisable, the Company may redeem the warrants:

If and when the warrants become redeemable by the Company, the Company may exercise its redemption rights; this is also the case if the Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

If the Company calls the warrants for redemption, management will have the option to require all holders that wish to exercise the Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of Class A Common Stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants.

The private placement warrants are identical to the public warrants, except that the private placement warrants and the Class A Common Stock issuable upon the exercise of the private placement warrants were not transferable, assignable or saleable, subject to certain limited exceptions. Additionally, the private placement warrants are exercisable on a cashless basis and non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the private placement warrants are held by someone other than the initial purchasers or their permitted transferees, the private placement warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants.

PIPE Warrants

As of June 30, 2024 and December 31, 2023, the Company had 1,022,500 PIPE Warrants, as referenced in Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed on October 4, 2022.

The PIPE Warrants have an adjusted exercise price of $5.00 per share of Class A Common Stock to be paid in cash (except if the shares underlying the warrants are not covered by an effective registration statement after the six-month anniversary of the closing date, in which case cashless exercise is permitted. The PIPE Warrants are also subject to adjustment for other customary adjustments for stock dividends, stock splits and similar corporate actions. The PIPE Warrants are exercisable for a period of five years following the Closing, or September 28, 2027. After exercise of a PIPE Warrant, the Company may be required to pay certain penalties if it fails to deliver the Class A Common Stock within a specified period of time.

Abaca Warrants

As of June 30, 2024, and December 31, 2023, the Company issued 5,000,000 Abaca warrants, as referenced in Exhibit 2.2 of the Company’s Current Report on Form 8-K, filed on October 27, 2023.

The 5,000,000 Abaca warrants have an exercise price of $2.00 per share of Class A Common Stock to be paid in cash. An Abaca Warrant may be exercised only during the period commencing 1 year of the Effective Date and terminating five (5) years from the effective date of the registration statement. The Company may, in its sole discretion, settle the Abaca Warrant when exercised, in whole or in part, in cash in lieu of issuing shares of common stock underlying the Warrant. The Company may elect to pay the Registered Holder in cash in the amount equal to the difference between the fair market value of the Company’s Class A Common Stock on the date of exercise and the warrant price ($2.00) multiplied by the number of shares of Class A Common Stock. The Company commits to promptly registering shares of Class A Common Stock issued upon Abaca Warrant exercises if required by law, ensuring these shares can be sold without restrictions. This registration must be filed within 45 days of receiving a notification of such a requirement, with failure to do so constituting a default. The Company will endeavor to keep the registration effective until the Warrants expire. If the registration isn’t effective within one year, Abaca Warrant holders may exercise their Warrants on a cashless basis, receiving shares based on a defined fair market value calculation. This process aims to facilitate the straightforward and lawful exercise of the Abaca Warrants, ensuring the shares issued are readily tradable without the need for restrictive legends.

Note 16. Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:

The Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment. Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise. If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective reporting period.

Assets and Liabilities Reported at Fair Value on a Recurring Basis

Public Warrants:

Public warrants are recorded at fair value on a recurring basis. The Company obtains exchange traded price, of Level 1 inputs, based on observable data to value these warrants.

Private Placement Warrants:

Private Placement Warrants are recorded at fair value on a recurring basis based upon an internal Company assessed value of these derivatives with Level 3 inputs, which are derived from the Black-Scholes model.

PIPE Warrants:

PIPE Warrants are recorded at fair value on a recurring basis based upon an internal Company assessed value of these derivatives with Level 3 inputs, which are derived from the Black-Scholes model.

Abaca Warrants:

Abaca Warrants are recorded at fair value on a recurring basis. The Company assessed the value of these derivatives with Level 3 inputs. Level 3 inputs, based on unobservable data derived from the Black-Scholes model.

Third Anniversary Payment Consideration:

Third anniversary payment consideration are recorded at fair value on a recurring basis. The Company values these derivatives based on third party reports for Level 3 inputs. Level 3 inputs are based on unobservable data derived from the Black Scholes-Merton model.

Forward Purchase Option Derivatives:

Forward purchase option derivatives are recorded at fair value on a recurring basis. In 2022, the Company values these derivatives based on third party reports for Level 3 inputs. In 2023 and 2024, no significant risk factor changes affecting forward purchase option derivative values were noted.

The following tables summarize financial assets and liabilities recorded at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy on June 30, 2024 and December 31, 2023:

Assets Measured at Fair Value on a Nonrecurring Basis

Assets that are measured at fair value on a nonrecurring basis primarily comprises of property, plant and equipment, right-to-use assets, finite lived intangible assets and goodwill. The Company does not record these at fair value on a recurring basis, however, the carrying value of the assets may be reduced to fair value when the Company determines that impairment has occurred.

At December 31, 2023, the Company’s developed technology asset were measured at fair value on a nonrecurring basis as result of annual impairment testing. In order to evaluate the fair value of the developed technology asset, the annual impairment test employed the Relief from Royalty Method for accurately reflecting market conditions and asset performance.

The following table presents the carrying amounts and fair values of financial instruments measured on a nonrecurring basis, by the level of valuation inputs in the fair value hierarchy, as of the dates indicated:

The following table provides quantitative information regarding Level 3 fair value measurements inputs as it relates to the finite lived intangible assets as of their measurement dates:

There were no assets or liabilities recorded at fair value on a nonrecurring basis for the period ended June 30, 2024.

Fair Value of Financial Instruments

The Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. With the exceptions of loans receivable, warrants and forward purchase option derivatives, the Company considers the carrying amounts of its financial instruments (cash, accounts receivable and accounts payable) in the balance sheet to approximate fair value because of the short-term or highly liquid nature of these financial instruments.

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:

The change in the assets measured at fair value on a recurring basis for which the Company have utilized Level 3 inputs to determine fair value are presented in the following table:

As of June 30, 2024 and on December 31, 2023, the valuation of private placement warrants, PIPE warrants, and Abaca warrants was carried out using the Black-Scholes model, while the fair value of the Abaca third anniversary payment consideration was determined using the Black Scholes Merton Option pricing model. As of June 30, 2024 and December 31, 2023, these warrants were valued using Level 3 inputs.

As of December 31, 2023, the Company assessed the fair value of its forward purchase agreement (FPA) derivative utilizing a Monte Carlo Simulation within a risk-neutral setting, which is a particular instance of the Income Approach, based on calculations from December 31, 2022. Throughout the periods ended June 30, of 2023 and 2024, there were no notable alterations in risk factors that would impact the valuation of the FPA derivative. Consequently, management retained the December 31, 2022, valuation for December 31, 2023 and June 30, 2024. The Company will continue to monitor the fair value of the forward option derivative each reporting period with subsequent revisions to be recorded in the Statements of Operations.

During the period ended June 30, of 2023 and 2024, there were no changes in the classification of financial instruments within Level 2 and Level 3 of the fair value hierarchy.

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:

The following table provides quantitative information regarding Level 3 fair value measurements inputs as it relates to the forward purchase derivatives as of their measurement dates on June 30, 2024 and December 31, 2023:

Note 17. Tax

For the six months ended June 30, 2024, the Company recorded income tax expense of $48,742 for continuing operations. The effective tax rate of 1.6% for the six months ended June 30, 2024, varied from the statutory United States federal income tax rate of 21.0% primarily because of state income taxes, net of the federal benefit, and adjustments to the fair market value of warrant liabilities The Company has net deferred tax assets of $43,793,536 and $43,829,019 as of June 30, 2024, and December 31, 2023, respectively. The Company considers their deferred tax assets to be realizable and has not established a valuation allowance, as it is considered more likely than not that the Company will utilize deferred tax assets in future periods through future taxable income.

The Company recognizes income tax benefits from uncertain tax positions where the realization of the ultimate benefit is uncertain. As of both June 30, 2024, and December 31, 2023, the Company has no unrecognized income tax benefits.

Note 18.401(k) Plan

The Company offers to all employees a tax-qualified retirement contribution plan, with the Company’s 100% matching contribution up to 4% of a participant’s eligible compensation. The Company’s consolidated matching contributions for the three and six months ended June 30, 2024, amounted to $28,714 and $63,947, respectively, and for the three and six months ended June 30, 2023 amounted to $13,426 and $34,089, respectively.

Note 19. Stockholders’ Equity

Preferred Stock

The Company is authorized to issue 1,250,000 preferred shares with a par value of $0.0001 per share with such designation rights and preferences as may be determined from time to time by the Company’s Board of Directors. As of June 30, 2024, there were 111 Class A preferred shares issued and outstanding, and 1,101 Class A preferred shares issued and outstanding on December 31, 2023. The holders of preferred stock shall be entitled to receive, and the Company shall pay, dividends on shares of preferred stock equal(on an as-if-converted-to-Class-A-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Class A Common Stock when, as and if such dividends are paid on shares of the Class A Common Stock. No other dividends shall be paid on the preferred stock. The terms of the preferred stock provide for an initial conversion price of $10.00 per share of Class A Common Stock, which conversion price is subject to downward adjustment on each of the dates that are 10 days, 55 days, 100 days, 145 days and 190 days after the effectiveness of a registration statement registering the shares of Class A Common Stock issuable upon conversion of the preferred stock to the lower of the Conversion Price and the greater of (i)80% of the volume weighted average price of the Class A Common Stock for the prior five trading days and (ii) $2.00 (the “Floor Price”), provided that, so long as a preferred stock holders continues to hold any preferred shares, such preferred stock holder will be entitled to receive the aggregate shares of Class A Common Stock that would be issuable based upon its initial purchase of preferred stock at the adjusted Conversion Price. Additionally, on January 25, 2023, at a special meeting of the Company’s stockholders, the stockholders approved a reduction in the floor conversion price of the outstanding preferred stock from $2.00 per share to $1.25 per share.

Common Stock

The Company is authorized to issue up to 130,000,000 shares of Class A Common Stock with a par value of $.0001 per share. Holders of the Company’s Class A Common Stock are entitled to one vote for each share. As of June 30, 2024 and December 31, 2023, there were 55,431,001 and 54,563,372 shares of Class A Common Stock issued and outstanding, respectively. As of June 30, 2024 and December 31, 2023,3,667,377 Class A Common Stock are held by the purchasers under forward purchase agreement dated June 16, 2022, by and among the Company and such purchasers.

2022 Equity Incentive Plan

Share-based compensation expense recognized six months ended June 30, 2024 and June 30, 2023 totaled $1,164,261 and $2,529,042, respectively.

Share-based compensation expense recognized three months ended June 30, 2024 and June 30, 2023 totaled $552,137 and $958,260, respectively.

The 2022 Equity Incentive Plan was approved by the Company’s stockholders on June 28, 2022. The 2022 Plan permits the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonus awards, and performance compensation awards. The Company has not issued stock appreciation rights, restricted stock, stock bonus awards, or performance compensation awards in the six months ended June 30, 2024 and June 30, 2023.

Stock Options

Stock options are awarded to encourage ownership of the Company’s Class A Common Stock by employees and to provide increased incentive for employees to render services and to exert maximum effort for the success of the Company. The Company’s incentive stock options generally permit net-share settlement upon exercise. The option exercise price, vesting schedule and exercise period are determined for each grant by the administrator (person appointed by board to administer the stock plans) of the applicable plan. The Company’s stock options generally have a 10-year contractual term.

The assumptions used to determine the fair value of options granted in the six months ended June 30, 2024, using the Black-Scholes-Merton model are as follows:

The expected term of the options granted is calculated based on the simplified method by taking average of contractual term and vesting period the awards. The shares and the redeemable warrants of the Company were listed on the stock exchange for a limited period of the time and the share price has also dropped significantly from the date of listing. Based on these factors Management has considered the expected volatility at 100% 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.

A summary of the Company’s stock option activities and related information for the six months ended June 30, 2024 is as follows:

A summary of the Company’s stock option activities and related information for the six months ended June 30, 2023 is as follows:

The following options were outstanding at their respective exercise price:

Restricted Stock Units (“RSUs”)

A summary of the Company’s RSU activities and related information for the six months ended June 30, 2024 is as follows:

A summary of the Company’s RSU activities and related information for the six months ended June 30, 2023 is as follows:

The following RSU were outstanding at their respective vest price:

Note 20. Subsequent events

There were not any material subsequent events that occurred after the balance sheet date of June 30, 2024 through the date of this report.