What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-04-15 compared with 2025-04-10 · 1173 added, 681 removed, 70 unchanged (96% of the section changed)

2 unchanged sentences

Holdings, Inc.

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

References to “management” refer to our officers and Board of Directors.

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

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.

1 unchanged sentence

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 ten 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

that allow them to run their business more efficiently and effectively with improved financial insight into their business and access

to resources to help them grow.

Due to limited availability of payment and other banking solutions for the cannabis industry, most businesses

transact with high volumes of cash.

Our fintech platform benefits CRBs and financial institutions by providing CRBs with access to financial

institutions and financial institutions access to increased deposits with the comfort of knowing that those deposits have been compliantly

monitored and validated.

By facilitating the daily deposits of cash receipts between CRBs and financial institutions, the risks associated

with high cash on hand are mitigated, creating a safer atmosphere for the CRB’s employees and the financial institutions at which

the deposit accounts are held.

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

clients offer loan options including senior secured debt and operating lines of debt.

Collateral types include real estate, equipment,

and other business assets.

We also provide access to lending options for ancillary service providers serving the cannabis industry as

these businesses also can have difficulty finding reliable financial services.

ensure access to consistent and dependable banking access to CRBs, we provide our compliance, validation and monitoring services to

financial institutions in a compliance driven environment ensuring strict adherence to the Bank Secrecy Act/FinCEN guidance and

related anti money laundering provisions.

Since inception, the Company has assisted in the processing of more than $24.9 billion in

cannabis related depository funds.

Through its relationship with its financial institution clients, the Company has successfully

navigated over 16 state and federal banking exams.

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.

addition to the measures presented in our consolidated financial statements, our management regularly monitors certain measures in the

operation of our business.

These key metrics are discussed below.

Company was founded in 2015 by PCCU and is headquartered in Golden, Colorado.

We operate a proprietary compliance technology platform

that enables financial institutions to provide banking and lending services to CRBs operating legally under applicable state law.

cannabis remains a federally controlled substance under the CSA, most financial institutions have historically been unwilling to serve

CRBs, creating significant demand for the compliance infrastructure and risk management services we provide.

We are not a bank or credit

union and do not hold customer deposits.

Instead, we provide compliance monitoring, onboarding, and reporting services that allow our

financial institution clients to accept and maintain CRB deposit accounts in a manner consistent with BSA requirements, FinCEN guidance,

and applicable anti-money laundering regulations.

our financial institution clients, we facilitate access to business checking and savings accounts, cash management, commercial lending,

remote deposit, ACH payments, wire transfers, and courier services through third-party relationships.

By enabling CRBs to deposit cash

receipts through regulated financial institutions, our platform helps to reduce the safety risks associated with high cash volumes and

gives CRBs access to financial tools that help them operate more efficiently.

In select markets, we also license our Program to other

financial institutions, providing them KYC due diligence tools, compliance monitoring, program management support, and regulatory exam

generate revenue primarily through three streams:

account fee income based on the number of active accounts and the size of deposit

balances in such accounts, loan program income (formerly loan interest income) on CRBs loans we source and service on behalf of our

financial institution clients, and investment income earned on CRB-related deposits held at those institutions.

Since 2015, the

Company has assisted in the processing of more than $35.4 billion in cannabis-related depository funds and has supported its

financial institution clients through more than 25 state and federal banking examinations.

is our primary financial institution client and the source of a significant majority of our revenue.

This relationship is governed by

the Second Amended CAA, which replaced the First Amended CAA as of October 1, 2025.

First Amended CAA introduced several significant changes to the CAA, including (i) the elimination of the Company’s indemnification

obligations for loan-related losses, (ii) a reduction in the Company’s loan program income share to approximately 35% to

reflect the incremental risk absorbed by PCCU in connection with the elimination of our indemnification obligations, (iii) the replacement

of a multiple per-account fee structure with a single asset hosting fee equal to 1.00% of average daily CRB deposit balances that increased

to 1.30% in the event balances exceeded $130 million, and (iv) us receiving 100% of investment income on CRB deposits.

Second Amended CAA fundamentally restructured the economics of the PCCU relationship.

The primary changes were that (i) the

Company’s share of loan program income increased from approximately 35% to up to 65%, reflecting the completion the September

2025 Recapitalization;

(ii) the Company now receives up to 65% of loan program income generated by PCCU’s CRB loan portfolio

in exchange for being obligated to indemnify PCCU for up to 65% of net losses of a default on any loan covered by the Second Amended

CAA, with no contractual cap on total exposure;

and (iii) the asset hosting fee structure transitioned from a flat rate to a tiered

marginal rate schedule based on average daily deposit balances, with rates ranging from 0.50% on the first $25 million to 1.25% on

balances above $125 million, resulting in estimated annual savings of approximately $0.3 million compared to the rates contained in

the First Amended CAA.

See Part I, Item 1., “Business––Recent Developments––September 2025

Recapitalization.”

concentration of our business with PCCU and the re-assumption of the indemnification obligation each represent material risks to the

Any loss of or material adverse change to the PCCU relationship, or any significant loan defaults in the CRB portfolio for which

we are required to fund indemnification payments, could have a material adverse impact on our liquidity, financial condition, and results

of operations.

See “––Related Party Relationship with PCCU” as well as Part I, Item 1A., “Risk Factors––Risks

Related to the Second Amended CAA” and Part III, Item 13., Certain Relationships and Related Party Transactions.”

Ended December 31, 2025 Performance Summary

revenue for the year ended December 31, 2025 was $7.7 million, a decrease of approximately 49.7% compared to $15.2 million for the year

ended December 31, 2024.

decline was primarily driven by a 63% reduction in loan program income resulting from revised interest allocation provisions under

the First Amended CAA.

This decrease was partially offset by approximately $0.4 million in incremental loan program income

recognized following the execution of the Second Amended CAA, which had a retroactive effective date of October 1, 2025.

income also decreased by 45%, reflecting declining balances, lower prevailing interest rates that ranged from 3.65% to 4.40% in 2025

versus 4.40% to 5.40% in 2024 and the implementation of an interest-bearing deposit program for customers.

Additionally, account fee

income declined by 39%, which was attributable to a reduction in the number of active accounts following the conclusion of our

relationship with Five Star Bank, as well as lower fees associated with merchant services.

operating expenses decreased by $9.3 million, or 42%, to $13.1 million for the year ended 2025, compared to $22.3 million in fiscal

year 2024, due to the absence of $9.1 million in goodwill and intangible asset impairment charges recorded in 2024 and from ongoing

cost reduction actions including workforce restructuring and reduced overhead.

The Company reported a net loss of $2.2 million for

the year ended December 31, 2025, compared to net loss of $48.3 million in year 2024.

The net loss in 2024 was significantly

influenced by a large, non-recurring deferred tax asset valuation adjustment of $43.9 million.

Excluding that item, the underlying

operating performance declined year-over-year consistent with the revenue trends described above.

Weaknesses in Internal Controls

identified material weaknesses in the Company’s internal control over financial reporting as of December 31, 2024.

These weaknesses

primarily related to the Company’s application of U.S.

generally accepted accounting principles (“GAAP”) to complex

transactions, including revenue recognition, accounting for financial instruments, forward purchase arrangements, and stock-based compensation,

as well as deficiencies in the going concern evaluation process and information technology access controls.

The Company has implemented

a remediation plan, including hiring new senior financial leadership with public company experience, engaging external technical accounting

advisors, implementing enhanced financial statement review procedures, and upgrading IT access controls.

of December 31, 2025, management believes these remediation actions have addressed all previously identified material weaknesses;

a material weakness was identified during the fourth quarter of 2025 related to the Company’s loan documentation and credit loss estimation process.

Additionally,

while the material weakness related to the completeness and accuracy of account activity fee income has been remediated, sufficient time

has not elapsed to conclude that the related controls are operating effectively.

See “Internal Control Over Financial Reporting”

below for further discussion.

and Regulatory Environment

remains a Schedule I controlled substance under federal law, which creates ongoing legal and compliance risks for us and for the financial

institutions we serve.

Proposed federal legislation, including the SAFER Banking Act, could expand the availability of banking services

to CRBs and increase competition in our market.

Conversely, changes in federal or state enforcement priorities could adversely affect

our clients and, in turn, our business.

We monitor legislative and regulatory developments closely, as they are a primary driver of both

the demand for, and the risks associated with our services.

See Part I, Item 1., “Business––Industry Overview”

for further discussion of the current and evolving industry and regulatory landscape.

addition to the measures presented in our consolidated financial statements, management regularly monitors certain operational and non-GAAP

financial measures to evaluate business performance.

These metrics are described below.

Financial Measures

addition to financial measures presented in accordance with accounting principles generally accepted in the United States of America

(“GAAP”), this document contains non-GAAP financial measures where management believes it to be helpful in understanding

our results of operations or financial position.

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as

well as the reconciliation to the comparable GAAP financial measure, can be found herein.

addition to financial measures prepared in accordance with GAAP, this Form 10-K contains non-GAAP financial measures that management

believes are useful in understanding our results of operations and financial position.

For each non-GAAP measure presented, we have provided

a reconciliation to the most directly comparable GAAP financial measure.

Before Interest Taxes Depreciation and Amortization (EBITDA) and Adjusted EBITDA

provide investors with additional information regarding our financial results, we have disclosed EBITDA and Adjusted EBITDA, both of

which are non-GAAP financial measures that we calculate as net loss before taxes and depreciation and amortization expense in the case

of EBITDA and further adjusted to exclude non-cash, unusual and/or infrequent costs in the case of Adjusted EBITDA.

Below we have provided

a reconciliation of net loss (the most directly comparable GAAP financial measure) to EBITDA and from EBITDA to Adjusted EBITDA.

present EBITDA and Adjusted EBITDA because these metrics are a key measure used by our management to evaluate our operating performance,

generate future operating plans, and make strategic decisions regarding the allocation of investment capacity.

Accordingly, we believe

that EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results

in the same manner as our management.

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.

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

and our other GAAP results.

reconciliation of net loss to non-GAAP EBITDA and Adjusted EBITDA is as follows:

Year Ended December 31,

$ (48,319,475 )

$ (17,279,847 )

Interest expense

Depreciation and amortization

Provision (benefit) for income taxes

(16,641,105 )

Other adjustments –

Credit loss (benefit) expense

Change in the fair value of warrants and forward purchase derivatives

Change in the fair value of deferred consideration

Deferred loan origination fees and costs

Stock based compensation

Goodwill and long-lived intangible assets impairment

is defined as net income (loss) before interest expense, income tax expense (benefit), and depreciation and amortization.

“Adjusted EBITDA”

the year ending December 31, 2024, our adjusted EBITDA declined primarily due to a decrease in account fee income resulting from a reduction

in the number of accounts, as well as higher professional expenses, particularly legal fees associated with ongoing litigation.

factors contributing to our financial performance are further discussed in the “Discussion of our Results of Operations”

section below.

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

funded by them.

The Company entered into the PCCU CAA with PCCU, under which it agreed to indemnify PCCU for claims related to CRB activities,

including loan default-related losses for loans funded by PCCU.

This agreement was subsequently amended and restated, effective December

31, 2024, to eliminate the Company’s indemnification liability.

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.

is further adjusted to exclude non-cash, unusual, and infrequent items that management does not consider reflective of the Company’s

core operating performance.

present EBITDA and Adjusted EBITDA because management uses these measures to evaluate operating performance, develop forward-looking

operating plans, and make strategic decisions regarding resource allocation.

We believe these measures provide useful supplemental information

to investors evaluating our results in the same manner as management.

measures have material limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our

GAAP results.

Specifically, although depreciation and amortization are non-cash charges, the underlying assets may require future replacement

and neither EBITDA nor Adjusted EBITDA reflects the associated capital expenditure requirements.

In addition, neither measure reflects

changes in working capital needs or tax payments that may reduce cash available to the Company.

Accordingly, these measures should be

considered alongside net income (loss) and other GAAP results.

reconciliation of net (loss) income to EBITDA and Adjusted EBITDA is as follows:

ended December 31,

of prepaid consulting associated with Series B

of contract asset

and amortization expense

for income taxes (benefit)

loss (benefit) expense

in the fair value of warrants

loan origination fees and costs

in the fair value of deferred consideration

on extinguishment of forward purchase derivative

incurred to secure financing

on common stock sold pursuant to the ELOC

based compensation

and long-lived intangible assets impairment

of Adjusted EBITDA Results

the year ended December 31, 2025, EBITDA was $(1.5) million, compared to $(3.2) million for the year ended December 31, 2024.

EBITDA was $(3.9) million and $2.9 million for the years ended December 31, 2025 and December 31, 2024, respectively, a decline of $6.7

The decline was driven by three primary factors, each of which is directly connected to structural changes in the Company’s

revenue arrangements and market conditions, rather than deterioration in the underlying business operations of the Company.

most significant factor was the First Amended CAA.

This agreement made two economically material changes to the Company’s revenue

it reduced the Company’s share of loan program income from substantially all of the interest earned on the CRB loan portfolio

to approximately 35%, with PCCU retaining the remainder to compensate for their absorption of the credit risk that the

Company had previously indemnified them against.

This structural reduction in loan program income accounted for the majority of

the year-over-year revenue decline.

the First Amended CAA replaced the prior per-account fee structure with an asset hosting fee equal to 1.00% of average daily CRB deposit

balances, which resulted in higher hosting costs relative to the prior structure.

these two changes under the First Amended CAA represented the primary explanation for the decline in Adjusted EBITDA and should be understood

as a deliberate restructuring of the economic relationship with PCCU rather than an operational shortfall.

The revenue impact of these

reductions was partially offset in the fourth quarter of 2025 by the Second Amended CAA, which increased the Company’s share of loan

program income from approximately 35% up to 65% and has been recognized as a Type 1 subsequent event under ASC 855.

second factor was a decline in investment income.

The Federal Reserve reduced its IORB rate multiple times during 2024 and 2025, from

5.40% at the start of 2024 to 3.65% by the end of 2025.

Because the Company’s investment income is directly tied to the IORB rate

applied to CRB deposit balances held at PCCU, these rate reductions directly generated lower investment income.

This decline was compounded

by the full-year impact in 2025 of the Company’s money market account program, introduced in 2024, under which the Company effectively

shares a portion of the IORB rate with CRB clients.

Although this arrangement improved client retention and deposit growth, it did further

reduce the Company’s net investment margin.

third factor was a reduction in account fee income primarily driven by a decline in the weighted average fee per account during the year.

This decline was driven by a shift in the client portfolio to newer accounts that generate fees at a lower rate given either lower initial

balances, or large balances across multiple accounts.

has identified three primary causes that it believes elevated attrition in 2025.

portion of the attrition reflected industry-level dynamics, including consolidation among cannabis operators and business closures

driven by ongoing market pressures in certain state markets, all of which are outside of the Company’s control.

pricing pressure from other cannabis banking providers.

More stringent loan underwriting and approval standards, including enhanced collateral requirements and longer processing timelines

through PCCU’s loan committee, were implemented by PCCU.

These changes reduced the Company’s ability to offer CRB clients competitive

lending terms and timely access to credit, both of which are key factors in client retention and acquisition.

The resulting decline

in loan origination activity contributed to elevated client attrition during this period.

The Second Amended CAA increased the Company’s

loan program income share to up to 65%, which management believes will support improved loan production and client retention going

was also impacted by approximately $0.5 million in lost income from a strategic merchant services partner that renegotiated its revenue-sharing

arrangement such that it resulted in less favorable terms for the Company in 2025.

This is a discrete, identifiable reduction that management

does not expect to recur at the same magnitude going forward.

focus for 2026 is on improving client retention through the Company’s expanding lending capability, enhanced client service

technology, and continued new account development driven by new marketing and customer acquisition processes.

significant non-cash and non-recurring items excluded from Adjusted EBITDA in 2025 include a $3.3 million gain on extinguishment of the

FPA, a $1.0 million charge for costs incurred in connection with the September 2025 Recapitalization, a $1.5 million non-cash stock-based

compensation charge, and a $1.3 million non-cash gain from the change in fair value of warrant and forward purchase derivative liabilities.

the year ended December 31, 2024, GAAP net loss figure of $48.3 million in the reconciliation above reflects the impact of

significant non-recurring items, including a large deferred tax valuation recognition and subsequent write-off.

Management believes

that for the year ended December 31, 2024 Adjusted EBITDA of $2.9 million is the more relevant basis for comparison, as it

reflects the operating performance of the business under the CAA structure before the entrance into the First Amended

monitors the following operational metrics to assess the health and trajectory of the core banking services business.

account balances, number of accounts and average account balances

Our ability to originate loans for PCCU is dependent on the size of our managed deposit base and number of active accounts.

In addition, fees are generated

based on open accounts and account activity.

We monitor account activity including deposits, withdrawals and ending account balance daily.

Total account balances represent the balance of onboarded and monitored deposits on hand at financial institution clients at period end.

Average account balance represents the total account balance divided by the number of accounts at the period end.

fees per average active accounts managed

a significant amount of our fees is generated from account openings, active accounts and account activity.

As a result, we monitor account

openings and closings on a daily, weekly and monthly basis.

We strive to meet the appropriate balance between depository balances and

fees and therefore review account fees per average number of active accounts managed.

Year Ended December 31,

Average monthly ending deposit balance

ability to generate account fee income and investment income is directly tied to the number of active CRB accounts we manage and the

total deposit balances maintained at our financial institution clients.

We monitor account activity including daily deposits,

withdrawals, and ending balances on an ongoing basis.

Average account balances represent the average aggregate ending balance of

onboarded and monitored CRB deposits held at financial institution clients over the revenue generating period.

at period end.

Average account balance is total account balances divided by total active accounts at period end.

Trailing 14-day average balances represent the aggregate ending balance of onboarded and monitored CRB deposits held

at financial institution clients over the 14 calendar days at the period end and represent a period end balance that smooths our clients’

two-week payroll cycles.

Fees per Average Active Account

fee income is generated from active accounts and account-level transaction activity.

We track account openings and closings on a daily,

weekly, and monthly basis and monitor account fees per average active account as an indicator of pricing efficiency and revenue quality.

Average deposit balance

$ 105,215,252

$ 117,847,512

(12,632,260 )

14 day average account balance

Average active accounts

1 unchanged sentence

Average fees per account

the average of monthly ending account balances

For the year ended December 31, 2025, represents the average deposit balance over the year;

ended December 31, 2024 represents the average of monthly ending account balances.

This represents the average balance for the relevant

revenue generating period.

Represents the average balance for the 14 calendar days ending on December 31, which represents a period end balance that smooths our clients’ two-week payroll cycles.

account activity fee revenue

1 unchanged sentence

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

the year ended December 31, 2024, there was a decline in the average number of accounts and associated fees compared to the prior

period, mainly due to a reduction in clientele following the termination of the agreement with the Central Bank of Arkansas which

was acquired in 2022 as part of the Abaca Acquisition.

However, we anticipate a reversal of this trend as we focus on our lending

program, which generally requires borrowers to maintain deposits with financial institutions with which we have established

relationships.

are focused on expanding and enhancing our lending platform.

As this part of our business scales, we will track key metrics, such as

average loan balance, average repayment term, effective interest rate, loan status, and other relevant indicators, to measure growth

and performance.

active accounts increased by 16 or 2.1% in 2025, and the accounts lost carried higher average balances than the accounts won,

resulting in a decline in average account balance and a net decline in account fee revenue despite positive account growth.

Management’s primary retention and growth initiatives for 2026 are described in the section above.

of our Results of Operations

Company generates interest and fee income through providing a variety of services to our 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.

expenses consist of compensation and benefits, professional services, rent expense, credit loss (benefit) expense 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

Company reports provisions for credit losses on internally funded and indemnified loans.

Prior to December 31, 2024, the Company indemnified

PCCU against losses on sourced loans.

With effect from the Amended CAA, the indemnification obligation ceased on December 31, 2024.

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

and marketing, travel meals and entertainment and other office and operating expense.

Company generates revenue through three primary streams.

Account fee income consists of fees charged to financial institution clients

based on the number of active CRB accounts managed, account-level transaction activity, and deposit balances.

These fees compensate the

Company for providing BSA compliance monitoring, onboarding, account management, and related regulatory reporting services.

income represents the Company’s contractual share of interest earned on CRB loans originated and serviced by the Company on behalf

of its financial institution clients, primarily PCCU.

The Company’s share of loan program income is currently determined in accordance

with the Second Amended CAA.

Investment income represents interest earned on CRB deposit balances held at financial institution clients

and is based on the prevailing market rates applied to those balances.

In addition, the Company earns fees from licensing its proprietary

Program to other financial institutions and from ancillary services provided to businesses serving the cannabis industry.

expenses consist of compensation and employee benefits, professional services, general and administrative expenses, rent expense, and

provision (benefit) for credit losses.

and employee benefits consist of employee wages, payroll taxes, employee benefits, and non-cash stock-based compensation.

compensation has increasingly been used as a component of total compensation to preserve cash and align employee and consultant incentives

with the performance of the Common Stock.

services consist of legal fees, audit and accounting fees, general consulting fees, and board-related fees.

include both ongoing corporate legal services and costs associated with the Company’s active litigation matters.

services expenses increased materially in 2025 primarily due to legal fees associated with the Abaca litigation described in

“ Litigation ” below, as well as costs incurred in connection with the September 2025 Recapitalization.

and administrative expenses include the asset hosting fee paid to PCCU under the First Amended CAA or the Second Amended CAA,

as applicable, investment hosting fees, bank sharing fees paid to financial institution clients, insurance, advertising and marketing,

travel and entertainment, and other office and operating expenses.

The asset hosting fee represents consideration paid to PCCU for

access to its banking platform, regulated deposit infrastructure, and bank charter and is the largest component of general and administrative

See “Related Party Relationships.”

expense reflects the cost of the Company’s corporate office.

The Company closed its Arkansas office during 2025, thereby

reducing its ongoing rent obligations.

(benefit) for credit losses reflects the Company’s estimated losses on loans it is obligated to indemnify.

Under the Second

Amended CAA, we receive up to 65% of loan program income generated by PCCU’s CRB loan portfolio.

In exchange, we are obligated

to indemnify PCCU for up to 65% of net losses of a default on any loan covered by the Second Amended CAA.

This obligation has no

maximum dollar limit and covers principal, accrued interest, fees, legal costs, collection costs, and collateral disposition costs,

net of any recoveries.

Because the Company and PCCU reached agreement on the material economic terms of the Second Amended CAA on or about

October 1, 2025, and the written agreement was formally executed on February 4, 2026, with the intervening period involving only procedural

and documentation matters, the Company has given effect to the Second Amended CAA from October 1, 2025 in accordance with ASC 606-10-25-10

through 25-13.

Accordingly, its financial statement impact is reflected

in the Company’s consolidated financial statements for the year ended December 31, 2025.

See “Related Party Relationships”

and Note 10 to the Company’s consolidated financial statements in this Form 10-K for further detail.

of our Results of Operations -2025 Compared to 2024 (Year Ended December 31)

Year Ended December 31,

Account fee income

2 unchanged sentences

Investment income

Loan interest income

Loan program income

Total revenue

$ (7,569,028 )

fee income consists of deposit account fees, activity fees and onboarding income.

We receive a flat fee and lower rates for

ancillary accounts, which are accounts provided to businesses servicing the cannabis industry in general but do not manufacture,

possess, distribute or transport cannabis.

The decrease in account fee income was primarily attributable to the previously disclosed

reduction in the number of accounts and the average monthly ending deposit

reconciliation of account fee income and account hosting fees are as follows:

Year Ended December 31,

Pacific Valley Bank

Five Star Bank

Total account fee income

$ (2,167,744 )

hosting fees:

Year Ended December 31,

Pacific Valley Bank

Five Star Bank

Total account hosting fees

Account fees, net of hosting fees, were $5,902,407 and $7,186,723 for December 31, 2024, and December 31, 2023, respectively, reflecting

an 8% margin improvement on reduced fees.

Company provides similar account services and outsourced support to other financial institutions that offer banking services to the cannabis

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

have agreements with PCCU and Five Star Bank (FSB), where our financial institution clients pay us interest on daily account balances

as per the rates outlined in the agreements.

March 29, 2023, we operated under a Loan Servicing Agreement with PCCU, where PCCU reported the loan balances on its financial statements.

This agreement was later superseded by the PCCU CAA, under which we paid a hosting fee equivalent to 25% of the investment income derived

from PCCU-related funds.

For the year ended December 31, 2024, investment income associated with PCCU totaled $1,903,422, with the Company

incurring $457,105 in investment hosting fees.

In comparison, for the year ended December 31, 2023, PCCU’s contribution to investment

income was $5,803,114, resulting in $1,445,517 in investment hosting fees.

These expenses were recorded under “General and Administrative

Expenses” in the Consolidated Statements of Operations.

The Amended CAA eliminates the 25% investment hosting fees.

Under the Amended CAA, the

Company is entitled to receive 100% of the investment income.

For further details, please refer to the ‘Amended and Restated CAA

with PCCU’ section in the Recent Updates above.

interest income

the year ended December 31, 2024, the Company serviced twenty-four loans, compared to twelve loans in the year ended December 31, 2023.

In 2024, the Company recognized $6,254,175 in loan interest income attributable to PCCU activities.

Related expenses for this income

included $143,217 in loan servicing fees, in compliance with both the Loan Servicing Agreement and the PCCU CAA.

In 2023, loan interest

income from PCCU operations amounted to $2,883,192, with associated loan servicing fees totaling $81,577, pursuant to the same agreements.

These expenses were also categorized under “General and Administrative Expenses” in the Consolidated Statements of Operations.

Amended CAA, the Company’s loan interest income will be determined by a new loan yield allocation formula.

This formula incorporates

the Constant Maturity US Treasury Rate and a proprietary risk rating to determine the fee split for each loan.

Please refer to the ‘Amended

and Restated CAA with PCCU’ section in the Recent Updates above.

Year Ended December 31,

fee income decreased by $2.5 million, or 38.5%, for the year ended December 31, 2025 compared to the year ended December 31, 2024.

decline was driven by following factors.

2025 the Company had limited lending capacity available through PCCU under the First Amended CAA.

Access to loans is a meaningful

factor in client retention, and this constraint directly contributed to client attrition during the affected period.

This attrition

was further compounded by broader cannabis industry pressures, including operator consolidation and business closures in certain

state markets, which resulted in additional account losses that were partially offset by 227 new account openings during the year.

In aggregate, client attrition and the reduction in average fees collected from PCCU-hosted clients accounted for approximately $1.4

million of the year-over-year decline.

termination of the Company’s banking relationship with Five Star Bank in the fourth quarter of 2024.

This reduced fee income

by approximately $0.5 million during 2025.

strategic merchant services partner renegotiated its revenue-sharing arrangement on less favorable terms during 2025, reducing account

fee income by approximately $0.5 million compared to the prior year.

income represents interest earned on net investable CRB deposit balances held at our partner financial institutions.

The rate of return

on these balances is directly benchmarked to the Interest on Reserve Balances (“IORB”) rate published by the Federal Reserve

Bank of Kansas City.

Under our agreements, investment income is calculated daily on net investable CRB deposit balances and paid to the

Company monthly in arrears.

the year ended December 31, 2025, total investment income was $1.2 million, compared to $2.1 million for the year ended December 31,

2024, a decrease of $0.9 million, or 44.8%.

The year-over-year decline was primarily driven by four factors:

in IORB rates.

The IORB rate at the beginning of 2025 was 4.40%, which already reflected three rate reductions totaling 100 basis

points that were enacted by the Federal Reserve in the second half of 2024.

During 2025, the Federal Reserve further reduced the

IORB rate by 25 basis points effective September 2025, and by an additional 25 basis points effective December 2025, which brought

the IORB rate to 3.65% at year-end.

In total, the IORB rate declined by 75 basis points during the 2025 fiscal year, compressing

the yield earned on net investable CRB deposit balances throughout the year and directly reducing investment income relative to 2024,

when the IORB rate averaged approximately 5.10% across the full year.

of interest-bearing money market accounts .

In the first quarter of 2025, the Company launched interest-bearing money market

accounts for CRB clients.

While this product enhances the Company’s competitive deposit offerings, balances held in money market

accounts generate interest income that is credited directly to clients rather than recognized as investment income by the Company,

which reduced the net investable deposit base upon which the Company earns IORB-benchmarked investment income.

in average daily deposit balances .

Average daily CRB deposit balances declined during 2025 compared to 2024, which reduced the

principal base upon which investment income is earned.

As discussed in “ Discussion of Adjusted EBITDA Results ”

above, Management has identified three primary causes of the elevated client attrition and deposit outflows experienced during 2025

Company’s banking relationship with Five Star Bank was terminated in 2024.

Five Star Bank contributed $0.2 million to investment

income in 2024, which is not material in 2025 results, representing an incremental headwind in the year-over-year comparison.

program income

2025, loan program income was generated primarily from CRBs loans originated by PCCU and underwritten and serviced by the Company

under the First Amended CAA.

the year ended December 31, 2025, the Company serviced twenty-two loans, compared to twenty-four loans for the year ended December 31, 2024.

ended December 31, 2025, the Company recognized $2.5 million loan program income attributable to PCCU activities, compared to $6.3 million

for the year ended December 31, 2024.

The decrease in loan program income was driven by three primary factors.

First Amended CAA became effective January 1, 2025, pursuant to which the Company received approximately 35% of loan program income

generated by the applicable loans, with the remainder retained by PCCU.

This replaced the prior structure in effect in 2024, under

which the Company received 100% of loan program income and paid PCCU a servicing fee of 0.25% to 0.35% per annum.

This structural

change reduced the Company’s effective yield on the portfolio in 2025 relative to the prior year.

Due to the Second Amended

CAA, the Company’s share of loan program income increased to up to 65%.

The Second Amended CAA constitutes a Type 1 subsequent

event, and as such the Company recognized approximately $0.4 million in incremental loan program income attributable to the fourth

quarter of 2025, partially offsetting the decline in loan program income resulting from the reduced allocation under the First

composition of the loan portfolio has not changed materially during 2025.

As of December 31, 2025, the portfolio consisted of twenty-two

loans with an aggregate outstanding balance of $52.1 million, compared to twenty-four loans with an aggregate outstanding balance

of $56.8 million as of December 31, 2024.

weighted average interest rate on the loan portfolio was approximately 10.6% as of December 31, 2025, compared to approximately 10.2%

as of December 31, 2024.

All loans in the portfolio carry fixed interest rates.

The increase in the weighted average rate reflects

changes in portfolio composition resulting from principal repayments on higher-risk rated loans.

Compensation and employee benefits

4 unchanged sentences

Professional services

Credit loss (benefit) expense

Amortization of contract asset

Credit loss (benefit)

Total operating expenses

$ (9,261,304 )

In 2024, we reduced expenses by $15,959,906, which is a 41.68% reduction in expenses compared to 2023.

and employee benefits expenses decreased due to decrease in stock-based compensation and a lower headcount as compared to previous year.

Restructuring efforts will continue as we optimize our talent portfolio.

and administrative expenses decreased across various categories including:

i) $988,412 in investment hosting fees as a result of the

decrease in investment income, ii) $900,034 in decreased bank sharing fees due to the decrease in the number of accounts, and iii) $661,776

in decreased amortization and depreciation.

the year ended December 31, 2024, the impairment of goodwill and finite-lived intangible assets was recognized as a result of the Company’s

annual impairment assessment conducted on December 31, 2024.

Similarly, for the year ended December 31, 2023, impairment of goodwill

and finite-lived intangible assets was recorded following both the annual impairment assessment on December 31, 2023, and an interim

impairment assessment on June 30, 2023.

The interim assessment was necessitated by the termination of the Master Services and Revenue

Sharing Agreement with the Central Bank, under which the Company provided expertise and intellectual property to cannabis-related businesses,

primarily in Arkansas.

professional services expense increased primarily due to higher legal fees related to ongoing litigation.

indemnity liability was eliminated from the Balance Sheet as of December 31, 2024, due to the Amended CAA, which led to the complete

reversal of the liability under the ‘credit loss (benefit) expense.’ Please refer to the ‘Amended and Restated CAA

with PCCU’ section in the Recent Updates above.

(income) /expenses

operating expenses

operating expenses decreased by $9.3 million or 41.5%, to $13.1 million for the year ended December 31, 2025, from $22.3 for the year

ended December 31, 2024.

The decrease was driven primarily by the absence of non-cash impairment charges that were recognized in 2024,

lower headcount-related costs, and reduced general and administrative expenses, partially offset by higher professional services costs

associated with litigation and the September 2025 Recapitalization.

and employee benefits

and employee benefits decreased by $1.5 million, or 19.5%, to $6.3 million for the year ended December 31, 2025, from $7.8 million for

the year ended December 31, 2024.

The decrease reflects several deliberate cost-reduction actions taken during 2025, including a reduction

in headcount as the Company continued to optimize its workforce, a reduction in the scope of employee bonus programs, and the termination

of the Company’s matching contributions to its 401(k) plan.

In addition, non-cash stock-based compensation expense decreased year

These decreases were partially offset by executive bonus compensation of approximately $0.5 million awarded during

2025, as well as a one-time settlement payment of approximately $0.3 million to a former employee, which was satisfied through a combination

of cash and shares of the Company’s Common Stock.

The Company has increasingly used equity-based

compensation to preserve cash and align employee and consultant incentives with the performance of its Common Stock.

and administrative expenses

and administrative expenses decreased by $0.7 million, or 18.0%, to $3.3 million for the year ended December 31, 2025, from $4.0

million for the year ended December 31, 2024.

The decrease was driven by several factors:

(i) a decrease of approximately $0.7

million in depreciation and amortization expense as certain intangible assets became fully amortized in 2024;

(ii) a reduction of

approximately $0.07 million in bank-sharing fees paid to other financial-institution clients due to a lower number of active

and (iii) a reduction in investment relations expense of approximately $0.12 million.

These decreases were partially

offset by an increase in hosting fees paid to PCCU, as the First Amended CAA resulted in an incremental cost of approximately $0.2

million after netting the savings from the elimination of investment-hosting and loan-services fees.

to December 31, 2025, the Second Amended CAA replaced the flat 1.00% asset hosting fee rate with a tiered rate structure.

Under the new

structure, the rate ranges from 0.50% on the first $25 million of average daily balances to 1.25% on balances above $125 million.

new rates apply retroactively from October 1, 2025, which resulted in a reduction of approximately $0.06 million in asset hosting fee

expense for the fourth quarter of 2025.

This adjustment has been recognized in the fourth quarter of 2025 financial statements as a Type

1 subsequent event.

of goodwill and long-lived intangible assets

impairment of goodwill and long-lived intangible assets charges were recorded during the year ended December 31, 2025.

During the year

ended December 31, 2024, the Company recognized impairment charges of $6.1 million related to goodwill and $3.1 million related to finite-lived

intangible assets, each identified through the Company’s annual impairment assessment as of December 31, 2024.

The absence of impairment

charges in 2025 accounts for $9.1 million of the total year-over-year decrease in operating expenses.

services expenses increased by $0.8 million or 32.2%, to $3.3 million for the year ended December 31, 2025, from $2.5 million for the

year ended December 31, 2024.

Change in the fair value of deferred consideration

$ (4,570,157 )

The increase reflects a structural shift in how the Company sources and manages certain services, as well

as a concentration of non-recurring costs associated with significant corporate events during 2025, partially offset by savings realized

from the transition to an outsourced service model and lower ongoing audit fees following the completion of the Company’s auditor

most significant structural change in 2025 was the elimination of the Company’s internal legal team and the engagement of external

general counsel and compliance service providers in its place.

This transition reclassified costs previously reported within compensation

and employee benefits into professional services and generated one-time transition costs during 2025.

Notwithstanding those transition

costs, the Company estimates that this change in structure produced annualized savings in excess of $0.3 million relative to the cost

of maintaining an internal legal function, the benefit of which is expected to be fully reflected in future periods.

increase in professional services expense was also attributable to the following during 2025:

fees associated with the shareholder litigation described in “Litigation” below;

incurred in connection with the resolution of employment matters with former employees;

legal, and other fees related to the September 2025 Recapitalization, including the cost of filing required registration statements,

the cost of issuance of convertible notes and the solicitation of required shareholder votes;

incurred in connection with the transition to a new independent registered public accounting firm, including parallel engagement

costs during the transition period;

and audit fees related to the restatement of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2025,

which was a non-recurring event.

connection with the September 2025 Recapitalization, the Company issued 1,063 shares of Series B Preferred Stock and accompanying Series

B Warrants to three independent service providers in exchange for a two-year service arrangement that run through September 30, 2027.

This structure reduced the immediate cash cost of those services;

however, under GAAP the equity instruments issued were recorded at

fair value as a prepaid asset and are being amortized to professional services expense ratably over the two-year service term.

of amortization recognized during the year ended December 31, 2025, is included within professional services expense above.

The unamortized

balance as of December 31, 2025, is reflected as a $0.3 million prepaid asset on the consolidated balance sheet.

See Note 7 to the consolidated

financial statements for further detail.

Partially offsetting these increases, the Company eliminated prior-year external counsel retainer

arrangements that were no longer necessary following the outsourcing of its legal function and began to benefit from lower recurring

audit and accounting fees following the completion of its auditor transition.

The Company expects that, with the majority of these non-recurring

items now behind it, ongoing professional services costs will decline in future periods relative to the elevated 2025 levels.

expense decreased by $0.03 million, or 9.9%, to $0.2 million for the year ended December 31, 2025, from $0.3 million for the year ended

December 31, 2024, primarily reflecting the closure of the Company’s Arkansas office during 2025.

Amortization of contract asset

The Company capitalized costs as a contract

asset to secure the Second Amended CAA related to the (i)

stand-ready guarantee liability and (ii) financial indemnification liability discussed in Note 8 to the Company’s consolidated financial statements in this Form 10-K.

Amortization of contract

costs was $0.1 million for the year ended December 31, 2025, compared to $0 for the year ended December 31, 2024.

represents the straight-line amortization of the cost to acquire a contract asset recognized as of October 1, 2025, the effective

loss (benefit) expense

The Company recognized a credit

benefit of $0.2 million for the year ended December 31, 2025, compared to a credit benefit of $1.4 million for the year ended December

For the year ended December

31, 2024, the credit benefit resulted from the full release of the indemnification liability under the CAA.

The First Amended

CAA eliminated the Company’s obligation to indemnify PCCU for CRB loan losses, and accordingly, the previous indemnification liability

was fully reversed.

For the year ended December

31, 2025, the Second Amended CAA, effective October 1, 2025, reinstated indemnification obligations, requiring the Company to cover up

to 65% of PCCU CRB loan portfolio.

The Company recorded a stand ready guarantee liability of $2.1 million under ASC 460 and a financial

indemnification liability of $1.1 million under ASC 326, each with a corresponding contract asset.

In accordance with ASC 460, the liability is recognized on a straight line

basis, based on a weighted-average remaining loan maturity of three years.

The Company reduced the stand ready guarantee liability by

$0.2 million and the consolidated statement of operation reflects $0.2 million as benefit in operating expense.

The expected amortization

per year is approximately $0.7 million in future periods, which will be reassessed annually.

Income (Expenses)

Ended December 31,

Change in the fair value of deferred

consideration

Interest expense

Change in fair value of warrant liabilities

$ (2,631,697 )

$ (1,621,501 )

$ (1,010,196 )

deferred consideration from the Abaca acquisition is classified as a derivative liability under ASC 815 and recorded at fair value, with

periodic adjustments.

Its value fluctuates based on factors such as the company’s stock price, market volatility, risk-free interest

rates, and amendments to the agreement.

For the year ended December 31, 2024, the fair value of deferred consideration decreased by $361,449

from its balance as of December 31, 2023.

This reduction was due to a decline in the fair value adjustment on the stock and cash consideration

payable to the Abaca shareholders, which affected the fair value of the third anniversary payment.

Interest expense for 2024 primarily consists of interest liability on the Senior Secured Promissory Note.

In contrast, interest expense

for 2023 primarily comprised interest liabilities on both the Senior Secured Promissory Note and the deferred obligation related to the

reverse acquisition of NLIT (see Note 8 for details on the issuance of shares to PCCU).

For the year ended December 31, 2024, interest

expense decreased by $561,346.

This reduction was mainly due to the restructuring of the deferred obligation payable related to the reverse

acquisition, which was converted into a Senior Secured Promissory Note on March 29, 2023.

Company has warrant liabilities related to Public, Private Placement, PIPE, and Abaca Warrants, which may be settled in cash or stock

depending on conditions such as stock price or registration status.

These warrants are accounted for as derivative liabilities due to

their contingent nature.

The liabilities are subject to adjustments based on terms and stock performance.

The change in the fair value

of warrant liabilities by $2,803,638 from December 31, 2023 was attributable to the decrease in the share price.

Year ended December 31,

Income tax expense (benefit), net

$ (1,829,701 )

Company recognized a deferred tax asset, primarily arising from temporary differences between financial accounting and tax reporting

related to the reverse acquisition of NLIT, the acquisition of Abaca, and Net Operating Loss (NOL) carryforwards (see Note 18 for a detailed

breakdown of deferred tax assets).

For the year ended December 31, 2024, the provision for income taxes increased by $45,689,387 compared

to the same period in 2023.

This increase was principally due to our determination that it is more likely than not the deferred tax assets

cannot be realized.

and cash equivalents

cash equivalents totaled $2,324,647 and $4,888,769 as of December 31, 2024 and 2023, respectively.

the year ended December 31, 2024, the Company generated $430,477 in cash from operations, compared to cash used of $832,144 for the year

Gain on extinguishment of forward purchase

Costs incurred to secure financing

Discount on Common Stock sold pursuant to the ELOC

Change in fair value of

warrant liabilities

Other Income/ (Expenses)

other income ( expenses) for the year ended December 31, 2025, was $3.2 million, compared

to total other expense of $2.6 million for the year ended December 31, 2024, an improvement of $ 0.5

The increase was primarily due to

a $3.3 million gain on the extinguishment of the FPA Liability, which had been carried on the Company’s balance sheet at $7.3 million

since December 31, 2022 and was settled through the issuance of Series B Preferred Stock and Series B Warrants rather than cash or Common

The increase in other income is partially offset by costs incurred to secure financing

and shift in the fair value of warrant liabilities .

Each component is described below.

in Fair Value of Deferred Consideration

contingent consideration payable to the former shareholders of Abaca was classified as a derivative liability under ASC 815 and remeasured

at fair value at each reporting date, with changes recognized in earnings.

The liability’s fair value was sensitive to the Company’s

stock price, implied volatility, risk-free interest rates, and any amendments to the underlying arrangement.

the year ended December 31, 2025, the Company recognized a gain of $0.08 million related to the decrease in the fair value of the deferred

consideration, compared to a gain of $0.4 million for the year ended December 31, 2024.

The gain in 2025 was primarily attributable to

the decline in the Company’s stock price during 2025, which reduced the fair value of the third anniversary payment obligation

prior to its extinguishment

third anniversary payment of $1.5 million was settled in full on October 3, 2025, through the non-cash issuance of 37,517 shares of the

Company’s Common Stock at the contractual floor value of $40.00 per share.

As a result of this settlement, the deferred consideration

liability was fully extinguished prior to December 31, 2025, and no balance remains on the consolidated balance sheet as of that date.

The last fair value measurement of the liability occurred at the time of settlement in October 2025, at which point the Company’s

stock price had declined from $9.00 per share as of December 31, 2024 to $6.90 per share on October 3, 2025.

This non-cash settlement

is reflected in the supplemental schedule of non-cash investing and financing activities in the consolidated statements of cash flows.

expense for the year ended December 31, 2025 consisted of (i) interest on the senior secured promissory note with PCCU (the “PCCU Note”) and (ii) non-cash interest expense related to

the OID on the Notes.

By comparison, interest expense for the year ended December 31, 2024 primarily reflected interest incurred on only

the PCCU Note.

2024, the Company made $2.2 million in scheduled principal repayments on the PCCU Note, reducing the outstanding

balance to approximately $11.0 million as of December 31, 2024.

The Company made one additional scheduled principal payment in January

In March 2025, the Company and PCCU amended the PCCU Note to convert it to an interest only structure for a two-year period and

to extend the maturity date to October 2030.

Following this amendment, the Company remained current

on all required interest payments through the date of the September 2025 Recapitalization.

September 30, 2025, in connection with the Company’s September 2025 Recapitalization, PCCU cancelled the PCCU Note in full

pursuant to a Debt Cancellation Agreement (the “Debt Cancellation Agreement”).

At the time of debt cancellation, the

outstanding principal balance was approximately $10.7 million.

In consideration for the cancellation, PCCU received 13,436 shares

of Series B Preferred Stock and a Series B Warrant to purchase 865,200 shares of Common Stock.

As a result, no balance remained

outstanding under the PCCU Note as of December 31, 2025.

See Note 11 to the Company’s consolidated financial statements in

this Form 10-K for further details.

year-over-year decrease in interest expense of $0.04 million was primarily attributable to a lower average principal balance on the PCCU Note during 2025 relative to 2024.

This decrease was partially offset by approximately $0.1 million of non-cash

interest expense recognized in connection with the OID on the Notes.

These Notes were subsequently exchanged for Series B Preferred Stock

and Series B Warrants in connection with the Exchange and Cancellation Agreements.

See Note 11 to the Company’s consolidated financial

statements in this Form 10-K for additional information.

on Extinguishment of Debt

June 16, 2022, the Company entered the FPA with Midtown, which subsequently assigned the FPA in part to Verdun and Vellar.

carried as a derivative liability on the Company’s balance sheet at a carrying value of $7.3 million as of the settlement date.

September 30, 2025, the Company entered into Exchange and Cancellation Agreements with each of Midtown, Verdun, and Vellar under which

each counterparty irrevocably cancelled, waived, and terminated all of its rights under the FPA.

In full settlement of the FPA Liability,

the Company issued an aggregate of 5,002 shares of Series B Preferred Stock and Series B Warrants to purchase 322,111 shares of Common

Stock at an exercise price of $7.7644 per share.

In February 2026, the Series B Preferred Stock and Series B Warrants’ exercise

price was reduced to $1.5528.

transaction was accounted for as an extinguishment of a liability under ASC 405-20.

The equity instruments issued were measured at

their fair value of $800 per unit, consistent with the price paid by unaffiliated third-party investors for identical securities on

the same date.

Because the aggregate fair value of the equity instruments issued was less than the carrying amount of the FPA

Liability, the Company recognized a gain on extinguishment of $3.3 million, which is included in Other Income (Expense) for the year

ended December 31, 2025.

This improvement was mainly due to lower operating expenses and the greater number of performing loans at better

interest rates than the previous period.

the year ended December 31, 2024, the Company generated $12,394 in cash from investing activities, compared to cash used of $2,180,448

August and September 2025, the Company issued the Notes in the aggregate principal amount of $0.7 million, with a 20% OID, resulting

in net proceeds of $0.6 million.

The Notes did not bear stated interest and the OID represented the investors’ yield and was recognized

as non-cash interest expense under ASC 835-30.

September 30, 2025, the Notes were exchanged for Series B Preferred Stock and Series B Warrants at $800 per unit.

The exchange was accounted

for as an extinguishment of debt under ASC 470-50.

To the extent the fair value of the equity instruments issued exceeded the carrying

amount of the Notes at the time of settlement, the Company recognized a loss on extinguishment.

For the year ended December 31, 2025,

The decrease was primarily due to the repayment of loans by customers in the previous period.

the year ended December 31, 2024, the Company used $3,006,993 in cash for financing activities, compared to $488,834 in the corresponding

period of 2023.

This was mainly due to the repayments on the senior secured promissory note during 2024.

assets and liabilities

revenue is primarily related to contract liabilities associated with the Company agreements.

As of December 31, 2024, SHF reported a

contract asset and liability of $0 and $28,335 respectively and on December 31, 2023, SHF reported a contract asset and liability of

$0 and $21,922, respectively.

and going concern

the Company recorded a net loss on extinguishment of debt of $0.003 million related to these convertible note exchanges.

Incurred to Secure Financing

the year ended December 31, 2025, the Company incurred $1.1 million in costs related to establishing its ELOC, of which $0.8 million

was in the non-cash form of Series B Preferred shares issued as commitment consideration.

These costs were expensed as incurred in

accordance with ASC 505-10-45-2, as the ELOC does not qualify for deferral treatment under GAAP.

There were no comparable costs

during the year ended December 31, 2024 .

Discount on Common Stock sold pursuant to the ELOC

For the year ended December 31, 2025, the Company

drew on its ELOC, selling shares of Common Stock at a contractual 10% discount to the lowest intraday stock price on each draw date.

pricing discount, which represents a direct cost of accessing the facility, resulted in a non-cash charge of approximately $0.08 million

recognized in the statement of operations for the year ended December 31, 2025.

This expense reflects the difference between the fair

market value of the shares issued on settlement date and the proceeds received by the Company under the ELOC.

in Fair Value of Warrant Liabilities

Company has outstanding public warrants, private placement warrants, PIPE warrants, and Abaca warrants, each of which is accounted

for as a derivative liability because the settlement of these instruments may be in cash or stock depending on conditions such as

the Company’s stock price or registration status.

Public warrants are remeasured at fair value using observable market prices

Private placement warrants, PIPE warrants and Abaca warrants are remeasured using the Black-Scholes-Merton option pricing

model (Level 3).

Changes in fair value are

recognized in earnings for each reporting period.

the year ended December 31, 2025, the Company recognized a gain of $1.3 million on the change in fair value of warrant liabilities, compared

to a loss of $2.8 million for the year ended December 31, 2024.

The favorable change of $4.1 million was primarily driven by a reduction

in the aggregate fair value of outstanding warrant liabilities, reflecting changes in the Company’s stock price and associated

implied volatility during the year.

As of December 31, 2025, all outstanding warrants were out of the money.

the year ended December 31, 2024, the $2.8 million loss was attributable to increases in warrant liability fair values, driven by movements

in the Company’s stock price relative to warrant exercise prices during that period.

tax (benefit) expense

ended December 31,

(benefit) expense

$ (43,918,156 )

tax (benefit)/expense for the year ended December 31, 2025 was $0.06 million, compared to $43.9 million for the year ended December

For the year ended December 31, 2024, income tax expense was primarily due to the recognition of a full valuation

allowance against the Company’s net deferred tax assets.

As of December 31, 2025 and December 31, 2024, the Company had net

deferred tax assets of approximately $45.8 million and $44.4 million, respectively and a full valuation allowance has been recorded

in each period.

Company’s net operating loss (“NOL”) carryforwards are subject to limitation under Section 382 of the Internal

Revenue Code of 1986, as amended.

As of December 31, 2025, the Company had approximately $67.7 million of federal NOL carryforwards.

For further detail, see Note 18 to the Company’s consolidated financial

statements in this Form 10-K.

and cash equivalents

and cash equivalents totaled $6.8 million and $2.3 million as of December 31, 2025 and 2024, respectively.

the year ended December 31, 2025, the Company used $3.4 million of cash in operating activities.

Operating cash flows for December

31, 2025 decreased from the prior year primarily due to the net loss of $2.2 million and changes to operating assets and liabilities

that totaled $0.8 million, which were offset by $2.0 million of non-cash adjustments to reconcile net income to net cash provided by operating activities.

For the year ended December 31, 2024, the Company

generated approximately $0.4 million of cash from operating activities, including non-cash adjustments to reconcile net income to net cash provided by operating activities of $50.8 million that

were offset by a net loss of $48.3 million and $2.0 million of changes to operating cash assets and liabilities.

the year ended December 31, 2025, the Company generated cash from investing activities of approximately $0.4 million, primarily from

the proceeds of a loan and from the sale of investment securities.

For the year ended December 31, 2024, cash from investing

activities of $0.01 million from the proceeds from a loan.

the year ended December 31, 2025, the Company had generated $7.4 million of cash from financing activities.

This primarily reflects

proceeds of $0.6 million from the issuance of the Notes, $6.1 million of gross proceeds from the issuance of Series B Preferred

Stock and Series B Warrants to purchase Common Stock, excluding $0.4 million offering cost, and $1.8 million from the sale of Common

Stock under the ELOC.

This was offset by the repayment of the PCCU Note totaling $0.3 million, $0.1 million repayment of a loan

payable for insurance financing and $0.3 million from the redemption of Series B Preferred Stock.

For the year ended December 31, 2024, the

Company used $3.0 million to repay the PCCU Note.

refers to our ability to meet anticipated cash demands, including servicing debt, funding operations, maintaining assets, and covering

other routine business expenses.

Our primary cash outflows include debt principal and interest repayments, operating costs, and general

business expenditures.

The main source of our liquidity continues to be cash inflows generated from operational performance.

As of December

31, 2024, the Company does not have significant capital investment commitments.

Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements—Going Concern, the Company is

responsible for evaluating whether conditions or events raise substantial doubt about its ability to meet future financial obligations

within one year of the financial statement issuance date.

Our primary cash outflows include operating costs, general business expenditures, and, to a lesser extent,

debt interest payments following the deferral of principal under the PCCU Note.

The primary source of our liquidity is

cash generated from operations.

As of December 31, 2025, the Company does not have significant capital investment commitments.

Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements, Going Concern, the Company is responsible

for evaluating whether conditions or events raise substantial doubt about its ability to meet future financial obligations within one

year of the financial statement issuance date.

This evaluation involves two steps:

(1) assessing whether conditions or events

raise substantial doubt about the Company’s ability to continue as a going concern, and (2) if substantial doubt is raised, evaluating

whether the Company has plans to mitigate that doubt.

Disclosures are required if substantial doubt exists or if the Company’s plans

alleviate the doubt.

the company reported a net working capital deficit of $983,833 at the end of 2024, this figure includes several non-cash liabilities

that do not affect liquidity.

After adjusting for these non-cash items and considering the cost of the Amended PCCU Note the adjusted

working capital calculation is as follows:

Working capital deficit as on December 31, 2024

Forward purchase agreement, net

Third anniversary payment consideration

Fees paid in 2025 on the Amended PCCU Note

Adjusted working capital as on December 31, 2024

The Company has the following non-cash items

on its balance sheet that impact the working capital calculation as reported, thus improving working capital:

- Obligation under the Forward Purchase Agreement :

As of December 31,

2024, the Company had a forward purchase receivable of $4,584,221 and a forward purchase derivative liability of $7,309,580, resulting

in a net liability of $2,725,359.

This liability can be settled in common stock at the Company’s discretion, offering flexibility to improve

working capital, which is management’s plan and intention.

- Obligation under the Third Anniversary Consideration Payment :

of December 31, 2024, the Company had an outstanding liability of $322,000, payable to the Abaca shareholders.

This liability can also

be settled in common stock at the Company’s discretion, providing further flexibility to enhance working capital, which is management’s

plan and intention.

At December 31, 2024, the Company reported

cash of $2,324,647 and a net working capital deficit of $983,833, compared to cash of $4,888,769 and a net working capital deficit of

$135,355 as of December 31, 2023.

The Company’s ability to continue as a going concern depends on its capacity to generate sufficient

liquidity to meet financial obligations, including interest repayments under the senior secured note with PCCU.

The Company incurred operating

losses of $7,091,486 and $20,731,049 for the years ended December 31, 2024 and 2023, respectively.

The reported working capital deficit and operating losses, before adjustment

for non-cash activity raises 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 are issued.

Management’s Plan Related to Going Concern

To address these concerns, the Company has

performed actions, including renegotiating its senior secured loan with PCCU.

On January 29, 2025, the Company and PCCU entered

into a letter agreement to defer the principal payments for February and March 2025 (the “Deferral Period”).

While interest

has been repaid during the Deferral Period, the note repayment schedule has been extended by an additional two months.

Furthermore, on March 1, 2025, the Company

entered into an Amended PCCU Note with PCCU, modifying the outstanding principal of $10,748,408 with an interest rate of 4.25% per annum.

The new repayment schedule includes interest-only payments from March 1, 2025, to January 5, 2027, followed by monthly principal and interest

payments from February 5, 2027, to September 5, 2030, with the full loan balance due by October 5, 2030.

This two-year deferment of principal

has unlocked $6,437,050 in cash flow, significantly improving the Company’s liquidity position.

On December 31, 2024, as a result of the

Amended PCCU Note, the Company excluded the short-term obligations of the PCCU Note totaling $2,883,167 from current liabilities and reclassified

it as non-current liabilities.

In the first quarter of 2025, the Company commenced

utilizing its stock-based compensation as an alternative to cash payments to attract and retain talent, the Board of Directors restructured

their compensation towards stock-based compensation, and the Company has continued to reduce costs through lower headcount and other

operational spend.

The Company has established a budget and monitors its liquidity position and will make

adjustments as needed.

Due to the uncertainty surrounding cash flows

from operations, the management plans outlined above do not entirely resolve the uncertainty regarding the going concern assumption.

a result, management has determined that there remains 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 are issued.

If the Company is not able to sustain its

present level of operations, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where

possible, or suspend or curtail planned expansion programs.

Any of these actions could materially harm the Company’s business, results

of operations and future prospects.

The accompanying 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.

October 17, 2024, the Company caused a Complaint to be filed in the District Court for the City and County of Denver, Colorado, captioned

SHF Holdings, Inc.

(1) assessing whether conditions or events raise substantial

doubt about the Company’s ability to continue as a going concern, and (2) if substantial doubt is raised, evaluating whether the

Company has plans to mitigate that doubt.

Disclosures are required if substantial doubt exists or if the Company’s plans alleviate

of December 31, 2025, the Company has cash and cash equivalents of $6.8 million and net working capital of $5.7 million.

has incurred recurring losses from operations and experienced negative cash flows from operations, including an operating loss of $5.4

million and cash used in operating activities of $3.4 million for the year ended December 31, 2025.

These conditions raise 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 are issued.

As of December 31, 2025, management believes our cash and cash equivalents is sufficient enough to meet our financial

obligations for the next twelve months.

has developed and implemented a series of measures intended to preserve liquidity and support the Company’s ability to meet its obligations

during the look-forward period.

Revenue Profile.

The Second Amended CAA increased the Company’s share of loan program income from approximately 35% to 65% of the

PCCU’s loan portfolio.

This agreement improves the recurring revenue profile of the Company’s core business on a prospective basis.

Additionally,

the Company is exploring strategic partnerships with other financial institutions.

to Additional Capital.

The Company has entered into a $150 million Equity Line of Credit, providing contingent access to additional

capital subject to customary conditions.

Management has identified and quantified specific, actionable cost reductions that are within its direct operational

control and that it would implement should operating conditions deteriorate below base-case expectations.

Flow Monitoring.

Management maintains a 52-week rolling cash flow projection that tracks anticipated expenses, revenues, and ending

cash balances against budget.

Cash positions are reviewed on a bi-weekly basis to ensure the Company maintains adequate liquidity to

fund operations.

Notwithstanding

the measures described above, the Company continues to incur operating losses and negative cash flows from operations, and uncertainty

remains as to whether these conditions will be fully resolved within the look-forward period.

As a result, management has concluded that

substantial doubt exists 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 are issued.

accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets

and the satisfaction of liabilities in the normal course of business.

These financial statements do not include any adjustments that

might result from the outcome of this uncertainty.

October 17, 2024, the Company filed a complaint in the District Court for the City and County of Denver, Colorado, captioned SHF Holdings,

Daniel Roda, Gregory W.

1 unchanged sentence

Carroll , Case No.

2024CV33187 (Denver County District Court).

On November 21, 2024, in connection with the Company’s request, the Company caused the Merger Payment to be deposited into

the Denver County District Court’s registry so that it can be distributed in accordance with the terms of the Merger Agreement.

The Merger Payment has already been accounted for in the working capital deficit disclosed in the Liquidity and Going Concern section.

On December 19, 2024, Daniel Roda, Gregory W.

Ellis, and James R.

Carroll caused

an answer and counterclaim to be filed in response to the Company Complaint.

For additional details, p lease refer to the section

titled “Abaca legal case in Denver” in the Recent Updates above as well as the Company’s Current Reports on Form 8-K

filed with the SEC on October 18, 2024 and December 19, 2024.

The lawsuit arises from a dispute over the terms

of the Company’s October 2022 acquisition of Abaca pursuant to a merger agreement that was subsequently amended in November 2022

and in October 2023 (the “Second Amendment”).

Second Amendment restructured certain merger consideration, including introducing warrants and modifying payment timing.

The defendants

contend the Second Amendment is invalid under Delaware law and seek to have it set aside, which would reinstate the original payment

terms and potentially increase the Company’s obligations.

The Company maintains that the Second Amendment was validly executed

and is binding.

November 21, 2024, at the Company’s request, the disputed merger payment of $3.0 million was deposited into the Denver County,

Colorado District Court’s registry pending resolution of the dispute.

This amount has been reflected in the Company’s consolidated balance sheet.

December 19, 2024, the defendants filed an answer and counterclaims against the Company.

On April 18, 2025, the District Court issued

an order denying the Company’s motion to dismiss most of the counterclaims, but the District Court did dismiss claims against the

Company’s Chairman, Fred Niehaus, with prejudice.

The District Court also clarified that the Delaware statutes cited by the defendants

govern pre-closing amendments and do not authorize post-merger amendments altering consideration, a finding that is consistent with the

Company’s legal position.

case is currently in active discovery.

A ruling on the summary judgement briefing is pending, and a court date is scheduled for May

Part I, Item 3., “Legal Proceedings” and Note 20 to the Company’s consolidated financial statements in this Form 10-K

for additional information.

Accounting Estimates

13 unchanged sentences

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

Company recognizes revenue in accordance with ASC 606, allocating transaction prices to specific services provided within a contract.

The primary revenue streams include account fee income, interest income on loans, and investment income, each classified as gross revenue

due to the Company’s control over the respective processes.

An important element of the estimation process is the determination

of a principal-vs-agent (gross-vs-net) relationship.

from account fee income is recognized when the Company fulfills its service obligations, including fees charged for financial services

such as account maintenance, transaction processing, and other miscellaneous services.

The transaction price is determined based on contractual

terms and potential fluctuations in customer usage.

The Company recognizes revenue on a gross basis, as it is directly responsible for

compliance monitoring, account management, and reporting services, and has sole discretion in setting service fees.

Income on Loans

Company earns revenue from interest on loans, previously determined using a fixed percentage fee structure, where PCCU received a share

of interest income from CRB-related loans.

Revenue is recognized over the loan period as earned.

The Company reports this revenue on

a gross basis as a principle, as it is responsible for identifying customers, evaluating and onboarding borrowers, and determining loan

interest rates.

Additionally, under the PCCU CAA, the Company is required to pay PCCU a loan servicing fee of 0.35% of the outstanding

loan balance and monthly service fees, which vary based on account balances above or below $1 million.

from investment income consists of interest earned on daily deposit balances maintained with financial institutions.

The Company’s

customer base primarily includes financial institutions serving cannabis-related businesses (CRBs), with revenue primarily generated

in the United States.

Revenue is recognized on a gross basis, as the Company retains first rights over deposit balances and controls

their allocation for loan funding, subject to contractual ceiling limits.

The Company maintains control over the utilization of deposit

balances, reinforcing its principal role in this revenue stream.

Additionally, the Company paid PCCU a 25% hosting fee based on investment

earnings derived from PCCU-related deposits.

revenue recognition policies align with ASC 606, ensuring the appropriate allocation of transaction prices to the Company’s distinct

performance obligations, including setup fees, ongoing service charges, and financial management activities.

conjunction with the 2022 Plan, as of December 31, 2024, 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

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

such terms defined below), involved complex transactions around Class A Common Stock.

Initially, about 0.19 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, and December 31, 2024, maintaining the FPA receivable’s value.

The value of the forward purchase agreement could diminish

if the Company issues any securities at a price below the reset price of $25.00 per share before the agreement expires.

Purchase Derivative

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 2022, the company fully accounted

for the maximum contractual liability.

Throughout 2023 and 2024, 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 years ended December 31, 2023

and December 31, 2024.

of Goodwill and Finite-lived intangible assets

Company assesses goodwill and intangible assets for impairment in accordance with ASC 350 and ASC 360, utilizing various valuation methodologies

that involve significant management judgment and estimation.

December 31, 2024, the Company conducted its annual goodwill impairment test under ASC 350, employing a combination of the Discounted

Cash Flow (DCF) Method and the Guideline Public Company (GPC) Method.

The DCF method estimated the present value of projected future

cash flows using an appropriate discount rate, while the GPC method compared key financial metrics against publicly traded comparable

As a cross-check, the enterprise value approach was used to validate the results.

The impairment determination incorporated

an equally weighted enterprise value derived from both the DCF and GPC methods.

Since the fair value of the asset group was lower than

its carrying amount, the Company recorded a full goodwill impairment charge of $6.06 million.

Additionally,

under ASC 360, the Company conducted a recoverability test by comparing the sum of estimated undiscounted future cash flows of the asset

group to its carrying amount.

As the undiscounted cash flows were lower than the carrying amount, the Company proceeded with a fair value

assessment using a DCF analysis.

The results indicated that the fair value of the asset group was lower than its carrying amount, leading

to impairment charges of $0.05 million for market-related intangible assets, $0.05 million for customer relationships, and $2.99 million

for developed technologies.

determination of impairment is inherently subjective and relies on key assumptions regarding future economic conditions, industry-specific

factors, and Company performance.

For goodwill and intangible asset impairment testing under ASC 350 and ASC 360, the Company applies

critical estimates, including projected future cash flows based on expected revenue growth, market demand, and operational performance,

discount rate selection reflecting asset-specific risks and prevailing market conditions, useful life estimates for intangible assets,

which impact the recoverability assessment, and customer attrition rates affecting the valuation of customer-related intangible assets.

These estimates are influenced by broader macroeconomic factors, including interest rate fluctuations, inflationary pressures, and sector-specific

developments.

Given the complexity and judgment involved, impairment test results may significantly vary over time due to changes in

market conditions, operational performance, technological advancements, or strategic business decisions such as asset sales or discontinued

As a result, impairment charges may fluctuate materially across reporting periods, highlighting the sensitivity of these

estimates to evolving financial and market dynamics.

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, PIPE and Abaca Warrants valuations are based upon internal assessments by the Company, employing

Level 3 inputs derived from unobservable inputs.

Key assumptions in the valuations include the expected volatility of our stock, exercise

price, the fair market value of the underlying Class A Common Stock, the risk-free interest rate, the expected life of the warrants,

and the dividend yield.

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

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

their fair market value on reporting date.

Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers , by identifying contracts with customers,

identifying distinct performance obligations, determining and allocating transaction prices, and recognizing revenue as each performance

obligation is satisfied.

A critical element of this process is the determination of whether the Company acts as a principal or agent

(gross versus net revenue presentation) in each of its revenue streams.

Company’s primary revenue streams are account fee income, loan program income, and investment income.

Each stream involves contractual

arrangements with PCCU.

Accordingly, the terms of the Second Amended CAA are material to the Company’s revenue recognition policies

and estimates.

See “Relationship with PCCU.”

Company’s revenue recognition process requires management to exercise judgment in three primary areas:

determining the transaction

price for account fee income, estimating the Company’s allocated share of loan program income under a variable yield formula,

and determining average net daily deposit balances for investment income.

Each involves assumptions that, if different, could materially

affect reported revenue.

Except for account fee income, where the Company acts as principal, the Company serves as an agent for loan program

income and investment income.

Because its primary role is to facilitate the contract with PCCU, the Company recognizes these revenues

on a net basis.

fee income consists of fees charged to CRBs for account maintenance, transaction processing, compliance monitoring, and other ancillary

Fees are recognized as services are performed.

The Company presents this revenue on a gross basis because it bears primary

responsibility for compliance monitoring, account management, and reporting, and retains sole discretion over fee pricing.

key estimation challenge is the transaction price, which varies by account type, deposit balance tier, and customer activity.

determines the appropriate fee tier each period and evaluates any adjustments for credits, waivers, or usage-based fluctuations.

the revised fee schedule effective January 1, 2025, changes in customer mix and average deposit levels directly affect recognized revenue.

Program Income

Company earns income from CRB loans originated and funded by PCCU and primarily serviced by the Company.

Revenue is recognized

over the loan’s term as interest is earned, reflecting only the Company’s allocated share of net interest income.

has concluded this arrangement is best characterized as a collaborative arrangement under ASC 808, given the bidirectional flow of consideration,

shared credit risk, and the absence of a traditional customer-vendor relationship between the Company and PCCU.

The timing and amount

of income recognized are identical regardless of whether ASC 808 or ASC 606 governs how the Company accrues its allocated share monthly

December 31, 2024, the Company’s allocated share of net interest income is determined under a loan yield allocation formula that

combines the externally observable Constant Maturity U.S.

Treasury Rate with a proprietary internal risk rating assigned to each loan.

The risk rating is a management estimate that directly drives the income split between the Company and PCCU, and changes in risk ratings

across the portfolio will increase or decrease the Company’s recognized share of interest income accordingly.

income represents interest earned on CRB deposit balances held at PCCU at the IORB rate, classified as a return on a financial instrument

under ASC 310 and outside the scope of ASC 606.

Income is accrued monthly based on average net daily deposit balances and the prevailing

IORB rate, both of which are externally determinable.

To the extent ASC 606 were determined to apply, the recognition outcome would be

identical, and accordingly no change in previously reported amounts would arise from this classification.

Pursuant to the each of the

First Amended CAA and the Second Amended CAA, the Company is entitled to 100% of this investment income, replacing the prior structure

under which 25% was remitted to PCCU as an investment hosting fee.

This change is a material factor in the comparability of investment

income between 2024 and 2025.

Company grants stock options and restricted stock units (“RSUs”) to employees, directors, and consultants under the Plan,

which was originally approved by stockholders on June 28, 2022.

During 2025, the Plan was amended to provide that the total number of

shares of Common Stock authorized for issuance under the Plan will automatically increase upon the occurrence of a Dilution Event (as

defined in the Plan) and on the first trading day of each calendar year, beginning January 1, 2026, by the number of shares necessary

to bring the total authorized shares under the Plan equal to fifteen percent (15%) of total outstanding shares of Common Stock as of

the last day of the immediately preceding calendar year, subject to a maximum annual increase of 50,000 shares.

The Company also filed

a Registration Statement on Form S-8 during 2025 to register the shares of Common Stock issuable under the Plan, ensuring that shares

delivered to grantees upon exercise or settlement of awards are freely tradeable.

The Company has not issued stock appreciation rights, restricted stock, stock bonus awards, or performance compensation

awards in the year ended December 31, 2025 and December 31, 2024.

As of December 31, 2025, a total of 626,749 shares of Common Stock were

authorized for issuance under the Plan, of which 78,799 shares remained available for future issuances.

Company accounts for all equity-based awards under ASC 718, Compensation - Stock Compensation.

Stock-based compensation is

considered a critical accounting estimate because the fair value of option awards is determined at the grant date using valuation

models and assumptions that are inherently uncertain.

Changes in those assumptions particularly expected stock price

volatility can materially affect the amount of compensation expense recognized over the requisite service period.

options are granted to incentivize employee and director ownership of the Company’s Common Stock and to help align compensation

with the long-term performance of the Company.

Options generally have a 10-year contractual term and permit net-share settlement upon

The exercise price, vesting schedule, and exercise period for each grant are determined by the Plan administrator at the time

fair value of each option award is measured on the grant date using the Black-Scholes-Merton option valuation model.

The key assumptions

applied during the year ended December 31, 2025 were as follows:

Expected volatility.

The Company estimates volatility based on its historical stock price over a period commensurate with the expected term of each award.

For options granted during the year ended December 31, 2025, expected volatility ranged from 93.42% to 115.54%.

This represents a refinement from the approach used in prior periods, which applied a fixed 100% volatility assumption given the Company’s limited post-listing trading history.

As the Company has accumulated additional trading history, the volatility assumption is now grounded in observed historical price data.

Expected volatility is the assumption with the greatest sensitivity to the fair value output, and changes in this estimate can materially affect the compensation expense recognized in current and future periods.

expected term is calculated using the simplified method, the average of the contractual term and the vesting period, because the

Company does not yet have sufficient historical exercise data to support a more refined estimate.

interest rate

risk-free rate is based on U.S.

Treasury security yields for maturities approximating the expected term of each award at the grant

For options granted during the year ended December 31, 2025, the risk-free rate ranged from 3.54% to 4.47%.

zero-dividend yield is assumed, consistent with the Company’s history of not paying dividends and its current expectation that

it will not do so in the foreseeable future.

cost for service-based options is recognized on a straight-line basis over the requisite service period.

During 2025, the Company also

granted performance-based stock options that vest upon the Company’s successful completion of an equity transaction generating

proceeds in excess of $4.0 million.

This performance condition is non-market-based as defined under ASC 718-10-20.

Compensation cost

for such performance-based awards is recognized only when it becomes probable that the performance condition will be achieved, with cumulative

expense adjusted prospectively as management’s estimates evolve.

Forfeitures are recognized as they occur.

Changes in any of the

valuation assumptions described above, or in management’s assessment of the probability of achieving a performance condition, could

produce materially different compensation expense amounts in current and future reporting periods.

are valued at the closing market price of the Company’s Common Stock on the grant date.

Compensation cost is recognized on a straight-line

basis over the requisite service period.

Because RSU fair value is based on an observable market price rather than a valuation model,

estimation uncertainty is lower than for stock options.

As of December 31, 2025, RSU activity under the Plan had substantially wound

down, with no units remaining outstanding.

Share Pool - Dilution Event and Annual Reset Provisions

automatic share pool expansion mechanic introduced by the 2025 amendment to the Plan requires management to assess on a continuous basis

whether a Dilution Event has occurred, which in turn determines the number of shares available for future grants and the scope of future

equity compensation arrangements.

An incorrect assessment of whether a Dilution Event has been triggered could affect the calculation

of available shares and, indirectly, the trajectory of future compensation expense.

The Company monitors its equity issuance activity

on an ongoing basis to ensure compliance with the Plan’s terms.

Company’s accounting for its outstanding warrant liabilities, comprised of public warrants, private placement warrants, PIPE warrants,

and Abaca warrants, constitutes a critical accounting estimate because of the significant judgment and assumptions required in their

valuation and the potential impact on our financial statements.

These warrants are carried at fair value on a recurring basis, with changes

in fair value recognized in the consolidated statements of operations each reporting period.

public warrants, the Company uses Level 1 inputs, relying on exchange-traded prices to determine fair value.

This approach minimizes

estimation uncertainty for this class of warrants.

private placement warrants and PIPE warrants, fair value is determined using the Black-Scholes-Merton option pricing model, which

incorporates Level 3 unobservable inputs.

Key assumptions include the expected volatility of the Company’s Common Stock, the

exercise price of each warrant, the fair market value of the underlying Common Stock, the risk-free interest rate, the expected remaining

life of the warrants, and an assumed zero dividend yield.

Abaca warrants, the Company has 250,000 warrants outstanding, each exercisable to purchase one share of Common Stock at an exercise

price of $40.00 per share.

The Abaca warrants are classified as a liability and carried at fair value using Level 3 inputs.

value is assessed at each reporting period end.

connection with the issuance of Series B Preferred Stock on September 30, 2025, the Company also issued Series B Warrants to purchase

1,999,544 shares of Common Stock.

After evaluation under ASC 815-40 and ASC 480, the Series B Warrants were determined to qualify for

equity classification and will not be subsequently remeasured at fair value.

key assumptions driving the Level 3 warrant valuations are stock price volatility, the risk-free rate, and the expected remaining life

of each warrant each are inherently uncertain and subject to change.

Fluctuations in the Company’s stock price, shifts in market

volatility, changes in prevailing interest rates, or changes in the holders’ expected exercise behavior could lead to significant

period-to-period movements in the recorded fair values of these warrant liabilities and, correspondingly, material swings in the Company’s

reported results of operations.

The Company closely monitors these assumptions and market conditions at each reporting date to ensure

the warrant valuations reflect current fair market value.

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 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

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

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

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 .

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

In accordance with ASC 815, Derivatives and Hedging, this obligation is classified as a derivative liability and is carried on the balance

sheet at fair value, with changes in fair value reflected in the consolidated statements of operations at each reporting period end.

deferred consideration arrangement includes cash payments scheduled at various anniversaries of the merger closing and the potential

issuance of Common Stock based on specified conditions.

The third anniversary payment of $1.5 million, which was due in October 2025,

was settled on October 3, 2025, through the issuance of 37,517 shares of Common Stock, using a floor value of $40.00 per share at the

Company’s election.

fair value of the deferred consideration was determined using a Monte Carlo Simulation model and influenced by several factors, including

the Company’s stock price, stock price volatility, the risk-free interest rate, the timing and structure of remaining payment obligations,

and the specific terms of the Abaca merger agreement and its amendments.

Changes in the Company’s stock price, fluctuations in

market volatility, or shifts in the risk-free interest rate could produce material adjustments to the recorded fair value of this derivative

liability in future periods, with a corresponding impact on the Company’s financial position and results of operations.

These estimates

and assumptions are subject to inherent uncertainty and the exercise of management’s judgment, and the Company monitors related

developments and market conditions closely to ensure the liability is accurately valued at each reporting date.

Purchase Agreement and Forward Purchase Derivative

previously disclosed, the Company entered the FPA with Midtown, which subsequently assigned the FPA in part to Verdun and Vellar.

FPA gave rise to both a FPA receivable, which had been carried on the balance sheet, and an FPA derivative liability.

the first quarter of 2025, the Company reclassified the FPA receivable balance of $4.6 million to additional paid-in capital after determining

that the arrangement met the conditions for equity classification under ASC 815-40 and ASC 480.

September 30, 2025, all three FPA holders entered into Exchange and Cancellation Agreements with the Company, pursuant to which they

irrevocably cancelled, waived, and terminated all of their rights under the FPA in exchange for shares of Series B Preferred Stock and

Series B Warrants to purchase Common Stock.

This transaction extinguished the FPA derivative liability, which had been carried at $7.3

million since December 31, 2022 without change, and was accounted for as a debt extinguishment under ASC 405-20.

The fair value of the

equity instruments issued was measured at $800 per unit, consistent with the cash price paid by unaffiliated third-party investors for

identical instruments on the same date.

The carrying amount of the FPA Liability exceeded the aggregate fair value of the instruments

issued, resulting in a gain on extinguishment of $3.3 million, which is included in Other Income (Expense) in the consolidated statements

of operations for the year ended December 31, 2025.

a result of these transactions, the FPA receivable and FPA derivative liability are fully settled as of December 31, 2025, and no amounts

remain on the balance sheet related to the FPA.

Accordingly, FPA and forward purchase derivative are not expected to constitute critical

accounting estimates in future periods.

in Preferred Securities - Valuation and Impairment Assessment

Company holds an investment in preferred securities of ADTX with a carrying value of $1.45 million as of December 31, 2025, and this

is accounted for under the measurement alternative permitted by ASC 321-10-35-2.

Because ADTX’s preferred shares are not actively

traded and lack a readily determinable fair value, the investment is carried at cost, less any impairment, adjusted for observable price

changes in orderly transactions for identical or similar instruments.

accounting policy requires management to exercise judgment in two key areas:

(i) assessing at each reporting date whether qualitative

indicators of impairment exist, and (ii) identifying and evaluating any observable price changes in orderly transactions involving identical

or similar instruments.

Both assessments involve significant judgment given the limited liquidity and publicly available financial information

regarding ADTX.

of December 31, 2025, management identified no indicators of impairment and no qualifying observable price changes.

However, future changes

in ADTX’s financial condition or business prospects could require the Company to recognize impairment charges that may be material

to its results of operations.

Ready Guarantee Obligation

connection with the Second Amended CAA with PCCU, the Company assumed an obligation to indemnify PCCU for up to 65% of credit losses

on PCCU’s CRB loan portfolio, which had a total outstanding balance of approximately $52.1 million as of December 31, 2025.

460, the issuance of a guarantee creates a noncontingent obligation to stand ready to perform, requiring the Company to recognize a liability

at fair value at inception regardless of whether losses are probable.

Because no observable market exists for cannabis lending guarantee

obligations, the Company measured the stand-ready liability using a Level 3 insurance-pricing methodology under ASC 820, estimating the

premium a knowledgeable, willing third-party surety or specialty financial guarantor would charge to assume the same obligation in an

arm’s-length transaction.

The fair value incorporates three components:

(i) probability-weighted expected credit losses at the Company’s

65% indemnification share, applying a pooled probability of default of 7.25% and loss given default of 25.0% for performing loans, and

a 35% probability of default and 50% loss given default for the individually evaluated criticized credit;

(ii) a stand-ready risk premium

of 120% of expected losses, reflecting the uncertainty, volatility, and duration of the commitment and the illiquidity of cannabis real

estate collateral;

and (iii) a time value discount at a risk-adjusted rate of 4.0%.

The resulting fair value at inception was $2.1 million,

which is recognized as a stand-ready guarantee liability with an offsetting contract asset, resulting in a net zero equity impact on

The liability is released to income on a systematic basis as the Company is progressively released from risk through loan paydowns

and maturities.

Indemnification Liabilities

connection with the Second Amended CAA with PCCU, the Company assumed an obligation to indemnify PCCU for up to 65% of credit losses

on PCCU’s CRB loan portfolio, which had a total outstanding balance of approximately $52.1 million as of December 31, 2025.

recognizes a financial indemnification liability under ASC 326-20 representing the contingent component of its obligation, management’s

estimate of the Company’s share of lifetime expected credit losses on PCCU’s CRB loan portfolio.

A corresponding contract asset of equal

amount was recognized under ASC 340-40 at inception, resulting in a net zero equity impact on Day 1.

Expected credit losses are estimated

using a probability of default times loss given default framework applied to the portfolio segmented into three tranches:

loans evaluated on a pooled basis, elevated-risk loans evaluated on a pooled basis at higher loss rates, and a single past-maturity commercial

loan that is individually evaluated due to its credit profile and limited collateral coverage.

Because the portfolio consists entirely

of cannabis-use real estate, management applies a two-step collateral discount, eliminating the cannabis license premium embedded in

appraised values and reducing the residual to proceeds realizable by a non-cannabis buyer in a liquidation sale resulting in adjusted

collateral coverage that is less than the gross portfolio balance.

A qualitative loss given default premium is applied across all pooled

tranches to reflect the portfolio’s complete concentration in a single industry operating under federal illegality, constrained collateral

marketability, and the absence of conventional refinancing markets.

The financial indemnification liability is dynamic and remeasured

quarterly based on changes in portfolio credit quality, economic conditions, and forward-looking assumptions, with all changes recognized

in credit loss expense or income in the period of remeasurement.

This estimate is inherently uncertain due to the portfolio’s complete

concentration in cannabis-related borrowers, limited industry loss history, and the potential for adverse changes in borrower credit

quality, collateral values, or the regulatory environment governing cannabis;

such changes could materially affect the carrying amount

of this liability in future periods.

Growth Company Status

Company is an emerging growth company (“EGC”), as defined in the JOBS Act.

Under the JOBS Act, EGCs can delay adopting new

or revised accounting standards issued until such time as those standards apply to private companies.

In electing this relief, the JOBS

Act does not preclude an EGC from adopting a new or revised accounting standard earlier than the time that such standard applies to private

SHF has elected to use this relief and will do so until the earlier of the date that it (a) is no longer an emerging growth

company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act.

As a result of the

elected JOBS Act relief, these combined and consolidated financial statements may not be comparable to companies that do not elect JOBS

Act relief or choose to early adopt different accounting pronouncements than SHF.

are an EGC as defined in the JOBS Act.

As such, we are eligible to take advantage of certain exemptions from various reporting requirements

that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not

being required to comply with the auditor attestation requirements of Section 404 of SOX, reduced disclosure obligations regarding executive

compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote

on executive compensation and shareholder approval of any golden parachute payments not previously approved.

addition, Section 107 of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section

7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards.

In other words, an EGC can delay the adoption

of certain accounting standards until those standards would otherwise apply to private companies.

We intend to take advantage of the

benefits of this extended transition period, for as long as it is available.

We will remain an EGC until the earlier of (1) the last

day of the fiscal year (a) following the fifth anniversary of the date of the first sale of our common equity securities pursuant to

an effective registration statement under the Securities Act, which is December 31, 2026, and (b) in which we have total annual gross

revenue of at least $1.07 billion, (2) the date on which we are deemed to be a large accelerated filer, which means the market value

of our Common Stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second

fiscal quarter, and (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

References herein to “emerging growth company” have the meaning provided in the JOBS Act.

The Company will cease to be an EGC on December 31, 2026.

Reporting Company

are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K, which allows us to take advantage of certain

exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements of Section 404.

We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of the shares of our Common

Stock held by non-affiliates exceeds $250.0 million as of the prior June 30, and (ii) our annual revenue exceeded $100.0 million during

such completed fiscal year or the market value of the shares of our Common Stock held by non-affiliates exceeds $700.0 million as of

the prior June 30.

To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial

statements with other public companies difficult or impossible.

Control Over Financial Reporting

connection with our management assessment of internal control over financial reporting as of and for the year ended December 31, 2024,

the Company has identified material weaknesses within our internal controls over financial reporting.

Refer to Item 9A of this document

for additional details.

Party Relationships

is considered a related party as it holds a significant ownership interest in the Company and serves as its position as the Company’s

sole lending institution.

The agreements between PCCU and the Company are as follows:

Servicing Agreement

Company had an Account Servicing Agreement with PCCU.

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

addition to providing the services, the Company 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.

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

Amounts due to the Company

were due monthly in arrears and upon receipt of invoice.

This agreement was replaced and superseded in its entirety by the PCCU CAA,

which was entered into on March 29, 2023, and later amended and restated on December 31, 2024, between PCCU and the Company

Services Agreement

July 1, 2021, SHF entered into a Support Services Agreement with PCCU.

In connection with PCCU hosting the depository accounts and the

related loans and providing certain infrastructure support, PCCU receives (and SHF pays) a monthly fee per depository account.

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

This agreement was replaced and superseded in its entirety

by the PCCU CAA, which was entered into on March 29, 2023, and later amended and restated on December 31, 2024, between PCCU and the

Servicing Agreement

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.

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, the Company 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, the Company has agreed to indemnify PCCU from all claims related to default-related credit losses as defined in the Loan Servicing

This agreement was replaced and superseded in its entirety by the PCCU CAA, entered into on March 29, 2023, between PCCU and

the Company, which was subsequently amended on December 31, 2024.

connection with management’s assessment of internal control over financial reporting as of December 31, 2025, the Company identified

material weaknesses in prior periods related to the application of U.S.

GAAP to complex transactions, the going concern evaluation process,

and information technology access controls.

2025, the Company executed a comprehensive remediation plan to address these weaknesses, and management believes all previously identified

material weaknesses have been remediated as of December 31, 2025.

Additionally, while the material weakness related to the completeness

and accuracy of account activity fee income has been remediated, sufficient time has not elapsed to conclude that the related controls

are operating effectively.

a material weakness was identified during the fourth quarter of 2025 related to the Company’s loan documentation and credit loss estimation process.

See Item 9A, “Controls

and Procedures” for a full description of the identified material weakness and management’s remediation plan.

Party Relationship with PCCU

is a related party because it held approximately 25.2% of the Company’s Common Stock as of December 31, 2025, holds approximately

43.3% of the Series B Preferred Stock and Series B Warrants as of the date hereof, and serves as the federally regulated credit union

through which the Company’s CRB clients hold their deposit accounts and obtain loans.

Because PCCU holds the majority of the Company’s

client deposits and has the ability to significantly influence the Company’s management and operating policies, all transactions

and arrangements between the Company and PCCU are disclosed as related party transactions in accordance with ASC 850 and SEC Regulation

However, as of May 21, 2025, PCCU no longer has contractual rights to appoint members to the Board of Directors.

Concentration

2025, the Company derived substantially all of its revenue from services provided to PCCU under the First Amended CAA.

For the years

ended December 31, 2025 and December 31, 2024, revenue generated under the then-applicable agreements totaled $6.7 million and $12.7

million, represented 86.7% and 83.5% of total revenue, respectively.

As of December 31, 2025 and December 31, 2024, amounts due from

PCCU totaled $1.0 million and $1.0 million, representing 97.0% and 87.8% of total accounts receivable, respectively.

loss of or a material adverse change to this relationship could have a material adverse impact on the Company’s results of operations

and financial condition.

Management monitors this concentration risk on an ongoing basis.

Alliance Agreement

March 29, 2023, the Company and PCCU entered into the PCCU CAA, which was subsequently amended and restated on December 31, 2024.

agreement set forth the terms and conditions of lending and account-related services, governing the relationship between the Company

The PCCU CAA outlined the application, underwriting, loan approval, and foreclosure processes for loans issued by PCCU to CRBs,

as well as the loan servicing and monitoring responsibilities of both parties.

particular, the PCCU CAA provided procedures to be followed upon the default of a loan to ensure that neither the Company nor PCCU would

take title to or possession of cannabis-related assets, including real property that may have served as collateral for loans funded by

PCCU pursuant to the agreement.

the PCCU CAA, PCCU had the right to receive monthly fees for managing loans.

For SHF-serviced loans (CRB loans provided by PCCU but primarily

handled by SHF), a yearly fee of 0.25% of the remaining loan balance was applied.

For loans both financed and serviced by PCCU, a yearly

fee of 0.35% on the outstanding balance was charged.

These fees were calculated based on the average daily balance of each loan for the

preceding month.

Additionally,

the Company was obligated under the PCCU CAA to indemnify PCCU from certain default-related loan losses, as fully defined in the agreement.

the PCCU CAA outlined certain fees to be paid to the Company for specified account-related services, including cannabis-related income

such as loan origination fees, interest income on CRB-related loans, participation fees, servicing fees, investment income, account activity

fees, processing fees, and other revenue.

These fees were set at $30.96 per account in 2022, $25.32-$27.85 per account in 2023, and $26.08-$28.69

CRB deposits held at PCCU, investment and interest income earned on these deposits (excluding interest income on loans funded by PCCU)

was shared at a ratio of 25% to PCCU and 75% to the Company.

Additionally, PCCU maintained its CRB-related deposits to total assets ratio

at 60%, unless otherwise dictated by regulatory, regulator, or policy requirements.

The initial term of the PCCU CAA was two years, with

a one-year automatic renewal, unless either party provided a one hundred twenty-day written notice prior to the end of the term.

to the third quarter of 2023, the Company’s investment earnings came solely from interest on deposits at the Federal Reserve Bank,

capped at the earnings accrued by PCCU from its reserves.

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

adopt the 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 an incremental revenue of $549,000, which was recognized in

the fourth quarter.

Under the PCCU CAA, the Company was obligated to pay a 25% of the investment earnings as a hosting fee to PCCU based

on this income.

December 31, 2024, the Company and PCCU entered into an Amended CAA, extending the term through December 31, 2028, with automatic two-year

renewal periods unless a party provides written notice of non-renewal at least 12 months before the current term expires.

modifications under the Amended CAA include:

of Indemnification Obligations:

The Company is no longer required to indemnify PCCU for any loan-related losses under either

the original or future agreements.

of Prior Fees and Implementation of Asset Hosting Fee Structure:

Under the previous agreement, the Company was required to pay

various fees to PCCU, including per-account servicing fees, investment hosting fees, and loan servicing fees.

The Amended CAA eliminates

all these charges and replaces them with a fixed account servicing fee.

Under the new structure, the Company will pay a single asset

hosting fee which is calculated as 0.01 multiplied by the average daily balance of account relationships generated by the Company,

divided by the number of days in the year, and multiplied by the number of days in the applicable month.

This revised model aligns

servicing costs with account balances rather than a flat per-account charge, offering a more scalable and efficient fee structure.

Income Entitlement:

Under the Amended CAA, the Company received all investment income earned on CRB funds invested on its behalf

by PCCU, effectively eliminating the investment hosting fees that were previously payable to PCCU.

Yield Allocation Formula:

The Company’s interest income will be determined using a loan yield allocation formula incorporating

the Constant Maturity US Treasury Rate and a proprietary risk rating formula for determining the fee split.

Loan-to-Share

Ratio Compliance:

The Amended CAA introduces penalties for the Company, if it fails to maintain the agreed Loan-to-Share (LTS)

If the LTS Maximum (60%) is exceeded for over 90 days, the Asset Hosting Fee increases from 1.00% to 1.10% of the average

daily balance (ADB) until compliance is restored.

If the LTS Minimum (27.5%) is breached, SHF must pay a quarterly adjustment fee

based on the shortfall.

Additionally, if the LTS Ratio exceeds 100% for 90 days, SHF incurs an interest charge at the Federal Funds

Rate + 120 bps, calculated daily and paid monthly.

schedule below demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits on December 31, 2024 and December

December 31, 2024

December 31, 2023

CRB related deposits

$ 116,064,487

$ 129,350,998

Capacity at 60%

PCCU net worth

Capacity at 1.3125

Limiting capacity

PCCU loans funded

Amounts available under lines of credit

Incremental capacity

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

31, 2024, and December 31, 2023:

December 31, 2024

December 31, 2023

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,

2024, and December 31, 2023:

Company’s commercial relationship with PCCU is currently governed by the Second Amended CAA, which sets forth the complete terms

and conditions governing the relationship between the Company and PCCU, including account-related services, lending activities, fee arrangements,

and loan capacity parameters.

Under the CAA, the First Amended CAA, and the Second Amended CAA, as applicable, the Company originates,

underwrites, and services CRB loans on PCCU’s behalf.

PCCU, as the federally regulated credit union, is the legal holder of CRB

deposits and the maker of CRB loans.

The Company provides all compliance analysis, credit analysis, due diligence, underwriting, and

administration required to onboard and service CRB accounts and loans.

The CAA also includes default procedures designed to ensure that

neither party takes title to or possession of cannabis-related assets, including real property that may serve as collateral.

CAA was originally executed on March 29, 2023, and was subsequently amended and restated by the First Amended CAA on December 31,

The CAA and the First Amended CAA were further amended and restated by the Second Amended CAA, which was executed on February

4, 2026 with a retroactive effective date of October 1, 2025.

The Company and PCCU reached agreement on the material economic terms

of the Second Amended CAA on or about October 1, 2025, following completion of the September 2025 Recapitalization.

agreement was formally executed on February 4, 2026;

the intervening period involved only procedural and documentation matters that

did not affect the substance of the agreed terms.

The Second Amended CAA extended the customer agreement with PCCU through December

31, 2031, with an automatic renewal for subsequent periods of two years each, unless notice of non-renewal is provided no later than

twelve (12) calendar months prior to the expiration of the then-current term.

This is an extension from the First Amended

CAA’s termination date of December 31, 2028.

Differences Between the Agreements

Second Amended CAA increases the Company’s share of CRBs loan program income to up to 65% of total interest, compared to

approximately 35% received under the Amended CAA.

The Second Amended CAA also shifts the calculation the asset hosting fee to a

graduated scale based on deposits, which is expected to result in a reduction of fees between approximately $0.2 million to $0.3

million annually compared to the First Amended CAA.

the CAA, which was effective for the year ended December 31, 2024, the Company was entitled to receive all of loan program income while

bearing 100% of the indemnification risk on loans originated through PCCU.

The Company was also obligated to pay PCCU asset hosting fees

based on a fixed fee per account from $26.08 to $28.69, investment hosting fees calculated based upon 25% of investment income earned

on the monthly closing CRB deposit balance, and loan servicing fees based upon 0.25% of the total loans serviced by PCCU but managed

by the Company.

First Amended CAA introduced significant changes to this arrangement.

The Company’s share of loan program income was reduced from

100% to 35%, with the introduction of a yield and loss allocation framework, while the Company’s indemnification liability was

fully eliminated.

Investment hosting fees and loan servicing fees were also eliminated, and the method of calculating asset hosting fees

was revised from a fixed per-account fee to a percentage applied to average daily balances of deposits held at PCCU.

Second Amended CAA now determines the revenue the Company receives from its relationship with PCCU from October 1, 2025 until at least

the end of 2031.

Under the Second Amended CAA, the Company receives up to 65% of net interest income on applicable loans and correspondingly

indemnifies up to 65% of default-related losses, with PCCU indemnifying the remaining 35%.

The asset hosting fee structure was also revised

from a flat rate of 1.0% to a sliding scale ranging from 0.50% for average daily deposit balances below $25.0 million to 1.25% for average

daily deposit balances exceeding $125.0 million.

The Company is required to deposit into escrow a current copy of the source code and technical documentation for

the Company’s proprietary software that the Company uses to provide its services under the Second Amended CAA (the “Escrowed

In the event of certain defaults by the Company under the Second Amended CAA or if the Company enters into, among other

things, bankruptcy, then the Escrowed Software will be released from escrow and transferred to PCCU.

In the event of such a release, PCCU

will receive a nonexclusive, royalty-free, fully-paid, non-transferrable, non-sub licensable license to (a) use the Escrowed Software

for the purpose of maintaining, supporting, performing, and operating an equivalent of the services as had otherwise been provided to

PCCU by the Company and (b) modify, enhance, and create derivative works of the Escrowed Software

Economic Terms Under the Agreements

the First Amended CAA in 2025, the Company paid PCCU a single asset hosting fee in exchange for access to PCCU’s Jack Henry core

banking platform, regulated deposit infrastructure, and related operational support.

This fee replaced all prior per-account servicing

fees, investment hosting fees, and loan servicing fees that existed under earlier agreements.

asset hosting fee was calculated as 1.00% per annum applied to the average daily balances of CRB account relationships generated by

the Company and hosted at PCCU, divided by the number of days in the year and multiplied by the number of days in the applicable

The fee increases to 1.30% per annum on the entire average daily balances once deposits exceed $130 million.

ended December 31, 2025, the Company incurred $1.2 million in asset hosting fees payable to PCCU.

February 4, 2026, the Company and PCCU executed the Second Amended CAA with a retroactive effective date of October 1, 2025.

Second Amended CAA replaced the flat 1.00% rate in the First Amended CAA with a tiered marginal rate structure (ranging from 0.50%

on the first $25 million of average daily balance to 1.25% on balances above $125 million) and increased the Company’s share

of loan program income from approximately 35% up to 65%, with a corresponding indemnification obligation of up to 65% for loan

The execution of the Second Amended CAA is a Type 1 recognized subsequent event under ASC 855-10-25-1.

As a result, the

retroactive reduction in asset hosting fees of $0.06 million for the period October 1 through December 31, 2025 has been recognized

as a reduction of operating expense in the year ended December 31, 2025.

On a prospective basis, the tiered rate structure is

expected to generate annualized savings of approximately $0.3 million compared to First Amended CAA rates beginning in the first

quarter of 2026.

Under both the First Amended CAA and the Second Amended CAA, the Company receives 100% of the investment income earned

on CRB funds invested on its behalf by PCCU.

The 25% investment hosting fee that was paid to PCCU under the CAA ceased on January 1, 2025.

Program Income

Second Amended CAA provides that each loan covered by the Second Amended CAA is subject to an allocation of yield and default-related

losses among the Company and PCCU.

Pursuant to this yield and loss allocation, the Company will receive up to 65% of all net interest

income on the applicable loans and will also indemnify up to 65% of default-related losses of such loans, with PCCU indemnifying the

However, if the Company determines that adjustments to its indemnity obligations are required in order to maintain compliance

with the listing requirements of Nasdaq, then the amount of loan program income the Company receives will also be adjusted (but not

above 65%) to match the Company’s new indemnification obligation on a go-forward basis for the applicable loans.

This applies retroactively

starting October 1, 2025, and this change is expected to materially increase the Company’s loan program income.

the First Amended CAA, the Company’s 2025 share of interest income on CRB loans originated and serviced was determined using a

loan yield allocation formula that incorporated the Constant Maturity U.S.

Treasury Rate and a proprietary risk-rating formula.

this formula, the Company’s interest income split was approximately 35% of total loan program generated during the year ended December

31, 2025, with the remainder retained by PCCU.

For the year ended December 31, 2025, the Company recognized $2.4 million in loan program

income attributable to PCCU activities, compared to $6.3 million for the year ended December 31, 2024

Financial Indemnification Liability

Company’s obligation to indemnify PCCU against default-related loan losses, which existed under the original CAA, was eliminated

in its entirety when the First Amended CAA took effect on January 1, 2025.

As a result, the Company recorded no provisions for financial indemnification liability on indemnified loans during the period January 1, 2025 through September 30, 2025.

Second Amended CAA, executed on February 4, 2026 with a retroactive effective date of October 1, 2025, reinstated an indemnification

obligation on restructured terms.

Under the Second Amended CAA, the Company is obligated to indemnify PCCU for up to 65% of net losses

on any CRB loan default, the same proportional percentage as the Company’s increased share of loan program income under that agreement.

This structure aligns risk and reward, as the higher income share is paired with a proportional assumption of credit loss exposure.

associated obligations under the Agreement are recognized in the Company’s December 31, 2025 financial statements at its October 1, 2025 inception date,

consistent with the Type 1 recognized subsequent event framework under ASC 855-10-25-1.

The obligation comprises two independent, coexisting

liabilities that do not offset or true-up to each other:

460 Stand-Ready Guarantee Liability:

At inception, the Company recognized a stand-ready

guarantee liability of approximately $2.1 million measured at fair value under ASC 820-10, representing

the noncontingent obligation to stand ready to perform in the event of borrower default on

PCCU’s cannabis-related business loan portfolio.

Under ASC 460-10-25-3, the issuance

of a guarantee imposes a noncontingent obligation to stand ready to perform, and initial

recognition is required regardless of the probability that payments will be required.

A corresponding

contract asset of equal amount was recognized under ASC 340-40.

326-20 Financial Indemnification Liability:

Separately, the Company recognized a contingent

expected liability of approximately $1.1 million under ASC 326-20, representing management’s

estimate of SHF’s up to 65% share of lifetime expected credit losses on the PCCU loan portfolio

based on current portfolio conditions and reasonable and supportable forecasts.

A corresponding

contract asset of equal amount was recognized under ASC 340-40.

net Day 1 equity impact is zero, as each liability is fully offset by its corresponding contract asset at inception, consistent with

ASC 340-40-25-2 and the treatment of these costs as incremental costs incurred to fulfill the Commercial Alliance Agreement.

ASC 460 stand-ready liability is fixed at inception and released to income on a systematic and rational basis consistent with the reduction

in guarantee exposure over the contract term per ASC 460-10-35-2.

The ASC 326-20 financial indemnification liability is dynamic and remeasured quarterly based

on changes in portfolio credit quality, economic conditions, and forward-looking assumptions, with changes recognized in credit loss

expense or income.

The two liabilities are governed by different measurement objectives under US GAAP and do not substitute for one another.

of December 31, 2025, the Company’s incremental loan capacity, representing the difference between the regulatorily stipulated

lending limit and the gross amount of loans currently outstanding, was approximately $12.0 million.

The Company is economically incentivized

to minimize incremental loan capacity, as the interest income earned on deployed loans exceeds the income that could otherwise be generated

on uninvested deposits.

Party Balances

The table below summarizes the cash and cash equivalents held at PCCU, along with the amounts due from and payable

to PCCU as reported on the Company’s consolidated balance sheets.

Cash and cash equivalents

Accounts receivable

Accounts payable

Senior Secured Promissory Note

of Operating Expenses Paid to PCCU

following table summarizes operating expenses incurred by the Company under its agreements with PCCU:

December 31, 2025

December 31, 2024

Support Services Agreement

Loan Servicing Agreement

Commercial Alliance Agreement

Asset hosting fee

Prior agreement fees (superseded)

Part III, Item 13., “Certain Relationships and Related Party Transactions” for further discussion of the related party transactions

we have entered into with PCCU.

of 420 IT Solutions

December 19, 2025, Safe Harbor Managed Services LLC, a wholly-owned subsidiary of the Company, completed the acquisition of substantially

all of the assets of 420 IT Solutions.

420 IT Solutions is engaged in the business of providing third-party professional advisory and

technology services to the cannabis industry.

The aggregate purchase price for the acquired assets consisted of 125,000 Earnout Shares,

plus the assumption of certain identified liabilities under contracts assigned to the Company.

The Earnout Shares are subject to performance-based

vesting over a two-year earnout period ending December 31, 2027, as follows:

50% of the Earnout Shares (62,500 shares) vest if the acquired business generates

net revenue of at least $5.0 million for the calendar year ending December 31, 2026.

50% of the Earnout Shares (62,500 shares) vest if the acquired business generates

net revenue of at least $6.0 million for the calendar year ending December 31, 2027.

2026 target is not met but the 2027 target is achieved, all 125,000 Earnout Shares vest in

Shares that have not yet vested are held by the Company (or its transfer agent) during the earnout period and may not be sold,

transferred, pledged, or assigned by 420 It Solutions.

The Earnout Shares will be issued as restricted securities under Rule 144.

The acquisition included the transfer of customer contracts, the registered trademark “420 IT Solutions”, domain name registrations, and other intellectual property.

consideration was paid at closing.

acquisition added capabilities that are complementary to our existing compliance platform and expanded the suite of services we can offer

to financial institution customers seeking to enter or grow their cannabis banking programs.

On-site reviews are a key component of BSA/AML

compliance for cannabis-banking financial institutions, and bringing this capability in-house strengthens both our service offerings

and our compliance infrastructure.

In addition, 420 IT Solutions’ founders, joined the Company

to lead the third-party professional advisory and technology services division following the acquisition.

Quantitative and Qualitative Disclosures About Market Risk.

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What changed 10-K

Item 7. Management’s Discussion and Analysis