SHF (SHFS) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the Company's unaudited condensed consolidated financial statements and related disclosures Item 1. Financial Statements This section presents SHF Holdings, Inc.'s unaudited condensed consolidated financial statements and detailed notes for periods ending September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and liabilities, with a substantial increase in parent-entity net investment and stockholders' equity - Total Assets decreased by approximately $26.96 million from December 31, 2022, to September 30, 2023, primarily due to a reduction in goodwill and intangible assets[10] - Total Liabilities significantly decreased by approximately $48.88 million, largely driven by the restructuring of 'Due to Seller' obligations[10] - Parent-Entity Net Investment and Stockholders' Equity increased substantially by approximately $21.91 million, reflecting the impact of the deferred obligation restructuring and stock issuances[11] Condensed Consolidated Balance Sheets (Unaudited) | Metric | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :--------------------------------- | :----------------------- | :------------- | | Total Current Assets | $10,588,595 | $10,231,172 | | Total Assets | $72,378,285 | $99,342,856 | | Total Current Liabilities | $19,969,708 | $49,571,192 | | Total Liabilities | $45,354,318 | $94,229,731 | | Total Parent-Entity Net Investment and Stockholders' Equity | $27,023,967 | $5,113,125 | Condensed Consolidated Statement of Operations The statement of operations reveals a significant increase in revenue but a substantial net loss for the nine months ended September 30, 2023 - Revenue for the nine months ended September 30, 2023, increased by 121.67% to $13,085,861 compared to $5,903,213 in the prior year, primarily driven by increased deposit, activity, onboarding income, investment income, and loan interest income[13][260] - The company reported a significant net loss of $(19,766,081) for the nine months ended September 30, 2023, a substantial decrease from a net income of $1,894,179 in the same period last year, largely due to impairment charges for goodwill and finite-lived intangible assets[13][265][267] Condensed Consolidated Statement of Operations (Unaudited) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $4,332,974 | $2,379,314 | $13,085,861 | $5,903,213 | | Total operating expenses | $3,801,525 | $1,553,858 | $32,088,848 | $4,239,813 | | Operating (loss) income | $531,449 | $825,456 | $(19,002,987) | $1,663,400 | | Net (loss) income | $(748,067) | $1,056,235 | $(19,766,081) | $1,894,179 | | Basic net (loss) income per share | $(0.02) | $0.06 | $(0.51) | $0.10 | | Diluted (loss) income per share | $(0.02) | $0.05 | $(0.51) | $0.09 | Condensed Consolidated Statements of Parent-Entity Net Investment and Stockholders' Equity Stockholders' equity significantly increased due to stock issuances and deferred obligation restructuring, despite a net loss - Total Shareholders' Equity increased from $5,113,125 at December 31, 2022, to $27,023,967 at September 30, 2023, primarily due to the issuance of 11,200,000 shares of Class A Common Stock to PCCU as part of a deferred obligation restructuring, and other equity activities, despite a net loss[16][150] - The adoption of CECL resulted in a cumulative effect adjustment of $(581,321) to retained deficit as of January 1, 2023[16][96] Changes in Stockholders' Equity (Nine Months Ended Sep 30, 2023) | Metric | Balance, Dec 31, 2022 | Reversal of deferred underwriting cost | Cumulative effect from adoption of CECL | Conversion of PIPE shares | Restricted stock units | Stock option conversion | Issuance of shares to PCCU (net of tax) | Net loss | Balance, Sep 30, 2023 | | :--------------------------------- | :-------------------- | :----------------------------------- | :------------------------------------ | :------------------------ | :--------------------- | :---------------------- | :-------------------------------------- | :------- | :-------------------- | | Preferred Stock (Shares) | 14,616 | - | - | (10,805) | - | - | - | - | 3,811 | | Preferred Stock (Amount) | $1 | - | - | $(1) | - | - | - | - | $- | | Class A Common Stock (Shares) | 23,732,889 | - | - | 10,394,200 | 1,266,228 | - | 11,200,000 | - | 46,593,317 | | Class A Common Stock (Amount) | $2,374 | - | - | $1,039 | $127 | - | $1,120 | - | $4,660 | | Additional Paid-in Capital | $44,806,031 | $900,500 | - | $11,641,086 | $1,243,446 | $1,707,763 | $38,405,288 | - | $98,704,114 | | Retained Deficit | $(39,695,281) | - | $(581,321) | $(11,642,124) | - | - | - | $(19,766,081) | $(71,684,807) | | Total Shareholders' Equity | $5,113,125 | $900,500 | $(581,321) | - | $1,243,573 | $1,707,763 | $38,406,408 | $(19,766,081) | $27,023,967 | Condensed Consolidated Statements of Cash Flows Cash flow from operations shifted to a net use, while investing activities provided cash, leading to a net increase in cash and equivalents - Net cash used in operating activities was $(225,032) for the nine months ended September 30, 2023, a significant shift from $1,967,767 provided by operating activities in the prior year, primarily due to increased operating expenses and payments related to the reverse acquisition[19][280] - Net cash provided by investing activities increased to $783,480 for the nine months ended September 30, 2023, compared to cash used of $(483,530) in the prior year, mainly due to higher repayment of loans receivable[19] Condensed Consolidated Statements of Cash Flows (Unaudited) | Cash Flow Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net (loss) income | $(19,766,081) | $1,894,179 | | Net cash (used in) provided by operating activities | $(225,032) | $1,967,767 | | Net cash provided by (used in) investing activities | $783,480 | $(483,530) | | Net cash provided by financing activities | $- | $287,834 | | Net increase in cash and cash equivalents | $558,449 | $1,777,107 | | Cash and cash equivalents – end of period | $8,948,644 | $7,273,012 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the unaudited condensed consolidated financial statements Note 1. Organization and Business Operations SHF Holdings, Inc. acquired SHF LLC and Abaca, expanding its cannabis industry financial services and restructuring deferred obligations with PCCU - SHF Holdings, Inc. acquired SHF LLC via a Business Combination on September 28, 2022, with an aggregate value of $185,000,000, consisting of Class A common stock and cash[22] - The company provides interest and fee income services to financial institutions servicing the cannabis industry, including origination, onboarding, compliance, and loan administration[25] - Acquired Abaca on November 15, 2022, for $30,000,000 in cash and shares, expanding customer base to over 1,000 accounts across 40 states and enhancing its fintech platform[26][27][108] - Restructured deferred obligations with PCCU on March 29, 2023, converting $56,949,800 into a $14,500,000 Senior Secured Promissory Note and issuing 11,200,000 shares of Class A Common Stock to PCCU[28][150] Note 2. Basis of Presentation and Summary of Significant Accounting Policies This note details the financial statements' basis of presentation, significant accounting policies, CECL adoption, and going concern risks - The financial statements are prepared under U.S. GAAP for interim information, with certain disclosures condensed or omitted per SEC rules[31][33] - The company adopted ASC Topic 326 (CECL) on January 1, 2023, replacing the incurred loss methodology with an expected credit loss methodology, resulting in a cumulative effect adjustment to retained deficit[47][94][96] - As of September 30, 2023, the company had $8,948,644 in cash and a net working capital deficit of $9,381,113, raising substantial doubt about its ability to continue as a going concern, despite restructuring obligations to PCCU[34][35][36] - The company's business is concentrated in servicing the cannabis industry, which remains federally illegal, posing a significant concentration of risk[40] Note 3. Business Combination The September 2022 Business Combination was a reverse recapitalization, deferring cash payments to PCCU and increasing Class A common stock - The Business Combination on September 28, 2022, was accounted for as a reverse recapitalization, with NLIT treated as the acquired company and no goodwill recorded for book purposes[101] - Approximately $56.9 million of the $70 million cash proceeds due to PCCU was deferred, with specific payment schedules and interest rates[104] - As of September 30, 2023, 46,593,317 shares of Class A Common Stock were issued and outstanding, significantly up from 23,732,889 shares at December 31, 2022[104] - For tax purposes, the transaction was treated as a taxable asset acquisition, resulting in an estimated tax basis Goodwill balance of $44,102,572 and a deferred tax asset[104] Note 4. Acquisition (Abaca) The acquisition of Abaca for $30 million expanded the Company's customer base and fintech platform, resulting in significant goodwill and intangibles - Acquired Abaca on November 15, 2022, for $30,000,000, paid in cash and shares, to expand customer base, integrate fintech platform, and increase lending capacity[107][108][110] Abaca Purchase Price Allocation | Asset/Liability | Amount | | :-------------------------- | :------------- | | Property, plant & equipment | $27,117 | | Software | $9,189 | | Cash & cash equivalents | $245,524 | | Prepaid expense | $23,061 | | Security deposit | $675 | | Accounts receivables | $232,265 | | Accounts Payable | $(206,508) | | Accrued Expense | $(235,894) | | Fair value of net assets acquired | $95,429 | | Other intangibles | $10,800,000 | | Goodwill | $19,266,276 | | Deferred tax liabilities | $(1,758,769) | | Total purchase consideration | $28,402,936 | Identifiable Intangible Assets from Abaca Acquisition | Intangible Asset | Amount | Useful life (Years) | | :----------------- | :---------- | :------------------ | | Market related | $2,100,000 | 8 | | Customer relationships | $2,000,000 | 10 | | Developed technology | $6,700,000 | 10 | | Total | $10,800,000 | | Note 5. Goodwill and Finite-lived Intangible Assets A significant goodwill impairment charge of $13.21 million and a $3.68 million intangible asset impairment were recognized due to declining performance and agreement termination - A non-cash goodwill impairment charge of $13,208,276 was recognized for the nine months ended September 30, 2023, reducing goodwill from $19,266,276 to $6,058,000[121][123] - The impairment was triggered by a decline in operating margins and cash flows, and the termination of the Master Services and Revenue Sharing Agreement with Central Bank[118][120] - A $3,680,463 impairment charge was recognized for finite-lived intangible assets (market-related intangibles and customer relationships) for the nine months ended September 30, 2023[126][127] Note 6. Loans Receivable Commercial real estate loans receivable decreased, with a corresponding reduction in the allowance for credit losses, and all loans remained current - No loans were past due, classified as non-accrual, or considered impaired as of September 30, 2023, or December 31, 2022[130] Commercial Real Estate Loans Receivable, Net | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Commercial real estate loans receivable, gross | $407,535 | $1,432,560 | | Less: loan origination charges | $(75,969) | $(109,081) | | Commercial real estate loans receivable, net | $331,566 | $1,323,479 | | Allowance for credit losses | $(14,433) | $(21,488) | | Commercial real estate loans receivable, net (final) | $317,133 | $1,301,991 | Allowance for Credit Losses Activity (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :--------------------------------- | :----------- | :----------- | | Beginning balance | $21,488 | $14,741 | | Cumulative effect from adoption of CECL | $14,980 | $- | | (Benefits) Provision | $(22,035) | $6,905 | | Ending balance | $14,433 | $21,646 | Note 7. Indemnification liability Indemnity liability to PCCU for loan losses significantly increased, with one $3.1 million indemnified loan identified as potentially defaulting - One indemnified loan with an outstanding balance of $3.1 million was identified as potentially defaulting and placed on non-accrual status in January 2023, and is now greater than 120 days delinquent[135][136] Indemnity Liability Activity (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :--------------------------------- | :----------- | :----------- | | Beginning balance | $499,465 | $- | | Cumulative effect from adoption of CECL | $566,341 | $- | | Provision | $399,649 | $377,005 | | Ending balance | $1,465,455 | $377,005 | Loans Funded by PCCU (Indemnified by SHF) | Loan Type | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Secured term loans | $40,939,996 | $18,400,000 | | Unsecured loans and lines of credit | $421,640 | $498,042 | | Total loans funded by Parent | $41,361,636 | $18,898,042 | Note 8. Property and equipment, net Property and equipment, net, increased, primarily driven by a substantial rise in office furniture and improvements - Office furniture saw a substantial increase from $7,070 at December 31, 2022, to $215,504 at September 30, 2023[139] Property and Equipment, Net | Asset Category | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Equipment | $45,397 | $45,397 | | Software | $51,692 | $51,692 | | Improvement | $71,635 | $71,635 | | Office furniture | $215,504 | $7,070 | | Total Gross | $384,228 | $175,794 | | Less: accumulated depreciation | $(257,865) | $(126,180) | | Property and equipment, net | $126,363 | $49,614 | Note 9. Related party transactions A new Commercial Alliance Agreement with PCCU superseded prior agreements, significantly increasing related party revenue and operating expenses - The Commercial Alliance Agreement, effective March 29, 2023, superseded prior agreements with PCCU, establishing new terms for lending and account-related services, including indemnification for loan losses[143][144] - PCCU's lending capacity for CRB-related loans was limited to $89,528,805 at September 30, 2023, with $41,334,145 funded and $47,669,660 incremental capacity[147] Revenue from Related Party Agreements (Nine Months Ended Sep 30) | Agreement Type | 2023 | 2022 | | :--------------------------------- | :------------ | :------------ | | Account servicing agreement | $3,261,284 | $5,777,446 | | Commercial alliance agreement | $6,791,346 | $- | | Total | $10,052,630 | $5,777,446 | Operating Expense from Related Party Agreements (Nine Months Ended Sep 30) | Agreement Type | 2023 | 2022 | | :--------------------------------- | :------------ | :------------ | | Support services agreement | $378,730 | $420,085 | | Loan servicing agreement | $53,790 | $14,264 | | Commercial alliance agreement | $770,928 | $- | | Total | $1,203,448 | $434,349 | Note 10. Due to Seller The $56.9 million deferred obligation to PCCU was fully settled and restructured into a Senior Secured Promissory Note and Class A Common Stock - The total deferred obligation of $62,500,391 was settled by issuing a $14,500,000 Senior Secured Promissory Note and 11,200,000 shares of Class A Common Stock (valued at $38,406,408) to PCCU[155] Due to Seller (Unsecured) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Due to Seller-Current | $- | $25,973,017 | | Due to Seller-long term | $- | $30,976,783 | | Total | $- | $56,949,800 | Note 11. Senior Secured Promissory Note A five-year, $14.5 million Senior Secured Promissory Note was issued to PCCU, collateralized by company assets, with repayments starting November 2023 - The note has a principal amount of $14,500,000, bears interest at 4.25%, and is secured by substantially all of the Company's assets[156] - Repayments of $295,487 (principal and interest) will commence on November 5, 2023, with only interest payments made prior to that date[157] Senior Secured Promissory Note | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Senior Secured Promissory Note (current) | $2,731,369 | $- | | Senior Secured Promissory Note (long term) | $11,768,631 | $- | | Total | $14,500,000 | $- | Note 12. Leases Operating lease assets and liabilities slightly decreased, while total lease costs increased for the nine months ended September 30, 2023 - The weighted-average remaining lease term was 3.67 years at September 30, 2023, with a weighted-average discount rate of 6.87%[161] Operating Lease Assets and Liabilities | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | ROU assets, net | $898,945 | $1,016,198 | | Lease liabilities, net | $1,021,253 | $1,028,233 | Total Lease Cost (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :--------------------------------- | :----------- | :----------- | | Total lease cost | $246,694 | $82,087 | Note 13. Revenue Total revenue significantly increased by 121.67% for the nine months ended September 30, 2023, driven by investment and loan interest income - The increase in deposit, activity, and onboarding income was primarily due to the increase in the number of accounts related to the Abaca acquisition[260] - Investment income increased significantly due to recent interest rate increases and higher customer deposit balances[262] Disaggregated Revenue by Type (Nine Months Ended Sep 30) | Revenue Type | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :------------ | :------------ | :------------ | | Deposit, activity, onboarding income | $7,036,444 | $4,179,323 | $2,857,121 | 68.36% | | Safe Harbor Program income | $48,140 | $125,767 | $(77,627) | (61.72)% | | Investment income | $4,023,940 | $935,993 | $3,087,947 | 329.91% | | Loan interest income | $1,977,337 | $662,130 | $1,315,207 | 198.63% | | Total Revenue | $13,085,861 | $5,903,213 | $7,182,648 | 121.67% | Note 14. Deferred underwriter fee The Company settled a $1.45 million deferred underwriter fee for $550,000, with the difference recorded in stockholders' equity - The Company settled a $1,450,500 deferred underwriter fee with EF Hutton for $550,000 on March 13, 2023[166] - The $900,500 difference from the settlement was recorded in the 'Condensed Consolidated Statements of Parent-Entity Net Investment and Stockholders' Equity'[166] Note 15. Commitments and contingencies The Company has a $750,000 irrevocable Letter of Credit and is involved in legal proceedings with uncertain financial outcomes - The Company has an irrevocable Letter of Credit for $750,000 in favor of AFCO Credit Corporation, callable upon default or bankruptcy-related events[169] - The Company is involved in legal proceedings, the ultimate outcome of which is uncertain and could materially impact its financial condition[169] Note 16. Earnings Per Share Basic and diluted net loss per share was $(0.51) for the nine months ended September 30, 2023, a significant decline from prior year income - Certain share-based equity awards, totaling 19,870,077, were excluded from diluted loss per share calculation due to their anti-dilutive effect[173][174] Earnings Per Share (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :--------------------------------- | :------------ | :------------ | | Net loss | $(19,766,081) | $1,894,179 | | Weighted average shares outstanding – basic | 38,725,273 | 18,715,912 | | Basic net (loss) income per share | $(0.51) | $0.10 | | Weighted average shares outstanding – diluted | 38,725,273 | 20,760,912 | | Diluted net (loss) income per share | $(0.51) | $0.09 | Note 17. Forward Purchase Agreement The FPA receivable significantly reduced to $4.6 million, resulting in a $42.3 million charge due to a lower reset price - The FPA receivable significantly reduced to approximately $4.6 million from $37.9 million at the end of Q3 2022, resulting in a $42.3 million charge to other expense in Q4 2022[180][302] - This reduction was triggered by a lower reset price of $1.25/share under the FPA, influenced by preferred shareholders electing to convert their shares at an adjusted conversion price[180][301] Forward Purchase Agreement Shares and Amount (Sep 30, 2023) | Party | Shares Held | Amount | | :--------------------------------- | :---------- | :----------- | | Vellar | 971,204 | $1,214,005 | | Midtown East | 1,517,924 | $1,897,405 | | Verdun | 1,178,249 | $1,472,811 | | Grand total | 3,667,377 | $4,584,221 | Note 18. Warrant Liability The Company had 5.75 million Public Warrants, 264,088 Private Placement Warrants, and 1,022,500 PIPE Warrants outstanding, exercisable until September 2027 - As of September 30, 2023, the Company had 5,750,000 Public Warrants, 264,088 Private Placement Warrants, and 1,022,500 PIPE Warrants outstanding[179][185] - Public and Private Placement Warrants became exercisable on September 28, 2022, and expire on September 28, 2027[179][186] - Public warrants are redeemable by the Company if the Class A Common Stock price equals or exceeds $18.00 per share for 20 trading days within a 30-trading day period[182] Note 19. Financial Instruments (Fair Value Measurements) Financial instruments are fair valued using Level 1 (public warrants) and Level 3 inputs (private placement, PIPE warrants, FPO derivatives), with warrant liabilities increasing due to adjustments - Public warrants are valued using Level 1 inputs (exchange traded price), while Private Placement Warrants, PIPE Warrants, and Forward Purchase Option Derivatives are Level 3, valued using Black-Scholes or Monte-Carlo Simulation models[188][189][190][191][198] Fair Value of Financial Instruments (Sep 30, 2023) | Description | Total Fair Value | Level 1 | Level 3 | | :--------------------------------- | :--------------- | :----------- | :----------- | | Public warrants | $797,329 | $797,329 | $- | | Private placement warrants | $36,620 | $- | $36,620 | | PIPE warrants | $250,359 | $- | $250,359 | | Forward purchase option derivative | $7,309,580 | $- | $7,309,580 | Level 3 Fair Value Measurement Inputs (Sep 30, 2023) | Metric | PIPE Warrants | Private Placement Warrants | Forward Purchase Derivatives | | :--------------------------------- | :------------ | :------------------------- | :--------------------------- | | Exercise price | $5.00 | $11.50 | Reset Price: $5.00 | | Share Price | $0.80 | $0.80 | Additional maturity consideration per share: $2.00 | | Expected term (years) | 3.99 | 3.99 | 1.99 | | Volatility | 88.58% | 88.58% | 46% | | Risk-free rate | 5.31% | 5.31% | 4.2% | | Risk-adjusted discount rate | | | 13.4% | Note 20. Tax The Company recorded a $1.2 million income tax benefit for the nine months ended September 30, 2023, with an effective tax rate of (5.72%) due to various adjustments - Income tax benefit of $1,199,483 was recorded for the nine months ended September 30, 2023, with an effective tax rate of (5.72%)[202] - The effective tax rate deviation from the 21.0% federal rate is primarily due to state income taxes, goodwill impairment, warrant liability adjustments, and a valuation allowance on capital loss carryovers[202] - Net deferred tax assets were $43,198,800 as of September 30, 2023, with a valuation allowance of $72,914 against capital loss carryovers[202] Note 21. 401(k) Plan The Company's 401(k) plan offers a 100% match up to 4% of compensation, with matching contributions increasing to $48,955 for the nine months ended September 30, 2023 - The Company's 401(k) plan includes a 100% matching contribution up to 4% of eligible compensation[204] 401(k) Matching Contributions | Period | 2023 | 2022 | | :--------------------------------- | :----------- | :----------- | | Three months ended Sep 30 | $14,866 | $13,517 | | Nine months ended Sep 30 | $48,955 | $38,947 | Note 22. Share based compensation Share-based compensation expense significantly increased to $2.95 million for the nine months ended September 30, 2023, reflecting grants under the 2022 Equity Incentive Plan - Share-based compensation expense for the nine months ended September 30, 2023, was $2,951,336, compared to $0 in the prior year[205] - As of September 30, 2023, there is $317,583 of unrecognized share-based compensation expense related to RSU awards[210] Stock Option Activity (Nine Months Ended Sep 30, 2023) | Metric | No. of Stock Option | Weighted Average Grant Date Fair Value Per Stock Option | | :--------------------------------- | :------------------ | :------------------------------------------------------ | | December 31, 2022 | 2,170,000 | $3.53 | | Granted | 336,730 | $1.03 | | Cancelled / Forfeited | (251,880) | $3.62 | | September 30, 2023 | 2,254,850 | $3.15 | Restricted Stock Unit (RSU) Activity (Nine Months Ended Sep 30, 2023) | Metric | No. of RSU | Weighted Average Grant Date Fair Value Per RSU | | :--------------------------------- | :--------- | :--------------------------------------------- | | December 31, 2022 | - | $- | | Granted | 1,600,028 | $0.99 | | Cancelled / Forfeited | (10,300) | $1.31 | | September 30, 2023 | 1,589,728 | $0.98 | Note 23. Subsequent events The Abaca merger agreement was amended, redefining deferred cash and future stock consideration, including new stock warrants and a board nomination right - Second amendment to Abaca merger agreement on October 26, 2023, redefined deferred consideration[211] - 5,835,822 shares of common stock to be issued as stock consideration on the first anniversary of the merger[212] - A $1,500,000 Third Anniversary Consideration Payment was added, payable in cash, stock, or both[213] - The Company will issue stock warrants equal to 5,000,000 shares of common stock with an initial exercise price of $2.00 per share[213] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition, operations, business reorganization, key metrics, revenue/expense trends, liquidity, and critical accounting policies Overview SHF Holdings, Inc. provides compliant banking, lending, and financial services to the legal cannabis industry, leveraging its proprietary platform and compliance expertise - SHF provides access to reliable and compliance-driven banking, lending, and financial services for the legal cannabis industry[220] - Services include business checking/savings, cash management, commercial lending, and compliance monitoring for CRBs[221][222] - SHF has assisted PCCU in processing over $20 billion in cannabis-related funds and successfully navigated 16 state and federal banking exams[225] Business Reorganization SHF LLC was reorganized from PCCU, acquired by SHF Holdings, Inc. for $185 million, and subsequently restructured deferred obligations with PCCU - SHF LLC's operations were reorganized from PCCU in July 2021[226] - SHF Holdings, Inc. acquired SHF LLC on September 28, 2022, for $185,000,000, with $56,949,801 of cash consideration deferred[228][232] - PCCU became the majority shareholder of the Company, owning 60.8% of outstanding shares, after the business combination[233] - Deferred obligations to PCCU were restructured on March 29, 2023, into a $14,500,000 Senior Secured Promissory Note and 11,200,000 shares of Class A Common Stock[239] Key Metrics Adjusted EBITDA increased, average monthly deposits and active accounts grew, but average account balance and fees per account decreased due to client mix shift - The decrease in average account size and fees per account is attributed to a churn of larger clients being replaced by smaller businesses, a trend expected to shift with the growth of the lending program[254] EBITDA and Adjusted EBITDA (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :--------------------------------- | :------------ | :------------ | | Net (loss) income | $(19,766,081) | $1,894,179 | | EBITDA | $(18,334,250) | $1,933,757 | | Adjusted EBITDA | $2,313,415 | $2,153,250 | Operational Key Metrics (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------- | :-------------- | :-------------- | :------------ | :------------ | | Average monthly ending deposit balance | $226,798,931 | $148,191,118 | $78,607,813 | 53.04% | | Average monthly account fees | $717,945 | $469,375 | $250,493 | 53.37% | | Average active accounts | 1,010 | 616 | 386 | 62.66% | | Average account balance | $223,037 | $240,440 | $(17,533) | (7.29)% | | Average fees per account | $718 | $762 | $(44) | (5.77)% | Components of our Results of Operations Revenue is derived from interest and fee income for CRB banking services, while operating expenses include compensation, professional services, and credit loss provisions - Revenue sources include fees from deposit accounts, Safe Harbor Program income, investment income, and loan interest income[256] - Operating expenses include compensation and benefits, professional services, rent, provision for credit losses, and general and administrative expenses[257] - The Company reports a provision for credit losses for both internally funded loans and indemnified loans carried by PCCU or other financial institutions[258] Discussion of our Results of Operations —2023 Compared to 2022 (Nine months ended September 30) Total revenue increased by 121.67%, but total operating expenses surged by 656.85% due to significant goodwill and intangible asset impairment charges - Compensation and employee benefits increased due to stock-based compensation and an increase in headcount in anticipation of growth[265] - General and administrative expenses rose significantly across investment hosting fees, marketing, amortization/depreciation, and business insurance[266] Revenue Trends (Nine Months Ended Sep 30) | Revenue Type | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :------------ | :------------ | :------------ | | Deposit, activity, onboarding income | $7,036,444 | $4,179,323 | $2,857,121 | 68.36% | | Safe Harbor Program income | $48,140 | $125,767 | $(77,627) | (61.72)% | | Investment income | $4,023,940 | $935,993 | $3,087,947 | 329.91% | | Loan interest income | $1,977,337 | $662,130 | $1,315,207 | 198.63% | | Total Revenue | $13,085,861 | $5,903,213 | $7,182,648 | 121.67% | Operating Expenses Trends (Nine Months Ended Sep 30) | Expense Category | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :------------ | :------------ | :------------ | | Compensation and employee benefits | $8,269,761 | $2,383,117 | $5,886,644 | 247.01% | | General and administrative expenses | $4,874,255 | $856,205 | $4,018,050 | 469.29% | | Professional services | $1,431,785 | $534,494 | $897,291 | 167.88% | | Impairment of goodwill | $13,208,276 | $- | $13,208,276 | 100.00% | | Impairment of finite lived intangible assets | $3,680,463 | $- | $3,680,463 | 100.00% | | Rent expense | $246,694 | $82,087 | $164,607 | 200.53% | | Provision for credit losses | $377,614 | $383,910 | $(6,296) | (1.64)% | | Total operating expenses | $32,088,848 | $4,239,813 | $27,849,035 | 656.85% | Discussion of our Results of Operations —2023 Compared to 2022 (Three Months Ended September 30) Total revenue increased by 82.11%, while operating expenses rose by 144.65%, with a credit loss benefit offsetting some expense increases - The increase in deposit, activity, and onboarding income was primarily attributable to the increase in the number of accounts related to the Abaca acquisition[270] - The provision for credit losses decreased (became a benefit) due to a decrease in the loss rate and an increase in the absolute value of loans[278] Revenue Trends (Three Months Ended Sep 30) | Revenue Type | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :------------ | :------------ | :------------ | | Deposit, activity, onboarding income | $2,233,203 | $1,369,559 | $863,644 | 63.06% | | Safe Harbor Program income | $7,312 | $38,599 | $(31,287) | (81.06)% | | Investment income | $1,186,246 | $558,860 | $627,386 | 112.26% | | Loan interest income | $906,213 | $412,296 | $493,917 | 119.80% | | Total Revenue | $4,332,974 | $2,379,314 | $1,953,660 | 82.11% | Operating Expenses Trends (Three Months Ended Sep 30) | Expense Category | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------- | :------------ | :------------ | :------------ | :------------ | | Compensation and employee benefits | $2,069,910 | $865,595 | $1,204,315 | 139.13% | | General and administrative expenses | $1,482,792 | $373,695 | $1,109,097 | 296.79% | | Professional services | $361,804 | $195,464 | $166,340 | 85.10% | | Rent expense | $87,951 | $30,759 | $57,192 | 185.94% | | Provision (benefit) for credit losses | $(200,932) | $88,345 | $(289,277) | (327.44)% | | Total operating expenses | $3,801,525 | $1,553,858 | $2,247,667 | 144.65% | Financial Condition Cash and cash equivalents slightly increased, but a significant net working capital deficit raises substantial doubt about the Company's going concern ability - The net working capital deficit at September 30, 2023, includes a $12,011,163 equity commitment towards the Abaca acquisition, which is a non-cash liability[282][284] - Management has determined there is a risk of substantial doubt about the Company's ability to continue as a going concern for at least twelve months from the financial statements' issuance date[283] Cash and Working Capital | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $8,948,644 | $8,390,195 | | Net working capital deficit | $(9,381,113) | $(39,340,020) | Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for revenue, indemnity liability, stock-based compensation, and impairment of goodwill and intangibles - Key estimates include allowance for credit losses, indemnification liabilities, valuation and useful lives of intangibles, and fair value of financial instruments[29] - Revenue recognition follows ASC Topic 606, identifying performance obligations and allocating transaction price[287] - Indemnity liability reflects management's estimate of probable credit losses under agreements, sensitive to risk ratings and economic assumptions[292] - A $13.21 million non-cash goodwill impairment charge and a $3.68 million finite-lived intangible asset impairment charge were recognized for the nine months ended September 30, 2023, due to declining operating margins and the termination of a key agreement[312][317] Emerging Growth Company Status SHF is an emerging growth company, electing to delay new accounting standard adoption, which may affect comparability of financial statements - SHF is an emerging growth company (EGC) and has elected to use the extended transition period for complying with new or revised financial accounting standards[319] - This election means the Company's financial statements may not be comparable to companies that do not elect JOBS Act relief or choose to early adopt different accounting pronouncements[319] Internal Control Over Financial Reporting Management identified material weaknesses in revenue recognition, complex financial instruments, and credit losses, but is implementing controls to address them - As of September 30, 2023, the Company identified three material weaknesses in internal control over financial reporting: Revenue Recognition, Complex Financial Instruments, and Credit Losses[320][338][340][342] - Material weaknesses related to Going Concern and Deferred Tax Asset have been remediated as of March 31, 2023, and June 30, 2023, respectively[335][337] - The Company is implementing enhanced management review controls to address the outstanding material weaknesses[339][341][343] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, SHF Holdings, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - SHF Holdings, Inc. is a smaller reporting company and is exempt from providing quantitative and qualitative disclosures about market risk[329] Item 4. Controls and Procedures Disclosure controls were ineffective due to material weaknesses in revenue recognition, complex financial instruments, and credit losses, despite remediation of prior issues - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2023[331][334] - Material weaknesses identified relate to Revenue Recognition, Complex Financial Instruments, and Credit Losses[338][340][342] - Prior material weaknesses regarding Going Concern and Deferred Tax Asset have been remediated[335][337] - Management believes the financial statements are fairly presented despite the identified material weaknesses, due to additional analysis performed[331] PART II - OTHER INFORMATION This section covers other required information including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings The Company reports no material legal proceedings as of the filing date - No material legal proceedings are reported[346] Item 1A. Risk Factors The Company received a Nasdaq non-compliance notice for minimum bid price and is considering options, including a reverse stock split, to regain compliance - The Company received a Nasdaq notice for not maintaining a minimum closing bid price of $1 per share[347] - An additional 180-day period, until March 11, 2024, has been granted to regain compliance[348][349] - The Company is considering options, including a reverse stock split, to regain compliance[350] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of public offering proceeds are reported, beyond prior disclosures - No unregistered sales of equity securities or use of proceeds from public offerings are reported, other than prior disclosures[352] Item 3. Defaults Upon Senior Securities The Company reports no defaults upon senior securities - No defaults upon senior securities are reported[354] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the Company's operations - Mine Safety Disclosures are not applicable[355] Item 5. Other Information No other information is applicable to report in this section - No other information is applicable[355] Item 6. Exhibits This section lists all exhibits filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q - The exhibits include Unit Purchase Agreements, Certificate of Incorporation, Registration Rights Agreement, Forbearance Agreement, and various certifications[358]