SHF Holdings, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. References in this section to “we,” “us,” “our,” “SHF,” or the “Company” refer to SHF Holdings, Inc. References to “management” refer to our officers and Board of 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 current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements. Overview The 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. Because 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. Through 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 assistance. We 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. Relationship with PCCU PCCU 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. The 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. The 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.” 36 The concentration of our business with PCCU and the re-assumption of the indemnification obligation each represent material risks to the Company. 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.” Year Ended December 31, 2025 Performance Summary Total 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. The 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. Investment 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. Total 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. Material Weaknesses in Internal Controls Management 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. As of December 31, 2025, management believes these remediation actions have addressed all previously identified material weaknesses; however, 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. Industry and Regulatory Environment Cannabis 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. Key Metrics In 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. Non-GAAP Financial Measures In 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. Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) and Adjusted EBITDA “ EBITDA” is defined as net income (loss) before interest expense, income tax expense (benefit), and depreciation and amortization. “Adjusted EBITDA” is further adjusted to exclude non-cash, unusual, and infrequent items that management does not consider reflective of the Company’s core operating performance. 37 We 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. These 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. A reconciliation of net (loss) income to EBITDA and Adjusted EBITDA is as follows: Year ended December 31, 2025 2024 Net loss $ (2,160,998 ) $ (48,319,475 ) Interest expense 492,643 533,390 Amortization of prepaid consulting associated with Series B 59,857 - Amortization of contract asset 129,072 - Depreciation and amortization expense 3,155 711,929 Provision for income taxes (benefit) (58,470 ) 43,859,686 EBITDA (1,534,741 ) (3,214,470 ) Other adjustments: Credit loss (benefit) expense (177,917 ) (1,393,131 ) Change in the fair value of warrants (1,320,871 ) (2,803,640 ) Deferred loan origination fees and costs - (63,275 ) Change in the fair value of deferred consideration (79,475 ) (361,449 ) Gain on extinguishment of forward purchase derivative (3,336,213 ) - Costs incurred to secure financing 987,621 - Discount on common stock sold pursuant to the ELOC 76,553 - Stock based compensation 1,523,489 1,575,952 Goodwill and long-lived intangible assets impairment - 9,148,881 Adjusted EBITDA $ (3,861,554 ) $ 2,888,868 Discussion of Adjusted EBITDA Results For the year ended December 31, 2025, EBITDA was $(1.5) million, compared to $(3.2) million for the year ended December 31, 2024. Adjusted 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 million. 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. The most significant factor was the First Amended CAA. This agreement made two economically material changes to the Company’s revenue model. ● First, 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. ● Second, 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. 38 Together, 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. The 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. The 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. Management has identified three primary causes that it believes elevated attrition in 2025. 1) A 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. 2) Competitive pricing pressure from other cannabis banking providers. 3) 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 forward EBITDA 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. Management’s 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. The 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. For 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 CAA. 39 Other Metrics Management monitors the following operational metrics to assess the health and trajectory of the core banking services business. Total account balances, number of accounts and average account balances Our 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. Account Fees per Average Active Account Our 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. Year Ended December 31, 2025 2024 Change Change (%) Average deposit balance (1) $ 105,215,252 $ 117,847,512 (12,632,260 ) (10.7 )% Trailing 14 day average account balance (2) $ 106,800,196 $ 113,008,693 (6,208,496 ) (5.5 )% Account fees (3) $ 2,741,124 $ 5,073,186 (2,332,062 ) (46.0 )% Average active accounts (4) 773 757 16 2.1 % Average account balance (5) $ 136,094 $ 155,728 (19,634 ) (12.6 )% Average fees per account (6) $ 3,546 $ 6,704 (3,158 ) (47.1 )% (1) For the year ended December 31, 2025, represents the average deposit balance over the year; For 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. (2) 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. (3) Reported account activity fee revenue (4) Represents the average of monthly ending active accounts (5) Refer to the below section – Discussion of Results of our Operations for additional discussion of trends. Average 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. 40 Components of our Results of Operations Revenue The 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. Loan program 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. Operating Expenses Operating expenses consist of compensation and employee benefits, professional services, general and administrative expenses, rent expense, and provision (benefit) for credit losses. ● Compensation and employee benefits consist of employee wages, payroll taxes, employee benefits, and non-cash stock-based compensation. Stock-based 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. ● Professional services consist of legal fees, audit and accounting fees, general consulting fees, and board-related fees. Legal fees include both ongoing corporate legal services and costs associated with the Company’s active litigation matters. Professional 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. ● General 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 expenses. See “Related Party Relationships.” ● Rent expense reflects the cost of the Company’s corporate office. The Company closed its Arkansas office during 2025, thereby reducing its ongoing rent obligations. ● Provision (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. Discussion of our Results of Operations -2025 Compared to 2024 (Year Ended December 31) Revenue Year Ended December 31, 2025 2024 Change ($) Change (%) Account fee income $ 3,963,097 $ 6,447,201 $ (2,484,104 ) (38.5 )% Safe Harbor Program income 76,920 76,920 - - Investment income 1,155,433 2,092,863 (937,430 ) (44.8 )% Loan program income 2,478,082 6,625,576 (4,147,494 ) (62.6 )% Total revenue $ 7,673,532 $ 15,242,560 $ (7,569,028 ) (49.7 )% Account fee income Account 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. The decline was driven by following factors. ● During 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. ● The 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. ● A 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. 41 Investment income Investment 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. For 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: 1) Decline 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. 2) Launch 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. 3) Decline 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 4) The 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. Loan program income In 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. For the year ended December 31, 2025, the Company serviced twenty-two loans, compared to twenty-four loans for the year ended December 31, 2024. For the year 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. 1) The 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 Amended CAA. 2) The 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 $56.8 million as of December 31, 2024. 3) The weighted average interest rate on the loan portfolio was approximately 10.6% as of December 31, 2025, compared to approximately 10.2% as of December 31, 2024. All loans in the portfolio carry fixed interest rates. The increase in the weighted average rate reflects changes in portfolio composition resulting from principal repayments on higher-risk rated loans. 42 Operating expenses Year Ended December 31, 2025 2024 Change ($) Change (%) Compensation and employee benefits $ 6,266,317 $ 7,783,331 $ (1,517,014 ) (19.5 )% General and administrative expenses 3,294,275 4,018,094 (723,819 ) (18.0 )% Impairment of goodwill - 6,058,000 (6,058,000 ) (100.0 )% Impairment of long-lived intangible assets - 3,090,881 (3,090,881 ) (100.0 )% Professional services 3,328,222 2,518,394 809,828 32.2 % Rent expense 232,773 258,477 (25,704 ) (9.9 )% Amortization of contract asset 129,072 - 129,072 100.0 % Credit loss (benefit) expense (177,917 ) (1,393,131 ) 1,215,214 (87.2 )% Total operating expenses $ 13,072,742 $ 22,334,046 $ (9,261,304 ) (41.5 )% Total operating expenses Total 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. Compensation and employee benefits Compensation 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 over 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. General and administrative expenses General 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 accounts; 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. Subsequent 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. The 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. Impairment of goodwill and long-lived intangible assets No 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. 43 Professional services Professional 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. 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 transition. The 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. The increase in professional services expense was also attributable to the following during 2025: ● Legal fees associated with the shareholder litigation described in “Litigation” below; ● Costs incurred in connection with the resolution of employment matters with former employees; ● Advisory, 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; ● Fees incurred in connection with the transition to a new independent registered public accounting firm, including parallel engagement costs during the transition period; and ● Accounting 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. In 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. The portion 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. Rent expense Rent 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. It represents the straight-line amortization of the cost to acquire a contract asset recognized as of October 1, 2025, the effective date. Credit 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 31, 2024. 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. 44 Other Income (Expenses) Year Ended December 31, 2025 2024 Change Change % Change in the fair value of deferred consideration $ 79,475 $ 361,449 $ (281,974 ) (78.0 )% Interest expense (492,643 ) (533,390 ) 40,747 (7.6 )% Gain on extinguishment of forward purchase derivative 3,336,213 - 3,333,213 100.0 % Costs incurred to secure financing (987,621 ) - (987,621 ) 100.0 % Discount on Common Stock sold pursuant to the ELOC (76,553 ) - (76,553 ) 100.0 % Change in fair value of warrant liabilities 1,320,871 2,803,638 (1,482,767 ) (52.9 )% Total Other Income/ (Expenses) $ 3,179,742 $ 2,631,697 $ 548,045 20.8 % Total 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 million. 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 Stock. 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. Change in Fair Value of Deferred Consideration The 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. For 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 The 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. Interest Expense Interest 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. 45 During 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 2025. 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. On 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. The 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. Gain on Extinguishment of Debt On June 16, 2022, the Company entered the FPA with Midtown, which subsequently assigned the FPA in part to Verdun and Vellar. The FPA was carried as a derivative liability on the Company’s balance sheet at a carrying value of $7.3 million as of the settlement date. On 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. The 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. In 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. On 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 Company recorded a net loss on extinguishment of debt of $0.003 million related to these convertible note exchanges. 46 Costs Incurred to Secure Financing For 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. This 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. Change in Fair Value of Warrant Liabilities The 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 (Level 1). 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. For 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. For the year ended December 31, 2024, the $2.8 million loss was attributable to increases in warrant liability fair values, driven by movements in the Company’s stock price relative to warrant exercise prices during that period. Income tax (benefit) expense Year ended December 31, 2025 2024 Change ($) Change (%) Income tax (benefit) expense $ ( 58,470 ) $ 43,859,686 $ (43,918,156 ) 100 % Income tax (benefit)/expense for the year ended December 31, 2025 was $0.06 million, compared to $43.9 million for the year ended December 31, 2024. 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. The 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. Financial Condition Cash and cash equivalents Cash and cash equivalents totaled $6.8 million and $2.3 million as of December 31, 2025 and 2024, respectively. Cash flows For 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. 47 For 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. For 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. Liquidity Liquidity 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 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. Under 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. As of December 31, 2025, the Company has cash and cash equivalents of $6.8 million and net working capital of $5.7 million. The Company 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. Management 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. Strengthened 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. Access 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. Expense Management. 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. Cash 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. The 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. Litigation On October 17, 2024, the Company filed a complaint in the District Court for the City and County of Denver, Colorado, captioned SHF Holdings, Inc. v. Daniel Roda, Gregory W. Ellis, and James R. Carroll , Case No. 2024CV33187. 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”). The 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. On 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. On 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. The case is currently in active discovery. A ruling on the summary judgement briefing is pending, and a court date is scheduled for May 2026. See Part I, Item 3., “Legal Proceedings” and Note 20 to the Company’s consolidated financial statements in this Form 10-K for additional information. Critical Accounting Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as disclosure of contingent assets and liabilities. An appreciation of our critical accounting policies is necessary to understand our financial results. In some cases, we could reasonably use different accounting policies and estimates, and changes in our estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates, and our financial condition or results of operations could be affected. We base our estimates on our experience and other assumptions that we believe are reasonable, and we evaluate these estimates on an ongoing basis. We refer to the following accounting estimates as critical accounting estimates, based on their importance to the financial reporting and potential for changes in future periods: 48 Revenue recognition The 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. The 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.” The 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. Account Fee Income Account fee income consists of fees charged to CRBs for account maintenance, transaction processing, compliance monitoring, and other ancillary services. 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. The key estimation challenge is the transaction price, which varies by account type, deposit balance tier, and customer activity. Management determines the appropriate fee tier each period and evaluates any adjustments for credits, waivers, or usage-based fluctuations. Following the revised fee schedule effective January 1, 2025, changes in customer mix and average deposit levels directly affect recognized revenue. Loan Program Income The 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. Management 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 as earned. Effective 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. Investment Income Investment 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. Stock-Based Compensation The 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. 49 The 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. Stock Options Stock 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 exercise. The exercise price, vesting schedule, and exercise period for each grant are determined by the Plan administrator at the time of grant. The 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. The 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. ● Risk-free interest rate The risk-free rate is based on U.S. Treasury security yields for maturities approximating the expected term of each award at the grant date. For options granted during the year ended December 31, 2025, the risk-free rate ranged from 3.54% to 4.47%. ● Dividend yield A 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. Compensation 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. 50 Restricted Stock Units RSUs 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. Plan Share Pool - Dilution Event and Annual Reset Provisions The 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. Warrants Liability The 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. ● For 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. ● For 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. ● For 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. Fair value is assessed at each reporting period end. In 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. The 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. 51 Deferred Consideration The 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. The 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. The 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. Forward Purchase Agreement and Forward Purchase Derivative As previously disclosed, the Company entered the FPA with Midtown, which subsequently assigned the FPA in part to Verdun and Vellar. The FPA gave rise to both a FPA receivable, which had been carried on the balance sheet, and an FPA derivative liability. During 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. On 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. As 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. Investment in Preferred Securities - Valuation and Impairment Assessment The 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. This 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. As 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. 52 Stand Ready Guarantee Obligation In 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. Under ASC 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 Day 1. The liability is released to income on a systematic basis as the Company is progressively released from risk through loan paydowns and maturities. Financial Indemnification Liabilities In 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. The Company 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: pass-rated 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. Emerging Growth Company Status We 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. In 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. Smaller Reporting Company We 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. Internal Control Over Financial Reporting In 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. During 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. However, 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. Related Party Relationship with PCCU 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 S-X. However, as of May 21, 2025, PCCU no longer has contractual rights to appoint members to the Board of Directors. 53 Revenue Concentration In 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. The 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. Commercial Alliance Agreement The 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. The CAA was originally executed on March 29, 2023, and was subsequently amended and restated by the First Amended CAA on December 31, 2024. 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. The written 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. The Differences Between the Agreements The 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. Under 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. The 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. The 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 Software”). 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 Key Economic Terms Under the Agreements Asset Hosting Fees Under 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. The 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 month. The fee increases to 1.30% per annum on the entire average daily balances once deposits exceed $130 million. For the year ended December 31, 2025, the Company incurred $1.2 million in asset hosting fees payable to PCCU. On February 4, 2026, the Company and PCCU executed the Second Amended CAA with a retroactive effective date of October 1, 2025. The 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 defaults. 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. Investment Income 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. 54 Loan Program Income The 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 other 35%. 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. Under 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. Under 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 The 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. The 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. The 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: ● ASC 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. ● ASC 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. The 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. The 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. As 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. Related 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. December 31, 2025 December 31, 2024 Cash and cash equivalents $ 6,779,040 $ 2,202,895 Accounts receivable 1,009,483 968,023 Accounts payable 171,365 75,608 Senior Secured Promissory Note $ - $ 11,004,173 Summary of Operating Expenses Paid to PCCU The following table summarizes operating expenses incurred by the Company under its agreements with PCCU: Year Ended December 31, 2025 Year Ended December 31, 2024 Asset hosting fee $ 1,153,637 $ 452,371 Prior agreement fees (superseded) - 600,322 Total $ 1,153,637 $ 1,052,693 See Part III, Item 13., “Certain Relationships and Related Party Transactions” for further discussion of the related party transactions we have entered into with PCCU. 55 Acquisition of 420 IT Solutions On 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: ● 2026 Tranche: 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. ● 2027 Tranche: 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. If the 2026 target is not met but the 2027 target is achieved, all 125,000 Earnout Shares vest in 2027. Earnout 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. No cash consideration was paid at closing. This 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise required with respect to market risk.