What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-04-14 · 559 added, 530 removed, 208 unchanged (84% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

in this section to “we,” “us,” or “our” refer to SHF Holdings, Inc (herein referred to as the “Company”).

in this section to “we,” “us,” “our,” “SHF” or the “Company” refer to SHF

Holdings, Inc.

References to “management” refer to our officers and board of managers.

The following discussion and analysis of our financial

performance and results of operations should be read in conjunction with our condensed consolidated financial statements.

Looking Statements

statements other than statements of historical facts contained in this report, including statements regarding future operations, are

forward-looking statements.

In some cases, forward-looking statements may be identified by words such as “believe,” “may,”

“will,” “estimate,” “continue,” “anticipate,” “intend,” “could,”

“would,” “expect,” “objective,” “plan,” “potential,” “seek,”

“grow,” “target,” “if,” and similar expressions intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that

we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations,

objectives, and financial needs.

in 2015 by PCCU (please see “Business Reorganization” below for a description of the Company’s organization), the Company’s

mission is to provide access to reliable and compliant financial services for the legal cannabis industry.

Through that mission and as

an early leader with over seven years of experience, the Company is a leading provider of access to reliable and compliance driven banking,

lending and other financial services to financial institutions desiring to provide those services to the cannabis industry.

our proprietary platform and on a multi-state level, the Company provides access to the following banking related services through PCCU

and other financial institutions:

Business checking and savings accounts

Cash management accounts

Savings and investment options

Commercial lending

Courier services (via third party relationships)

Remote deposit services

Automated Clearing House (ACH) payments and origination

Wire payments

The following discussion and analysis

of our financial performance and results of operations should be read in conjunction with our consolidated financial statements and the

notes to those financial statements included elsewhere in this Form 10-K This discussion contains forward-looking statements based upon

current expectations that involve risks and uncertainties.

See “Cautionary Note Regarding Forward-Looking Statements.” Our

actual results may differ materially from those contained in or implied by any forward-looking statements.

in 2015 by Partner Colorado Credit Union (“PCCU”) (please see “Business Reorganization” below for a description

of SHF’s organization), SHF’s mission is to provide access to reliable and compliant financial services for the legal cannabis

Through that mission and as an early leader with over nine years of experience, SHF is a leading provider of access to reliable

and compliance driven banking, lending and other financial services to financial institutions desiring to provide those services to the

cannabis industry.

our proprietary platform and on a multi-state level, SHF provides access to the following banking related services through PCCU and other

financial institutions:

checking and savings accounts;

management accounts;

and investment options;

services (via third-party relationships);

deposit services;

Clearing House (ACH) payments and origination;

services allow Cannabis Related Businesses (herein referred to as “CRBs”) to obtain services from financial institutions

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the deposit accounts are held.

Because the Company is not a financial institution, the Company does not hold customer deposits.

accounts are held by the Company’s financial institution clients and all transmissions of funds to and from deposit accounts are

handled directly by the financial institutions.

In an industry with limited capital and financing options, we offer access to loan options

at what we believe to be competitive rates often with less punitive terms than the current industry average.

Because the Company is not a financial institution, it does not hold customer deposits.

All deposit accounts

are held by the Company’s financial institution clients and all transmissions of funds to and from deposit accounts are handled

directly by the financial institutions.

In an industry with limited capital and financing options, we offer access to loan options at

what we believe to be competitive rates, often with less punitive terms than the current industry average.

Our financial institution

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laundering provisions.

Since inception, the Company has assisted PCCU in processing more than $12 billion in cannabis related funds and,

through its relationship with PCCU and other financial institutions, the Company has successfully navigated 16 state and federal banking

strategically selected geographic areas, the Company licenses to other financial institutions its proprietary software and Safe Harbor

Program (the “Program”) to provide compliance-related services to CRBs.

As part of the Program, we provide the following

to financial institutions interested in licensing the Program to assist in compliant cannabis banking:

Initial customer due diligence – Know Your Customer

Customer application management

Program management support

Compliance monitoring

Regulatory exam assistance

Since inception, the Company has assisted in the processing of more than $22 billion in cannabis related funds.

Through its relationship with its financial institution clients, the Company has successfully navigated 16 state and federal banking

strategically selected geographic areas, the Company has licensed its proprietary software and Safe Harbor Program (the “Program”)

to other financial institutions to provide compliance-related services to CRBs.

As part of the Program, we provide the following to financial

institutions interested in licensing the Program to assist in compliant cannabis banking:

customer due diligence – Know Your Customer;

application management;

management support;

exam assistance.

Reorganization

February 11, 2022, SHF, LLC and SHF Holding Co., LLC, the sole member of SHF, LLC, and Partner Colorado Credit Union (“PCCU”),

the sole member of SHF Holding, Co., LLC, entered into a definitive purchase agreement (herein referred to as the “Business Combination”)

with Northern Lights Acquisition Corp.

(“NLIT”), a special purpose acquisition company, and its sponsor, 5AK, LLC.

to the completion of the transaction, NLIT changed its name to “SHF Holdings, Inc.” (herein referred to as the “Company”).

Board of Directors approved the contribution of certain assets and operating activities associated with operations from both the Branches

and Safe Harbor Services (“SHS”) a wholly-owned subsidiary of PCCU, to SHF Holding, Co., LLC.

Holding, Co., LLC then contributed the same assets and related operations to SHF, LLC with PCCU’s investment in SHF, LLC maintained

at the SHF Holding, Co., LLC level (the “reorganization”).

was formed by PCCU following the approval of the contribution of certain assets and operating activities associated with operations from

both certain branches and Safe Harbor Services, a wholly-owned subsidiary of PCCU, to SHF Holding, Co., LLC.

SHF Holding, Co., LLC then

contributed the same assets and related operations to SHF, with PCCU’s investment in SHF maintained at the SHF Holding, Co., LLC

The reorganization effectively occurred July 1, 2021.

In conjunction

with the reorganization, all of Branches’ employees and certain PCCU employees were terminated from PCCU and hired as SHF, LLC

Collectively, oldco, the Branches and SHF, LLC represent the “Carved-Out Operations.” After the reorganization,

SHF, LLC contains the entirety of the Carved-Out Operations and oldco was dissolved.

In addition, effective July 1, 2021, the entity

entered into an Account Servicing Agreement and Support Servicing Agreement which were subsequently amended and restated.

to the Unit Purchase Agreement, upon the closing of the transaction, NLIT purchased all of the issued and outstanding membership

interests of SHF in exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares of the entity’s Class A

common stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash.

At transaction close, 1,831,683 shares of

the Class A Common Stock were deposited with an escrow agent to be held in escrow for a period of 12 months following the closing

date to satisfy potential indemnification claims of the parties.

In addition, $3,143,388 in cash and cash equivalents representing

the amount of cash on hand at July 31, 2021, less accrued but unpaid liabilities, were paid to PCCU at the final transaction close.

On September 19, 2022, the parties entered into the first amendment to the purchase agreement to extend the date by which the

closing had to occur from August 31, 2022 until September 28, 2022 and provide for the deferral of $30 million of the $70 million in

cash due at the closing.

On September 22, 2022, the parties entered into the second amendment to the purchase agreement to provide

for the deferral of a total of $50 million of the $70 million due at the closing.

On September 28, 2022, the parties entered into

the third amendment to the purchase agreement to provide for the deferral of a total of $56,949,800 of the $70,000,000 due at the

February 11, 2022, the Company entered into a Loan Servicing Agreement with PCCU.

The agreement sets forth the application, underwriting

and approval process for loans from PCCU to CRB customers and the loan servicing and monitoring responsibilities provided by both PCCU

and the Company.

For the loans subject to this agreement, the Company underwrites the loans and performs all compliance analysis, credit

analysis of the potential borrower, due diligence and underwriting and all administration, including hiring and incurring the costs of

all related personnel or third-party vendors necessary to perform these services.

PCCU receives a monthly servicing fee at an annual

rate of 0.25% of the then-outstanding principal balance of each loan funded by PCCU.

Under the Loan Servicing Agreement, the Company

has agreed to indemnify PCCU from all claims related to default-related loan losses as defined in the Loan Servicing Agreement.

The agreement

is for an initial term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of

non-renewal or there is a termination for cause, provided that PCCU may not provide notice of non-renewal until 30 months following the

signing date.

Pursuant to this agreement, the Company reported expenses of $775,259 for the year ended December 31, 2022 and $190,908

for the year ended December 31, 2021.

On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the

lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Loan Servicing

Agreement, as well as the Amended and Restated Support Services Agreement and the Amended and Restated Account Servicing Agreement.

In conjunction with the reorganization, all of the employees engaged in

the operations and certain PCCU employees were terminated from PCCU and hired as SHF employees.

The relevant operations of the PCCU branches,

and SHF, represent the “Carved-Out Operations.” After the reorganization, the entirety of the Carved-Out Operations were

owned by SHF and the Pre-Public Company was dissolved.

In addition, effective July 1, 2021, SHF entered into an Account Servicing Agreement

and Support Services Agreement with PCCU, which memorialized the operational relationship between SHF and PCCU and which were subsequently

amended and restated and are discussed in Note 10 to the Consolidated Financial Statements included elsewhere in this Form 10-K.

February 11, 2022, SHF and SHF Holding Co., LLC, the sole member of SHF, and PCCU, the sole member of SHF Holding, Co., LLC, entered

into a definitive Unit Purchase Agreement (herein referred to as the “Business Combination”) with Northern Lights Acquisition

(“NLIT”), a special purpose acquisition company, and its sponsor, 5AK, LLC.

Subsequent to the completion of the transaction,

NLIT changed its name to “SHF Holdings, Inc.” (herein referred to as the “Company”).

On September 19, 2022, the

parties entered into the First Amendment to the Unit Purchase Agreement to extend the date by which the closing had to occur from August

31, 2022 until September 28, 2022 and provide for the deferral of $30 million of the $70 million in cash due at the closing.

22, 2022, the parties entered into the second amendment to the Unit Purchase Agreement to provide for the deferral of a total of $50

million of the $70 million due at the closing.

On September 28, 2022, the parties entered into the third amendment to the Unit Purchase

Agreement to provide for the deferral of a total of $56,949,800 of the $70,000,000 due at the closing.

to the Unit Purchase Agreement, upon the closing of the transaction, NLIT purchased all of the issued and outstanding membership interests

of SHF in exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares of the entity’s Class A common stock with

an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash.

At transaction close, 1,831,683 shares of the Class A Common Stock

were deposited with an escrow agent to be held in escrow for a period of 12 months following the closing date to satisfy potential indemnification

claims of the parties.

In addition, $3,143,388 in cash and cash equivalents representing the amount of cash on hand at July 31, 2021,

less accrued but unpaid liabilities, were paid to PCCU at the final transaction close.

Company’s lending services program currently depends on PCCU as its largest funding source for new loans to CRBs.

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to the greater of $100,000 or 15% of PCCU’s net worth.

September 28, 2022, the parties consummated the Business Combination, resulting in NLIT, consistent with the aforementioned

parameters, purchasing all of the issued and outstanding membership interests of SHF in exchange for an aggregate of $185,000,000,

consisting of (i) 11,386,139 shares of the Company’s Class A Common Stock with an aggregate value equal to $115,000,000 and

(ii) $70,000,000 in cash, $56,949,801 of which will be paid on a deferred basis.

to the completion of the business combination, the status of PCCU has changed from Parent to majority shareholder of the Company pursuant

to its ownership of 60.8% of the Company.

Company generates both interest income and fee income through providing a variety of services to financial institutions desiring to service

the cannabis industry including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding

to account inquiries, responding to customer service inquiries relating to CRB depository accounts held at PCCU, and sourcing and managing

In addition to PCCU, the Company provides these similar services and outsourced support to other financial institutions providing

banking to the cannabis industry.

These services are provided to other financial institutions under the Safe Harbor Master Program Agreement.

to the Unit Purchase Agreement, the Company entered into the Amended and Restated Support Services Agreement and the Amended and

Restated Account Servicing Agreement under similar terms as the July 2021 agreements.

In addition, in

conjunction with the Unit Purchase Agreement, the Company and PCCU entered into a Loan Servicing Agreement.

On March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement that sets forth the terms and conditions of the

lending-related and account-related services governing the relationship between the Company and PCCU and supersedes the Amended and Restated

Support Services Agreement, the Amended and Restated Account Servicing Agreement, and the Loan Servicing Agreement.

September 28, 2022, the parties consummated the Business Combination, resulting in NLIT, consistent with the aforementioned parameters,

purchasing all of the issued and outstanding membership interests of SHF in exchange for an aggregate of $185,000,000, consisting of

(i) 11,386,139 shares of the Company’s Class A Common Stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000

in cash, $56,949,801 of which will be paid on a deferred basis.

purpose of the $56,949,800 deferral is to provide the Company with additional cash to support its post-closing activities.

the third amendment to the Unit Purchase Agreement, the deferred consideration shall be paid in one payment of $21,949,801 on or before

the third amendment to the Unit Purchase Agreement, the deferred consideration was to paid in one payment of $21,949,801 on or before

December 15, 2022, and the $35,000,000 balance in six equal installments of $6,416,667, payable beginning on the first business day following

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Definitive Unit Purchase Agreement, and the reimbursement of certain reimbursable expenses under the Definitive Unit Purchase Agreement.

to the Unit Purchase Agreement, the Company entered into the Amended and Restated Support Services Agreement and the Amended and Restated

Account Servicing Agreement under similar terms as the July 2021 agreements.

In addition, in conjunction with the Unit Purchase Agreement,

the Company and PCCU entered into a Loan Servicing Agreement.

On March 29, 2023, the Company and PCCU entered into the Commercial Alliance

Agreement that sets forth the terms and conditions of the lending-related and account-related services governing the relationship between

the Company and PCCU and supersedes the Amended and Restated Support Services Agreement, the Amended and Restated Account Servicing Agreement,

and the Loan Servicing Agreement.

October 26, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital

As per the terms of the agreement, PCCU has agreed to defer all payments owed pursuant to the Unit Purchase

Agreement for a period of six (6) months from the date hereof while the Parties engage in good faith efforts to renegotiate the payment

terms applicable to the Deferred Obligation (the “Forbearance Period”).

March 29, 2023, the Company and PCCU entered into a definitive transaction (Refer to Note 22, “Subsequent Events,” of the

consolidated financial statements) to settle and restructure the deferred obligations, including $56,949,800 into a five-year Senior

Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25%;

Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all

of the assets of the Company;

and a Securities Issuance Agreement, pursuant to which the Company will issue 11,200,000 shares of the

Company’s Class A Common Stock to PCCU.

(“Luminous”).

As per the terms of the agreement, PCCU has agreed to defer all payments owed pursuant to the Unit

Purchase Agreement for a period of six (6) months from the date hereof while the Parties engage in good faith efforts to renegotiate

the payment terms applicable to the Deferred Obligation (the “Forbearance Period”).

March 29, 2023, the Company and PCCU entered into a definitive transaction to settle and restructure the deferred obligations, including

$56,949,800 into a five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest

at the rate of 4.25%;

a Security Agreement pursuant to which the Company has granted, as collateral for the Note, a first priority security

interest in substantially all of the assets of the Company;

and a Securities Issuance Agreement, pursuant to which the Company has issued

11,200,000 shares of the Company’s Class A Common Stock to PCCU.

Agreement and Public Company Costs

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in accordance with GAAP.

Under this method of

accounting, NLIT was treated as the acquired company for financial reporting purposes.

Accordingly, for accounting purposes, the Business

Combination is treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a recapitalization.

assets of NLIT are recognized at fair value (which is expected to be consistent with carrying value), with no goodwill or other intangible

assets recorded.

Under this method of accounting, NLIT was treated as the acquired company for financial reporting purposes.

Accordingly, for accounting purposes, the Business Combination is treated as the equivalent of SHF issuing shares for the net assets

of NLIT, accompanied by a recapitalization.

The net assets of NLIT are recognized at fair value (which is expected to be consistent with

carrying value), with no goodwill or other intangible assets recorded.

related events in connection with the Business Combination are summarized below:

2,875,000 of Class B Common Stock converted at the closing to an equal number of shares

of Class A Common Stock.

closing of the Business Combination, 11,386,139 shares of Class A Common Stock were issued to PCCU as set forth in and pursuant to

the terms of the Unit Purchase Agreement.

2,875,000 of Class B Common Stock converted at the closing to an equal number of shares of

Class A Common stock.

closing of the Business Combination, 11,386,139 shares of Class A Common Stock were issued

to PCCU as set forth in and pursuant to the terms of the Purchase Agreement.

was due to receive a cash payment of $3.1 million at the consummation of the Business Combination, which represented the amount of SHF’s

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Approximately $21.9 million of the amount was due to PCCU beginning December

The residual $35.0 million is due in six quarterly installments of $6.4 million

The residual $35 million is due in six quarterly installments of $6.4 million thereafter.

Interest accrues at an effective annual rate of approximately 4.71%.

1,200,000 shares of Class A Common Stock were escrowed until the amount is paid in full.

A sum of 1,200,000 shares

of Class A Common Stock were escrowed until the amount is paid in full.

Parent-Entity Net Investment appearing in the balance sheet of the Company amounting to $9,124,297

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The shares of Series A Convertible Preferred were converted into 2,045,000

shares of Class A Common Stock at a purchase price of $10.00 per share of Class A Common Stock.

(20) percent of the aggregate value was deposited into a third party escrow account for purposes

of paying the PIPE Investors any required Registration Delay Payments.

Upon the filing of

the registration statement 10 calendar days subsequent to closing, 17.5% of the escrow amount

was released with the remaining amount once all securities were included in an effective

registration statement.

shares of Class A Common Stock at a purchase price of $10.00 per share of Class A Common

Twenty (20) percent of the aggregate value was deposited into a third party escrow

account for purposes of paying the PIPE Investors any required Registration Delay Payments.

Upon the filing of the registration statement 10 calendar days subsequent to closing, 17.5%

of the escrow amount was released with the remaining amount once all securities were included

in an effective registration statement.

tax purposes, the transaction is treated as a taxable asset acquisition, resulting in an

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As of December 31, 2023, there were

14,616 preferred shares issued or outstanding and no preferred shares outstanding on December

1101 preferred shares issued or outstanding and 14,616 preferred shares issued or outstanding

on December 31, 2022.

A Common Stock:

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As of December 31, 2023, and December 31,

there were 20,815,912 and 3,393,175 shares, respectively, of Class A Common Stock issued or outstanding.

As of December 31, 2022, 3,669,504 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, there were 54,563,371 and 20,815,912 shares, respectively, of Class A Common Stock

issued or outstanding.

As of December 31, 2023, and December 31, 2022, 3,667,377 Class A

Common Stock are held by the purchasers under the Forward Purchase Agreement dated June 16,

2022, by and among the Company and such purchasers.

● Parent-Entity

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in the same manner as our management.

and Adjusted EBITDA have limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis

and Adjusted EBITDA have limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis

of our results as reported under GAAP.

Some of these limitations are as follows:

although depreciation and

amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and both EBITDA

and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

EBITDA and Adjusted EBITDA

do not reflect changes in, or cash requirements for, our working capital needs;

EBITDA and Adjusted EBITDA

do not reflect tax payments that may represent a reduction in cash available to us.

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in

the future, and both EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for

new capital expenditure requirements;

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

EBITDA and Adjusted EBITDA do not reflect tax payments that may represent a reduction in cash available to us.

of these limitations, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including net loss

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Year Ended December 31,

Net (loss)/ income

$ (17,279,847 )

$ (35,128,083 )

Interest expense

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(16,622,375 )

(43,486,497 )

Other adjustments –

Loan loss provision

Provision for credit losses

Change in the fair value of warrants and forward purchase derivatives

Deferred loan origination fees and costs

Stock option conversion

Change in fair value of Forward Purchase Agreement

Change in the fair value of deferred consideration

Deferred loan origination fees and costs

Stock based compensation

Goodwill and long-lived intangible assets impairment

Adjusted EBITDA

decrease in our income on an EBITDA and Adjusted EBITDA basis for the year ended December 31, 2022, is due to substantial drop in

the value of forward purchase agreement, increase in professional fees pursuant to business combination activity as well as

increases in compensation, employee benefits, marketing, insurance, and additional items, as discussed under “ Discussion of

our Results of Operations ” below.

Other adjustments include estimated future loan losses not yet realized including

amounts indemnified to PCCU for loans funded by them.

Effective February 2022, the Company entered into a Loan Servicing Agreement

with PCCU, pursuant to which the Company agreed to indemnify PCCU for claims associated with CRB activities including any loan

default related losses for loans funded by PCCU;

the Loan Servicing Agreement has since been superseded by the Commercial Alliance

(Refer to Note 22, “Subsequent Events,” of the consolidated financial statements.) Deferred loan origination

fees and costs represent the change in net deferred loan origination fees and costs.

When included with a new loan origination, we

receive an upfront loan origination fee in conjunction with new loans funded by our financial institution partners and incur costs

associated with originating a specific loan.

For accounting purposes, the cash received for loan origination fees and costs is

initially deferred and recognized as interest income utilizing the interest method.

increase in our income on both an EBITDA and Adjusted EBITDA basis for the fiscal year ending December 31, 2023, can be attributed to

several key factors.

These include a rise in deposits and activity income, which was significantly influenced by the growth in account

numbers following the Abaca acquisition.

Additionally, there was an increase in employee benefits and general and administrative expenses,

coupled with a decrease in professional expenses, as detailed in the ‘Discussion of our Results of Operations’ section below.

Other adjustments include estimated future credit losses not yet realized, including amounts indemnified to PCCU for loans funded by

them, change in the fair value of warrants and forward purchase derivates, Change in fair value of Forward Purchase Agreement, Stock

based compensation and Goodwill and long-lived intangible assets impairment.

The Company had entered into a Loan Servicing Agreement

with PCCU, pursuant to which the Company agreed to indemnify PCCU for claims associated with CRB activities including any loan default

related losses for loans funded by PCCU;

the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement.

Deferred loan origination fees and costs represent the change in net deferred loan origination fees and costs.

When included with a new

loan origination, we receive an upfront loan origination fee in conjunction with new loans funded by our financial institution partners

and incur costs associated with originating a specific loan.

For accounting purposes, the cash received for loan origination fees and

costs is initially deferred and recognized as interest income utilizing the interest method.

our business operations, we monitor the following key metrics.

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Average fees per account

Represents the average of monthly

ending account balances

Reported account activity fee revenue

Represents the average of monthly ending active accounts

Refer to the below section – Discussion of

Results of our Operations for additional discussion of trends.

the average number of accounts increased for the year ended December 31, 2022 as compared to the year ended December 31, 2021, the average

account size and account fees decreased as we experienced some churn of larger clients replaced by smaller business.

We expect this trend

to shift as we lead with our lending program typically requiring borrowers to place deposits with financial institutions with which we

have relationships.

Company’s lending operations are considered early stage, as it began its focused efforts on expanding its lending in 2021.

focused on enhancing and growing our lending platform.

the average of monthly ending account balances

account activity fee revenue

the average of monthly ending active accounts

to the below section – Discussion of Results of our Operations for additional discussion of trends.

the year ending December 31, 2023, there was a decline in the average number of accounts compared to the previous year, primarily due

to a decrease in clientele following the termination of an agreement with the Central Bank.

Despite this, the average size and fees associated

with accounts saw an increase, largely attributed to the acquisition of Abaca.

We anticipate this pattern to persist as our lending program,

which generally necessitates borrowers to make deposits at our affiliated financial institutions, remains a key focus.

are focused on enhancing and growing our lending platform.

Incremental lending key metrics will be monitored as this portion of our business

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of our Results of Operations

Company generates interest and fee income through providing a variety of services to PCCU to facilitate its banking services to CRBs

including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding to account inquiries,

responding to customer service inquiries relating to CRB deposit accounts held at financial institution clients, and sourcing and originating

In addition, the Company provides these similar services and outsourced support to other financial institutions providing banking

to the cannabis industry.

Company generates interest and fee income through providing a variety of services to PCCU and other financial institutions to facilitate

its banking services to CRBs including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding,

responding to account inquiries, responding to customer service inquiries relating to CRB deposit accounts held at financial institution

clients, and sourcing and originating loans.

In addition, the Company provides these similar services and outsourced support to other

financial institutions providing banking to the cannabis industry.

These services are provided under the Safe Harbor Master Program Agreement.

expenses consist of compensation and benefits, professional services, rent expense, PCCU allocations, provisions for loan losses and

other general and administrative expenses.

expenses consist of compensation and benefits, professional services, rent expense, parent allocations, provisions for credit losses

and other general and administrative expenses.

and benefits consist of employee wages and associated benefits while professional services consist of legal, general consulting and accounting

allocations include corporate allocations such as information technology, customer support, marketing, executive compensation and other

general and administrative expenses attributed to the Carved-Out Operations based on the size of the specifically identifiable CRB’s

deposit balances, deposit activity and accounts relative to the totals of consolidated PCCU.

These allocations were discontinued effective

July 1, 2021 in conjunction with the reorganization.

Company reports a provision for loan losses both as it relates to loans funded internally and those carried by PCCU or other financial

Company reports a provision for credit losses both as it relates to loans funded internally and those carried by PCCU or other financial

institutions.

The Company indemnifies PCCU for losses on loans to borrowers sourced by the Company and funded by PCCU.

The Company anticipates

comparable arrangements with other financial institutions that fund loans to borrowers sourced by the Company.

The Company indemnifies PCCU and other financial institutions for the losses on loans to borrowers sourced by the Company

and funded by PCCU and other financial institutions.

The Company anticipates comparable arrangements with other financial institutions

that fund loans to borrowers sourced by the Company.

general and administrative expenses consist of various miscellaneous items including account hosting fees, insurance expense, advertising

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Loan interest income

Miscellaneous fee income

Total Revenue

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During 2023, we reduced our fee percentage for cannabis specific accounts in order to ensure

we were competitive with the market and for many accounts implemented a flat fee structure for certain CRB accounts based on historical

and anticipated deposit levels.

In addition, we receive a flat fee and lower rates for ancillary accounts, which are accounts provided

to businesses servicing the cannabis industry in general but do not manufacture, possess, distribute or transport cannabis.

of ancillary accounts to cannabis specific accounts increased during 2022.

we were competitive with the market and for many accounts implemented a flat fee structure for certain CRB accounts based on client specific

activity levels.

In addition, we receive a flat fee and lower rates for ancillary accounts, which are accounts provided to businesses

servicing the cannabis industry in general but do not manufacture, possess, distribute or transport cannabis.

The increase in deposit,

activity and onboarding income was primarily attributable to the increase in the number of accounts related to the Abaca acquisition.

In 2023, PCCU accounted for $5,150,397 of the revenue generated from deposits, activities, and client onboarding.

Related to this revenue,

the Company recognized $529,209 in account hosting expenses, in accordance with the Loan Servicing Agreement and the Commercial Alliance

In 2022, PCCU contributed $5,554,922 to the revenue from similar sources, with account hosting expenses amounting to $255,853

as per the Loan Servicing Agreement provisions.

These expenses were categorized under “General and administrative expenses”

in the Consolidated Statements of Operations.

Company provides similar account services and outsourced support to other financial institutions providing banking to the cannabis industry.

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and states we allow under this program and instead focus on servicing CRBs directly.

have an investment servicing agreement with PCCU (related party) where our financial institution clients invest their customer

deposits into short term US treasury instruments.

The investment income in our income statement reflects our share of that

investment income.

Investment income earned on deposits with the Federal Reserve Bank increased as a result of recent interest rate

had a Loan Servicing Agreement with PCCU (related party) where our financial institution carries the loan balances on their

financial statement;

The reduction in Safe Harbor Program income is a

result of the reduction in the number of accounts.

have agreements with PCCU (related party) and Five Star Bank (FSB) where our financial institution clients pay us interest on the daily

account balance as per the rates in the agreements.

In fiscal 2022 and up to the third quarter of 2023, our investment earnings were

solely from interest on deposits at the Federal Reserve Bank, capped at the earnings accrued by PCCU from its reserves.

However, a strategic

shift in the fourth quarter of 2023 led us to adopt Federal Reserve’s interest rates applied to the daily average balance of SHF

customer deposits, with certain exclusions.

This method, applied retroactively from the beginning of 2023, resulted in incremental revenue

of $549,000 recognized in the fourth quarter.

Under our Commercial Alliance Agreement, we pay 25% of the investment income as a hosting fee to PCCU based

on this income.

In 2023, the income derived from investment income associated with PCCU totaled $5,803,114.

In relation to this income,

the Company incurred $1,445,517 in investment hosting fees, consistent with the stipulations of the Loan Servicing Agreement and the Commercial

Alliance Agreement.

In 2022, PCCU’s contribution to investment income amounted to $2,110,572, against which the Company recorded

investment hosting fees of $519,406, as governed by the terms of the Loan Servicing Agreement.

These expenses were categorized under “General

and administrative expenses” in the Consolidated Statements of Operations.

had a Loan Servicing Agreement with PCCU (related party) where our financial institution carries the loan balances on their financial

the Loan Servicing Agreement has since been superseded by the Commercial Alliance Agreement.

(Refer to Note 22,

“Subsequent Events,” of the consolidated financial statements.) The loan interest income reflects our share of loan

interest on issued credit.

Loan interest earned on the Company’s direct loans and the indemnified loans increased as the

Company increases its focus on lending.

For the year ended December 31, 2022, SHF serviced 11 loans in the year ended December 31,

2022, as compared to 4 loans in the year ended December 31, 2021.

discussed in the reverse recapitalization section above, PCCU allocations were discontinued effective July 1, 2022, and SHF entered

into both an account servicing agreement and support service agreement.

There is no impact on revenue as a result of implementing these

The loan interest income reflects

our share of loan interest on issued loans.

We are obligated to pay 0.35% on the total outstanding principal of each loan that is funded

and serviced by PCCU.

Loan interest earned on the Company’s direct loans and the indemnified loans grew as the Company

increased its focus on lending.

For the year ended December 31, 2023, SHF serviced 22 loans, as compared to 11 loans in the year ended

December 31, 2022.

In 2023, the Company recognized $2,883,192 in loan interest income attributable to PCCU activities.

Related expenses

for this income included $81,577 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the Commercial Alliance

In the preceding year, 2022, loan interest income from PCCU operations amounted to $989,642, with associated loan servicing

fees totaling $26,088, pursuant to the same agreements.

These expenses were categorized under “General and administrative expenses”

in the Consolidated Statements of Operations.

Year Ended December 31,

Compensation and employee benefits

General and administrative expenses

Impairment of goodwill

Impairment of long-lived intangible assets

Professional services

Corporate allocations

Provision for loan losses

General and administrative expenses

Total Operating Expenses

and employee benefits increased on account of stock-based compensation and partially as a result of Sundie Seefried, our CEO, and

one of our Vice President’s resigning from PCCU effective July 1, 2021 and beginning employment at SHF the same date.

the July 1, 2021 reorganization a portion of their costs would have been included in the PCCU allocations.

Amounts also increased as

SHF increased head count in conjunction with anticipated growth.

services expense increased primarily due to the increase in the legal fees, audit fees, and consulting fees incurred in relation with

business combination transactions occurring during the year.

allocations decreased to zero as they were discontinued in conjunction with the reorganization discussed in the Business

Reorganization section above.

for loan losses has increased as SHF focuses on increasing lending activity.

The number of loans services by SHF has increased from 4

in 2021 to 11 in 2022.

and employee benefits expenses rose due to an increase in stock-based compensation and a higher headcount, in anticipation of business

and administrative expenses increased across various categories including:

i) approximately $584,351 in account and hosting fees as a

result of the reorganization, ii) approximately $306,387 in increased advertising and marketing as we focus on growth, iii) $26,088 in

loan servicing fees, and iv) $352,576 in business insurance.

i) $926,111 in investment hosting fees as a result of the

increase in investment income, ii) $715,771 in increased bank sharing fees due to the increase in the number of accounts related to the

Abaca acquisition, iii) $1,184,432 in amortization and depreciation, and iv) $343,187 in business insurance.

services expense reduced primarily due to the reduction in the legal fees and consulting fees associated with acquisition and SEC filing.

of goodwill and finite-lived intangible assets arose from the annual impairment assessment conducted on December 31, 2023, and an interim

impairment assessment on June 30, 2023, triggered by the termination of the Master Services and Revenue Sharing Agreement with the Central

Under this agreement, the Company offered expertise and intellectual property to cannabis-related businesses primarily in Arkansas.

for credit losses has decreased due to the adoption of ASU 2016-13 as of January 1, 2023, utilizing the modified retrospective method.

and cash equivalents

cash equivalents totaled $8,390,195 and $5,495,905 as of December 31, 2022, December 31, 2021, respectively.

the year ended December 31, 2022, the Company’s cash provided by operations was $ 1,697,380 , compared to cash provided by $2,946,383

cash equivalents totaled $4,888,769 and $8,390,195 as of December 31, 2023 and 2022, respectively.

the year ended December 31, 2023, the Company’s cash used in operations was $832,144 compared to cash provided by operations of

$1,697,380, for the year ended December 31, 2022.

This was mainly due to reduced net income from operations with an additional amount resulting from

changes across operating assets and liabilities.

See discussion under “ Discussion of our Results of Operations ” above

for more information.

This was mainly due to increase in the operating expenses and payments of the liabilities

pertaining to the reverse acquisition along with an additional amount resulting from changes in working capital.

See discussion under

“Discussion of our Results of Operations” above for more information.

assets and liabilities

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As of December 31, 2023, SHF reported a

contract asset and liability of $21,170 and $996 and on December 31, 2021, SHF reported a contract asset and liability of $18,317 and

$8,333, respectively.

contract asset and liability of $0 and $21,922 respectively and on December 31, 2022, SHF reported a contract asset and liability of

$21,170 and $996, respectively.

and going concern

of December 31, 2022, the Company had $8,390,195 in cash and net working capital of ($39,340,020), as compared to $5,495,905 in

cash and net working capital of $5,922,023 at December 31, 2021.

Included in the working capital deficit at December 31, 2022

is $25,973,017 current portion of the long-term payable owed to the seller, PCCU, from the aforementioned business combination, and $14,359,822

deferred consideration current portion related to the Abaca acquisition.

The Company has also incurred a significant cumulative consolidated

operating loss for the year ended December 31, 2022.

Liquidity refers to our capacity to fulfill anticipated cash demands, encompassing obligations to settle debt,

sustain assets and operations, distribute earnings to shareholders, and cover other typical business expenditures.

Our cash outflows predominantly

settle towards repaying debt principal and interest, distributing dividends to shareholders, and financing our operational activities.

The main contributors to our liquidity are the cash inflows from our operational performance.

As of the end of the fiscal year on December

31, 2023, the Company reports no significant commitments to capital investments.

of December 31, 2023, the Company had $4,888,769 cash and net working capital deficit of $135,355.

The Company has also incurred an operating

loss of $20,712,319 for the year ended December 31, 2023, and cash flows used in operating activities of $832,144.

upon these factors, management of the Company has determined that there is a risk of substantial doubt about the Company’s ability

to continue as a going concern for a period of at least twelve months from the date these consolidated financial statements have been

mitigated the going concern risk by renegotiating its aforementioned payable with PCCU (refer to the “Subsequent Events” disclosure

within Note 22 of the consolidated financial statements herein) , thus reducing the working capital deficit and certain other liabilities.

The Company also hired an experienced Chief Financial Officer in October 2022, who has immediately begun to institute certain cost-cutting

measures across the Company, including expense reduction measures and negotiating reduced amounts and extended terms for certain payables.

factors, however, do not fully remove substantial doubt regarding the Company’s ability to continue as a going concern

that has been identified.

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.

of these actions could materially harm the Company’s business, results of operations and future prospects.

The accompanying audited 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.

Accounting Policies and Estimates

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.

accompanying 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.

Accounting Estimates

consolidated financial statements and accompanying notes are prepared in accordance with GAAP.

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believe are reasonable, and we evaluate these estimates on an ongoing basis.

We refer to accounting estimates of this type as critical

accounting policies and estimates, which we discuss further below.

recognized revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods

or services to customers in an amount that reflects the consideration to which SHF expects to be entitled in exchange for those goods

ASC 606 defines a five-step process to achieve this core principle including identifying performance obligations in the

contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to

each separate performance obligation.

is recorded at a point in time when the performance obligation is satisfied, and no contingencies exist.

Revenue consists primarily of

fees earned on deposit accounts held at PCCU but serviced by SHF such as bank account charges, onboarding income, account activity fee

income and other miscellaneous fees.

addition, SHF recognizes revenue from the Master Program Agreement.

The Master Program Agreement is a non-exclusive and non-transferable

right to implement and utilize the Safe Harbor Program.

The Safe Harbor Program has two performance obligations;

an implementation fee

recognized when the contract is effective and a service fee recognized ratable over the contract term as the compliance program is executed.

SHF also records revenue for interest on loans and investment income allocated by PCCU based on specific customer balances.

received in advance of the service being provided is recorded as a liability under deferred revenue on the consolidated balance sheets.

Safe Harbor Program contracts are three-year contracts with amounts due monthly, quarterly or annually based on contract terms.

consist of financial institutions providing services to CRBs.

Revenues are concentrated in the United States.

for loan losses

allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and

decreased by charge-offs less recoveries.

Management estimates the required allowance for loan losses balance using past loan loss experience,

known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral

values, economic conditions, and other factors.

Allocations of the allowance for loan losses may be made for specific loans, but the

entire allowance is available for any loan that, in management’s judgment, should be charged-off.

Loan losses are charged against

the allowance for loan losses when management believes the uncollectibility of a loan balance is confirmed.

allowance for loan losses consists of specific and general components.

The specific component relates to loans that are individually

classified as impaired or loans otherwise classified as substandard or doubtful.

The general component covers non-classified loans and

is based on historical loss experience adjusted for current factors.

to the nature of uncertainties related to any estimation process, Management’s estimate of loan losses inherent in the loan portfolio

may change in the near term.

However, the amount of the change that is reasonably possible cannot be estimated.

loan is considered impaired when, based on current information and events, full payment under the loan terms is not expected.

is generally evaluated in total for smaller-balance loans of similar nature such as a commercial loan and commercial lines of credit,

but may be evaluated on an individual loan basis if deemed necessary.

If a loan is impaired, a portion of the allowance is allocated

so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the

fair value of collateral if repayment is expected solely from the collateral.

loans SHF intends to originate will be collateralized by various types of assets of the borrowers, including real property and certain

personal property, including value associated with other assets to the extent permitted by applicable laws and the regulations governing

the borrowers.

The documents governing the loans also include a variety of provisions intended to provide remedies against the value

associated with licenses.

Collection procedures are designed to ensure that neither SHF nor its financial institution clients who provide

funding for a loan, nor a third-party agent engaged to assist with the liquidation or foreclosure process, will take possession of cannabis

inventory, cannabis paraphernalia, or other cannabis-related assets, nor will they take title to real estate used in cannabis-related

Upon default of a loan, a third-party agent will be engaged to work with the borrower to have the borrower sell collateral

securing the loan to a third party or to institute a foreclosure proceeding to have such collateral sold to generate funds towards the

payoff of the loan.

Applicable regulations under state law that govern CRBs generally do not permit the taking of title to real estate

involved in commercial sales of cannabis, whether through foreclosure or otherwise, without prior regulatory approval.

The sale of a

license or other realization of the value of licenses also requires the approval of state and local regulatory authorities.

loan may also be sold if such a sale would yield higher proceeds or that a sale could be accomplished more quickly than a foreclosure

proceeding while yielding proceeds comparable to what would be expected from a foreclosure sale.

Such sale of the loan would be conducted

through a third-party administrative agent.

However, SHF can provide no assurances that a sale of such loans would be possible or that

the sales price of such loans would be sufficient to recover the outstanding principal balance, accrued interest, and fees.

indemnification component of the Loan Servicing Agreement is accounted for in accordance with ASC 450-20 Loss Contingencies.

In determining

the applicability of ASC 450-20, we considered that the agreement outlines a broad indemnification of all claims related to the cannabis-related

The most immediate and potentially significant of these are potential default-related loan losses.

In the lending industry,

it is inherently anticipated future loan losses will result from currently issued debt.

SHF’s indemnity obligation is subordinate

to PCCU’s and other financial institution clients’ other means of collecting on the loans including foreclosure of the collateral,

recourse against personal and/or corporate guarantors and other default remedies available in the loan agreements.

Since borrowers are

not party to the agreement between SHF and PCCU, any indemnity payments do not relieve borrowers of their obligation to PCCU nor would

such payments preclude PCCU’s right to future recoveries from the debtor.

Therefore, as defined in ASC 450-20, the indemnification

clause represents a general loss contingency in that it is an existing condition, situation or set of circumstances involving uncertainty

as to possible loss to the Company that will ultimately be resolved when one or more future events occur or fail to occur.

indemnity liability reflects SHF management’s estimate of probable loan losses inherent under the agreement at the balance sheet

Management uses a disciplined process and methodology to establish the liability, and the estimates are sensitive to risk ratings

assigned to individual loans covered by the agreement as well as economic assumptions driving the estimation model.

Individual loan risk

ratings are evaluated quarterly by SHF management based on each situation.

addition to default-related loan losses, SHF continuously monitors all other circumstances pursuant to the agreement and identifies events

that may necessitate a loss contingency under the Loan Servicing Agreement.

A loss contingency is reported when it is both probable that

a future event will confirm that a loss had been incurred on or before the related balance sheet date and the loss is reasonably estimable.

2022 Plan (“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, restricted

stock units, stock bonus awards, and performance compensation awards in years 2022 and 2021.

In conjunction with the 2022 Plan, as of

December 31, 2022, the Company had granted stock options which are described in more detail below.

options are awarded to encourage ownership of the Company’s 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 and vest over 3-4 years period from the grant date.

The Company measures

all equity-based payment arrangements to employees and directors in accordance with ASC 718, Compensation–Stock Compensation.

Company’s stock-based compensation cost is measured based on the fair value at the grant date of the stock-based award.

It is recognized

as expense on a straight-line basis over the requisite service period for the entire award.

Forfeitures are recognized as they occur.

The Company estimates the fair value of each stock-based award on its measurement date using either the current market price of the stock

or Black-Scholes option valuation model, whichever is most appropriate.

The Black-Scholes valuation model incorporates assumptions such

as expected term of the instrument, volatility of the Company’s future share price, risk free rates, future dividend yields and

estimated forfeitures at the initial grant date, by reference to the underlying terms of the instrument, and the Company’s experience

with similar instruments.

Changes in assumptions used to estimate fair value could result in materially different results.

The shares of the Company were listed on the stock exchange for a limited

period of the time and also the stock price has dropped significantly from the date of listing, based on which the Company has considered

the expected volatility at 100% for the purpose of stock compensation.

The risk-free interest rates are based on quoted U.S.

rates for securities with maturities approximating the awards’ expected lives.

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 expected dividend yield is zero

as the Company has never paid dividends and does not currently anticipate paying any in the foreseeable future.

We refer to the following accounting estimates as critical

accounting estimates, based on their importance to the financial reporting and potential for changes in future periods:

company records revenue when it meets its service obligations, which include various fees charged for financial services such as account

maintenance and transaction fees, along with other miscellaneous fees.

When determining transaction prices, the company considers potential

variations in these fees, which may fluctuate based on customer usage and specific contract terms.

This is in line with ASC 606 standards,

which require the allocation of transaction prices to the specific services provided within a contract, such as setup and ongoing fees

for certain programs.

The company also earns revenue from interest on loans, which includes those directly issued and those backed by

a partnership with PCCU under a commercial alliance agreement.

Investment income consist of interest earned on the daily deposits balance

with financial institution.

A strategic change in the fourth quarter of 2023 saw the company adopt a new method for calculating interest

on customer deposit balances, excluding certain amounts.

This new approach, applied retroactively to the start of 2023, led to an additional

$549,000 in revenue for that quarter.

The company’s customer base mainly consists of financial institutions that serve cannabis-related

businesses (CRBs), with revenue primarily generated in the United States.

Under the terms of its Commercial Alliance Agreement with PCCU,

the company is obligated to pay PCCU various fees, including a loan servicing fee of 0.35% of the current loan balance, and monthly service

fees based on account balances, with rates varying for balances below and above $1 million.

Additionally, the company must pass on 25%

of its investment hosting fees to PCCU, which are calculated from the returns on PCCU-related deposits.

indemnification component of the Loan Servicing Agreement is accounted for in accordance with ASC 460 Guarantees, which follows guidance

in ASC 326 - Financial Instruments - Credit Losses (ASC Topic 326), for estimating expected credit losses under the current expected

credit loss (“CECL”) methodology, presented in the liabilities section in the consolidated balance sheets as an “Indemnity

The Company accounts for the indemnification component of the Commercial Alliance Agreement for claims related to cannabis-related

businesses, with a particular emphasis on default-related credit losses.

The Company’s indemnity is secondary to other recovery

methods like foreclosure or guarantor recourse.

Indemnity payments don’t absolve borrowers of their obligations, maintaining PCCU’s

rights to recoveries.

The indemnification is considered a general loss contingency under ASC 460 due to uncertainties that could lead

to losses, resolved by future events.

The Company’s liability for indemnity is based on management’s estimation of probable

credit losses at the balance sheet date, influenced by individual loan risk ratings and economic assumptions in the estimation model.

These risk ratings are re-evaluated quarterly.

The indemnity liability for the pooled component is derived from an estimate

of expected credit losses primarily using an expected loss methodology that incorporates risk parameters such as probability of default

(“PD”) and loss given default (“LGD”) which are derived from internally developed model estimation approaches

for smaller homogenous loans.

The PD is quantified by analyzing historical data to determine the rate at which loans have defaulted within

the portfolio, relative to the total outstanding loans as of the end of the reporting period.

This rate is expressed as a percentage

and serves as a key indicator of the likelihood of default across the loan pool.

LGD assessments are conducted to estimate the potential

loss amount in the event of a default, considering the recoverable value from the collateral liquidation against the remaining loan balance.

This involves a detailed analysis of two primary components:

the loss on principal, which arises from the gap between the collateral’s

liquidation value and the unpaid principal balance of the loan;

and the loss associated with various ancillary costs to recover, including,

but not limited to, foregone interest, transaction costs, legal and administrative fees, and expenses related to the maintenance and

renovation of the property.

in the PD and LGD directly affect the estimated indemnity liability.

An increase in PD, indicating a higher likelihood of defaults, necessitates

a larger indemnity liability to cover potential losses, impacting the company’s financial reserves.

Conversely, a decrease in PD

would lower the required indemnity liability, reflecting a more favorable risk outlook.

Similarly, a rise in LGD, due to reduced collateral

values or higher recovery costs, increases the estimated loss per default, requiring a higher indemnity liability.

Conversely, a reduction

in LGD suggests more loss recoveries, allowing for a decrease in the indemnity liability.

conjunction with the 2022 Plan, as of December 31, 2023, the Company had granted stock options and restricted stock units which are described

in more detail below:

Company awards stock options to incentivize employee ownership and performance, applying ASC 718 for equity-based payments.

with a 10-year term with their fair value determined at the grant date, considering either market price or the Black-Scholes model.

model factors in expected option term, stock price volatility (set at 100% due to significant price fluctuations since listing), risk-free

interest rates (aligned with U.S.

Treasury rates), and an assumed zero dividend yield, given the Company’s history of not paying

The expected option term is derived using the simplified method, averaging the contractual term and vesting period.

cost is recognized over the service period on a straight-line basis, with immediate recognition of forfeitures.

Changes in valuation

assumptions could significantly alter fair value estimates.

Stock Units / Restricted Stock Awards

Company values equity-based payments under ASC 718, using fair value at grant date for stock awards, recognizing expenses over the service

Fair value is estimated via the market price or Black-Scholes model, considering variables like expected term, stock volatility,

risk-free rates, and forfeiture rates.

Given the stock’s limited listing period and significant price drop, volatility is presumed

Risk-free rates align with U.S.

Treasury rates matching the awards’ lifespans.

The options’ expected term merges

the contractual and vesting durations.

The Company assumes zero dividend, reflecting the Company’s history and future dividend

outlook, impacting the valuation of stock-based compensation.

Changes in valuation assumptions could significantly alter fair value estimates.

Purchase Agreement

June 16, 2022, NLIT entered into a Forward Purchase Agreement with Midtown East Management NL, LLC (“Midtown East”).

to entering into the Forward Purchase Agreement, the Company, NLIT, and Midtown East entered into assignment and novation agreements

with Verdun Investments LLC (“Verdun”) and Vellar Opportunity Fund SPV LLC – Series 1 (“Vellar”), pursuant

to which Midtown East assigned its obligations as to 1,666,666 shares of the shares of Class A Stock to be purchased under the Forward

Purchase Agreement to each of Verdun and Vellar.

As contemplated by the Forward Purchase Agreement:

Prior to the business combination, Midtown East, Verdun and Vellar purchased approximately 3.8 million shares of NLIT Class A common stock directly from investors at market price in the public market.

Midtown East and other counter parties waived their redemption rights with respect to the acquired shares;

One business day following the Closing, NLIT paid approximately $39.3 million from the cash held in its trust account to Midtown East;

Verdun and Vellar for the shares purchased and approximately $0.3 million in related expense amounts.

At any time prior to the Maturity Date (defined as the earlier of i) the third anniversary of the Closing of the Business Combination, ii) the shares are delisted from The Nasdaq Stock Market or (iii) during any 30 consecutive Scheduled Trading Day-period following the closing of the Business Combination, the Volume Weighted Average share Price (VWAP) Price for 20 Scheduled Trading Days during such period shall be less than $3.00 per share), Midtown East, Verdun and Vellar may elect an optional early termination to sell some or all of the shares (the “Terminated Shares”) of Class A Stock in the open market.

If Midtown East, Verdun and Vellar sell any shares prior to the Maturity Date, the pro-rata portion of the Reset Price will be released from the escrow account and paid to SHF.

Midtown East, Verdun and Vellar shall retain any proceeds in excess of the Reset Price that is paid to SHF.

At the Maturity Date, Midtown East, Verdun and Vellar shall be entitled to (1) the product of the shares then held by them multiplied by the Forward Price, and (2) an amount, in cash or shares at the sole discretion of NLIT, equal to (a) in the case of cash, the product of(i)(x) 3.8 million shares less (y) the number of Terminated Shares and (ii) $2.00 (the “Maturity Cash Consideration”) and (b) in the case of shares, (i) the Maturity Cash Consideration divided by (ii) the VWAP Price for the 30 Scheduled Trading Days prior to the Maturity Date.

The trading value of the common stock combined with preferred shareholders electing to convert their preferred shares to common stock triggered a lower reset price embedded in the forward purchase agreement, or FPA.

As of December 31, 2022, the Company had already called a special meeting to lower the make-whole price under the preferred share purchase agreement to $1.25/share.

The Company, majority common shareholders and the preferred investors had entered into a voting agreement whereby the vote to approve the $1.25/share make-whole price was secured.

Knowing the Company would ultimately be issuing shares to the preferred stockholders with a make whole issuance at $1.25/share compelled the company to recognize a reset price under the terms of the FPA of $1.25/share.

These events significantly reduced the FPA receivable to approximately $4.6 million, from approximately $37.9 million reported at the end of the September 2022 quarter.

The loss in value resulted not only in a compression of the balance sheet, but also $42.3 million charge to other expense on the statement of operations.

The Company’s Second Amended and Restated Certificate of Incorporation

authorizes the issuance of up to 1,250,000 shares of preferred stock, par value $0.0001 per share.

There are currently 20,450 shares of

preferred stock issued and outstanding.

The preferred stock does not carry any voting rights.

The option to convert the preferred

stock into Class A Common stock of the Company is at the will of the holder.

The holder of the preferred stock shall only have the right

to receive Class A Common stock of the Company while making any request for conversion.

Refer to Note 3 (“Business Combination”)

of the consolidated financial statements herein for additional details pursuant to the aforementioned preferred stock.

Company, under a Forward Purchase Agreement (FPA) with Midtown East, which was later reassigned to Verdun and Vellar, involved complex

transactions around Class A common stock.

Initially, about 3.8 million shares were acquired from the market.

Post-business combination,

the Company disbursed $39.6 million for these shares and associated costs.

The FPA allows for an early termination sale of shares by

the assignees, with proceeds above the reset price going to them and the rest to the Company.

The final settlement at the Maturity Date

includes a cash or share payment based on the Forward Price and a Maturity Cash Consideration.

In 2022, the reset price adjustment, influenced

by the common stock’s trading value and preferred share conversions, significantly reduced the FPA receivable from $37.9 million

to $4.6 million.

No further transactions or value changes were noted in the year end December 31, 2023, maintaining the FPA receivable’s

The value of the forward purchase agreement could diminish if the Company issues any securities at a price below the

reset price of $1.25 per share before the agreement expires.

Purchase Derivative

Company accounts for the forward purchase derivative assumed in the business

combination in accordance with the guidance contained in ASC Topic 815, “Derivatives and Hedging” (“ASC 815”).

The Company classifies the forward purchase derivative as an asset or liability carried at fair value and adjusts the forward purchase

derivative to fair value at each reporting period.

This derivative asset or liability is subject to re-measurement at each balance sheet

date until the conditions under the forward purchase agreement are exercised or expire, and any change in fair value is recognized in

the consolidated statement of operations.

The fair value of the forward purchase derivative was estimated using a Monte-Carlo Simulation

in a risk-neutral framework (a special case of the Income Approach).

Specifically, the future stock price is simulated assuming a Geometric

Brownian Motion (“GBM”).

For each simulated path, the forward purchase value is calculated based on the contractual terms

and then discounted at the term-matched risk-free rate.

Lastly, the value of the forward is calculated as the average present value over

all simulated paths.

The Company measured the fair value of the forward purchase option derivative upon execution of the Forward Purchase

Agreement and as of December 31, 2022, with the respective fair value adjustments recorded within its Statements of Operations.

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.

Company records the forward purchase derivative from a business combination as per ASC 815, marking it as an asset or liability at fair

value, adjusted each reporting period.

Fair value adjustments are recognized in the consolidated statement of operations.

The Monte-Carlo

Simulation, applying Geometric Brownian Motion for stock price projections, was utilized for valuation in the year ended December 31,

In 2022, the company fully accounted for the maximum contractual liability.

Throughout 2023, there were no notable shifts in risk

factors that would impact the values of FPA derivatives.

As a result, the valuation established on December 31, 2022, was maintained

for the year ended December 31, 2023.

of Goodwill and Finite-lived intangible assets

November 15, 2022, the company finalized a significant acquisition for $30 million, resulting in the recognition of $19,266,276 in goodwill

and $10,800,000 in amortizable intangible assets, which included market-related intangible assets valued at $2,100,000, customer relationships

at $2,000,000, and developed technology at $6,700,000.

According to ASC 350 and 360, the company is required to perform impairment assessments

annually or more frequently if needed.

An interim assessment conducted on June 30 utilized a hybrid approach, dividing emphasis between

the income approach (one-third) and the market approach (two-thirds) for evaluating goodwill’s fair value.

Additionally, specific

methods were applied to the intangibles:

the Royalty Method for market-related intangibles, the Discounted Cash Flow Method for customer

relationships, and the Cost to Re-create Method for developed technologies.

This interim evaluation led to a goodwill impairment of $13.2

million, a $1,865,668 impairment for market-related intangible assets, and a $1,814,795 impairment for customer relationships.

assessment on December 31, 2023, also adopted the hybrid approach for goodwill valuation and applied the Relief from Royalty Method for

market-related intangibles and developed technologies, along with the Multi-Period Excess Earnings Method for customer relationships,

resulting in a $2,019,000 impairment for developed technologies.

impairment determination process is inherently subjective, heavily reliant on assumptions about future conditions and events that might

affect asset values.

For impairment testing under ASC 350 and ASC 360 regarding goodwill and other intangibles, critical assumptions

include future cash flow projections, appropriate discount rate determination reflective of asset-specific risks, the estimated useful

lives of intangible assets, and customer attrition rates for assets tied to customer relationships.

These assumptions are affected by

wider market and economic factors, including interest rate fluctuations, inflation, and sector-specific developments.

Due to these variables,

impairment test outcomes can significantly shift over time with changes in the company’s operational performance, market dynamics,

technological innovations, or strategic decisions like asset disposals or cessation of certain operations.

This variability highlights

the complex and judgment-based nature of impairment testing, emphasizing the potential for notable fluctuations in impairment charges

across different periods.

Company’s accounting for warrants, including Public, Private Placement, PIPE, and Abaca warrants, constitutes a critical accounting

estimate due to the significant judgments and assumptions involved in their valuation and the potential impact on our financial statements.

These warrants are recorded at fair value on a recurring basis, requiring the use of observable market data and valuation techniques

that involve significant estimates and assumptions.

For Public warrants, the Company utilizes Level 1 inputs, relying on exchange-traded

prices which provide a transparent and observable market valuation.

This approach minimizes the level of estimation uncertainty associated

with these warrants.

Private Placement and PIPE Warrants valuation, as of 2023, has transitioned from third-party reports to internal

assessments by the Company, employing Level 3 inputs derived from unobservable inputs.

This shift aims to enhance the precision of the

valuation process, allowing for adjustments reflective of the unique characteristics of these warrants and prevailing market conditions.

Key assumptions in this valuation include the expected volatility of our stock, the risk-free interest rate, the expected life of the

warrants, and the dividend yield.

Variability in these assumptions could significantly impact the fair value estimates of these warrants.

For Abaca Warrants, the Company also utilizes an internal assessment approach with Level 3 inputs.

The valuation assumptions include,

but are not limited to, the exercise price, the fair market value of the underlying Class A Common Stock, the expected term of the warrants,

and the risk-free interest rate.

Future variations in these critical assumptions could arise from changes in market conditions, such

as fluctuations in the volatility of the Company’s stock, alterations in the risk-free interest rate reflecting broader economic

shifts, or adjustments in the expected life of the warrants due to changes in the holders’ exercise behavior.

Additionally, regulatory

changes or shifts in the market perception of the Company could also necessitate adjustments to these assumptions.

Changes in these assumptions

could lead to significant variations in the recorded fair value of the warrants, impacting the Company’s financial position and

results of operations.

The Company closely monitors these assumptions and market conditions to ensure that the warrant valuations accurately

reflect their fair market value on reporting date.

consideration

Company’s accounting for the deferred consideration arising from the acquisition of Abaca represents a critical accounting estimate,

consistent with ASC Topic 815, “Derivatives and Hedging” (“ASC 815 “).

This consideration, due to

its failure to meet the equity classification criteria under ASC 815, is accounted for as a derivative liability.

This approach necessitates

the recognition of this obligation on the balance sheet at its fair value, with subsequent adjustments to fair value reflected at each

reporting period end.

The determination of fair value involves significant judgments and assumptions, particularly in light of the complex

terms outlined in the Abaca merger agreement and its amendments.

The deferred consideration includes cash payments scheduled at various

anniversaries of the merger closing, the issuance of common stock based on specified conditions, and the introduction of additional consideration

and stock warrants as per the latest amendments to the agreement.

The fair value assessment of these components is influenced by several

factors, including the Company’s stock price, the volatility of the stock, the risk-free interest rate, and the specific terms

of the deferred and stock considerations as amended.

Future variations in the fair value of this derivative liability could arise from

changes in the Company’s stock price, fluctuations in market volatility, alterations in the risk-free interest rate, or changes

in the terms of the agreement as negotiated with the Abaca stockholders.

Such changes could be prompted by evolving business strategies,

market conditions, or regulatory environments that impact the financial and operational aspects of the agreement.

These estimates and

assumptions are subject to inherent uncertainties and the exercise of management’s judgment.

Changes in these critical assumptions

could lead to significant adjustments in the recorded fair value of the derivative liability associated with the Abaca acquisition’s

deferred consideration.

These adjustments could materially impact the Company’s financial position and results of operations, emphasizing

the importance of the estimates and assumptions used in the valuation of this complex financial instrument.

The Company closely monitors

related developments and market conditions to ensure the derivative liability is accurately valued, providing transparency and reliability

on the reporting date .

Growth Company Status

10 unchanged sentences

Control Over Financial Reporting

In connection

with our management assessment of internal control over financial reporting as of and for the year ended December 31, 2022, the Company

has identified four (4) material weaknesses within our internal controls over financial reporting related to its Deferred Tax Asset, Going

Concern, Revenue Recognition, and Complex Financial Instruments.

connection with our management assessment of internal control over financial reporting as of and for the year ended December 31, 2023,

the Company has identified three (3) material weaknesses within our internal controls associated with Revenue Recognition, Complex Financial

Instrument and Credit losses.

Refer to Item 9A of this document for additional details.

Party Relationships

allocations include overhead expenses such as information technology, customer support, marketing, executive compensation and other general

and administrative expenses that are attributed to the Branches proportionately based on the relative size of the specific identifiable

customer deposits to the consolidated PCCU.

Servicing Agreement

July 1, 2021, SHF entered into an Account Servicing Agreement with PCCU.

SHF provides services as per the agreement to CRB accounts at

In addition to providing the services, SHF assumes the costs associated with the CRB accounts.

These costs include employees to

manage account onboarding, monitoring and compliance, rent and office expense, insurance and other operating expenses necessary to service

these accounts.

Under the agreement, PCCU agrees to pay SHF all revenue generated from CRB accounts.

Amounts due to SHF are due monthly

in arrears and upon receipt of invoice.

The agreement is for an initial term of 3 years from the effective date.

It shall renew thereafter

for 1-year terms until either SHF or PCCU provide sixty days prior written notice.

Pursuant to this agreement, SHF reported revenue of

$8,823,608 for the year ended December 31, 2022, and $3,168,243 for the period July 1,2021 to December 31, 2021.

described elsewhere in this document, on February 11, 2022, SHF and PCCU entered into the Amended and Restated Account Servicing Agreement,

pursuant to which SHF provides services including, among other things, Bank Secrecy Act compliance and reporting, onboarding, responding

to account inquiries, and responding to customer service inquiries relating to accounts at PCCU held for cannabis-related businesses

Pursuant to the Amended and Restated Account Servicing Agreement, SHF’s fees for such services will equal

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.

The Amended and Restated Account

Servicing Agreement is for an initial term of three years and will renew for additional one-year terms unless a party provides 120 days’

notice of non-renewal, provided that PCCU may not provide notice of non-renewal until 30 months following the signing date.

and Restated Account Servicing Agreement initially provided that the agreement would terminate within 60 days of SHF no longer qualifying

as a “credit union service organization” or within 60 days of the assumption by a third party of all CRB-related accounts;

however, on May 23, 2022, SHF and PCCU entered into the Second Amended and Restated Account Servicing Agreement, which agreement amended

and restated the Amended and Restated Account Servicing Agreement to remove the provision providing for the termination of the agreement

within 60 days of SHF no longer qualifying as a “credit union service organization,” as SHF will cease to qualify as a CUSO

following the closing of the Business Combination.

Company had an Account Servicing Agreement with PCCU.

SHF provides services as per the agreement to CRB accounts at PCCU.

to providing the services, SHF assumed the costs associated with the CRB accounts.

These costs include employees to manage account onboarding,

monitoring and compliance, rent and office expense, insurance and other operating expenses necessary to service these accounts.

the agreement, PCCU agreed to pay SHF all revenue generated from CRB accounts.

Amounts due to SHF were due monthly in arrears and upon

receipt of invoice.

This agreement was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29,

2023, between PCCU and the Company.

Services Agreement

3 unchanged sentences

25% of any investment income associated with CRB deposits is paid to PCCU.

The respective duties and obligations as per the agreement

commenced on the effective date and continue unless terminated by either SHF or PCCU upon giving sixty days prior written notice.

to these agreements and as amended and restated on February 11, 2022, the Company reported expenses of $775,259 for the year ended December

31, 2022, and $190,908 for the year ended December 31, 2021.

described elsewhere in this document, on February 11, 2022, SHF and PCCU entered into the Amended and Restated Support Services Agreement,

pursuant to which PCCU will continue to provide to SHF certain operational and administrative services relating to, among other things,

human resources, employee benefits, IT and systems, accounting and marketing for a monthly fee equal to $30.96 per account in 2022 and

$25.32 per account in 2023 and 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 SHF.

SHF will also reimburse

PCCU for any of its out-of-pocket expenses relating to the services provided to SHF.

The Amended and Restated Support Services Agreement

also sets forth certain agreements of PCCU to limit bonus distributions to its members to $30,000,000 during any 12-month period following

the effective date of the agreement and to allow its ratio of CRB-related deposits to total assets to equal at least 65% unless otherwise

dictated by regulatory, regulator or policy requirements.

The Amended and Restated Support Services Agreement has the same term and termination

provisions as the Amended and Restated Account Servicing Agreement, including a provision providing for the termination of the agreement

within 60 days of SHF no longer qualifying as a “credit union service organization.” On May 23, 2022, SHF and PCCU entered

into the Second Amended and Restated Support Services Agreement, which agreement amended and restated the Amended and Restated Support

Services Agreement to remove the provision providing for the termination of the agreement within 60 days of SHF no longer qualifying

as a “credit union service organization,” as SHF will cease to qualify as a CUSO following the closing of the Business Combination.

This agreement was replaced and superseded in its entirety

by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.

Servicing Agreement

2 unchanged sentences

approval process for loans from PCCU to CRB customers and the loan servicing and monitoring responsibilities provided by both PCCU and

PCCU will receive a monthly servicing fee at the annual rate of 0.25% of the then-outstanding principal balance of each loan funded

For the loans that are subject to this agreement, SHF originates the loans and performs all compliance analysis, credit analysis

of the potential borrower, due diligence and underwriting and all administration, including hiring and incurring the costs of all related

personnel or third-party vendors necessary to perform these services.

Under the Loan Servicing Agreement, SHF has agreed to indemnify

PCCU from all claims related to default-related loan losses as defined in the Loan Servicing Agreement.

The agreement is for an initial

term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of non-renewal or there

is a termination for cause, provided that PCCU may not provide notice of non-renewal until 30 months following the signing date.

to this agreement, the Company reported expenses of $26,088 for the year ended December 31, 2022, and $0 for the year ended December

July 1, 2021, SHF entered into a one-year gross lease with PCCU to lease space in its existing office at a monthly rent of $5,400.

Effective July 1, 2022, the Company amended its existing lease to a month-to-month lease and therefore no asset or liability amounts

are reported pursuant to ASC 842.

PCCU receives a monthly servicing fee at the annual rate of 0.25% of the then-outstanding principal balance of each loan funded

and serviced by PCCU.

For the loans that are subject to this agreement, SHF originates the loans and performs all compliance analysis,

credit analysis of the potential borrower, due diligence and underwriting and all administration, including hiring and incurring the

costs of all related personnel or third-party vendors necessary to perform these services.

Under the Loan Servicing Agreement, SHF has

agreed to indemnify PCCU from all claims related to default-related credit losses as defined in the Loan Servicing Agreement.

This agreement

was replaced and superseded in its entirety by Commercial Alliance Agreement entered on March 29, 2023, between PCCU and the Company.

Alliance Agreement

March 29, 2023, the Company and PCCU entered into the Commercial Alliance Agreement.

This Agreement sets forth the terms and conditions

of the lending and account-related services, governing the relationship between the Company and PCCU.

The Commercial Alliance Agreement

replaces and supersedes, in their entirety, the following agreements entered into between the aforementioned parties:

the Amended and

Restated Loan Servicing Agreement (the “Loan Servicing Agreement”, dated September 21, 2022);

the Second Amended and Restated

Account Servicing Agreement (“the “Account Servicing Agreement,” dated May 23, 2022, effective February 11, 2022) and

the Second Amended and Restated Support Services Agreement (the “Support Agreement,” dated May 23, 2022, effective February

Commercial Alliance Agreement sets forth the application, underwriting, loan approval, and foreclosure process for loans from PCCU to

borrowers that are cannabis-related businesses and the loan servicing and monitoring responsibilities provided by the Company and PCCU.

In particular, the Commercial Alliance Agreement provides for procedures to be followed upon the default of a loan to ensure that neither

the Company nor PCCU will take title to or possession of any cannabis-related assets, including real property, that may be collateral

for a loan funded by PCCU pursuant to the Commercial Alliance Agreement.

Under the Commercial Alliance agreement, the PCCU has the right to receive monthly fees

for managing loans.

For SHF-serviced loans, which are CRB loans provided by the PCCU but primarily handled by SHF, a yearly fee of 0.25%

of the remaining loan balance is applied.

On the other hand, loans both financed and serviced by the PCCU are charged a yearly fee of

0.35% on their outstanding balance.

These fees are calculated using the average daily balance of each loan for the preceding month.

addition, the Company’s is obligated by the Commercial Alliance Agreement to indemnify PCCU from certain default-related loan losses

(as fully defined in the Commercial Alliance Agreement).

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.

fiscal 2022 and up to the third quarter of 2023, our investment earnings were solely from interest on deposits at the Federal Reserve

Bank, capped at the earnings accrued by PCCU from its reserves.

However, a strategic shift in the fourth quarter of 2023 led us to adopt

Federal Reserve’s interest rates applied to the daily average balance of SHF customer deposits, with certain exclusions.

applied retroactively from the beginning of 2023, resulted in incremental revenue of $549,000 recognized in the fourth quarter.

our Commercial Alliance Agreement, we are obligated to remit 25% of the investment hosting fees to PCCU based on this income.

below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits at December 31, 2023 and December

CRB related deposits

$ 129,350,998

$ 161,138,975

Capacity at 60%

PCCU net worth

Capacity at 1.3125

Limiting capacity

PCCU loans funded

Amounts available under lines of credit

Incremental capacity

$ 154,971,429

revenue from operation on the statement of operations consists of the following agreement mentioned above for the year ended December

31, 2023, and December 31, 2022:

December 31, 2023

December 31, 2022

Account Servicing Agreement

Commercial Alliance Agreement

operating expense on the statement of operations consists of the following agreement mentioned above for the year ended December 31,

2023, and December 31, 2022:

December 31, 2023

December 31, 2022

Support Services Agreement

Loan Servicing Agreement

Commercial Alliance Agreement

Quantitative and Qualitative Disclosures About Market Risk.

Holdings, Inc.

is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information

otherwise required with respect to market risk.

Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise

required with respect to market risk.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis