SHF Holdings, Inc. 10-Q

Item 4. Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023 due to the material weaknesses described below. In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the periods presented. Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the below-mentioned material weaknesses, the Company’s disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective as of September 30, 2023. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Prior to September 30, 2023, the Company has the following material weakness outstanding which we consider remediated as of and during the nine-month ended September 30, 2023: Going Concern: As of September 30, 2022, the Company had failed to document an analysis to identify the substantial doubt about the ability to continue as a going concern; evaluate whether the substantial doubt was alleviated by management’s plans; and disclose the going concern in the September 30, 2022 10-Q. To remediate this material weakness, the Company implemented a quarterly process with enhanced management review controls to perform and review a going concern analysis and the adequacy of disclosures within the consolidated financial statements, as applicable based on the results. The Company proceeded to collectively perform these tasks during the fourth quarter of 2022 and first quarter of 2023 by continuing to retain a CPA firm (onboarded during the latter part of the third quarter of 2022) to assist with the preparation of the analysis pursuant to the Company’s ability to continue as a going concern and prepare applicable disclosures. The analysis and disclosures are then assessed by senior management of the Company performing review of the documentation and disclosures. As such, the Company has remediated this material weakness as of March 31, 2023. Deferred Tax Asset: The Company failed to update the deferred tax calculation as of September 30, 2022 using actual amounts from the business combination due to ineffective management review controls over the income tax provision. To remediate this material weakness, the Company implemented a quarterly control to calculate and review the Deferred Tax Asset, evaluate the necessity for any valuation allowance, and reconcile it to the general ledger. The Company proceeded to collectively perform these tasks during the fourth quarter of 2022 and first quarter of 2023 by retaining a CPA firm in the United States to assist in the preparation of the tax provision and tax compliance work along with management’s independent review of the quarterly income tax provision and valuation of the Deferred Tax Asset. The analysis and disclosures are then assessed by senior management of the Company performing a review of the documentation and disclosures. As such, the Company has remediated this material weakness as of June 30, 2023. 63 We consider the following material weaknesses to be outstanding as of September 30, 2023: Revenue Recognition : During fiscal year 2022, the Company’s revenue was primarily earned through certain related party contracts with PCCU that define contractually the revenue earned by the Company from PCCU for account servicing. The Company has identified a material weakness in our internal control over financial reporting related to the need to enhance the design and operating effectiveness of internal controls over the review of revenue recognition from allocations that occurs on a monthly basis between the Company and PCCU. To remediate this material weakness, the Company has implemented a monthly process with enhanced management review controls to perform and review revenue recognition. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures. Complex Financial Instruments: During fiscal year 2022 and the nine months ending September 30, 2023, the Company had a material weakness with regard to the ineffectiveness in management review controls of the accounting and valuation of complex financial instruments (warrants, forward purchase agreement, and stock-based compensation). To remediate this material weakness, the Company has implemented a quarterly process with enhanced management review controls to perform and review complex financial instruments. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures. Credit Losses: During the three months ending March 31, 2023, the Company identified a material weakness with regard to the initial implementation of CECL. This included initially not having supporting documentation of the model aligning to the calculations recorded, and incorrectly applying the modified retrospective adoption through the Condensed Unaudited Consolidated Statements of Operations only, as opposed to the Condensed Unaudited Consolidated Statements of Parent-Entity Net Investment and Stockholders’ Equity on January 1, 2023. To remediate this material weakness, the Company enhanced the allowance model documentation during the period from June 30, 2023, through September 30, 2023, and has implemented a quarterly process with enhanced management review controls to perform and review CECL. The analysis and disclosures are assessed by senior management of the Company performing review of the documentation and disclosures. Changes in Internal Control over Financial Reporting Other than as noted above in the September 30, 2023 material weaknesses, there was no change in our internal control over financial reporting that occurred during the nine month ended September 30, 2023 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, with the exception of the following: The Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation of the material weaknesses and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we have expanded and will continue to improve these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards. 64 PART II - OTHER INFORMATION Item 1. Legal Proceedings None.