COMBINED
NOTES TO FINANCIAL STATEMENTS
Note
1. Organization and Business Operations
Business
Description
On February 11, 2022, SHF, LLC and SHF Holding Co.,
LLC, the sole member of SHF, LLC, and Partner Colorado Credit Union (“PCCU”), the sole member of SHF Holding Co., LLC, entered
into a definitive purchase agreement (herein referred to as the “Business Combination”) with Northern Lights Acquisition Corp.
(“NLIT”), a special purpose acquisition company, and its sponsor, 5AK, LLC. In connection with the closing of the Business Combination,
NLIT changed its name to “SHF Holdings, Inc.” (herein referred to as the “Company”).
PCCU’s
Board of Directors approved the contribution of certain assets and operating activities associated with operations from both the
Branches and Safe Harbor Services (“SHS” or “Oldco”), a wholly-owned subsidiary of PCCU, to SHF Holding,
Co., LLC. SHF Holding, Co., LLC then contributed the same assets and related operations to SHF, LLC with PCCU’s investment in
SHF, LLC maintained at the SHF Holding Co., LLC level (the “reorganization”). The reorganization effectively
occurred July 1, 2021. In conjunction with the reorganization, all of Branches’ employees and certain PCCU employees were terminated from PCCU and hired as SHF, LLC employees. Collectively,
Oldco, the Branches and SHF, LLC represent the “Carved-Out Operations.”= After the reorganization,
SHF, LLC contains the entirety of the Carved-Out Operations and Oldco was dissolved. In addition, effective July 1, 2021, the entity entered
into an Account Servicing Agreement and Support Servicing Agreement which were subsequently amended and restated and are discussed in
Note 7.
Pursuant
to the purchase agreement, upon the closing of the transaction, NLIT purchased all of the
issued and outstanding membership interests of SHF in exchange for an aggregate of $185,000,000, consisting of (i) 11,386,139 shares
of the entity’s Class A common stock with an aggregate value equal to $115,000,000 and (ii) $70,000,000 in cash. At transaction
close, 1,831,683 shares of the Class A Common Stock were deposited with an escrow agent to be held in escrow for a period of 12 months
following the closing date to satisfy potential indemnification claims of the parties. In addition, $3,143,388 in cash and cash equivalents
representing the amount of cash on hand at July 31, 2021, less accrued but unpaid liabilities, were paid to PCCU at the final transaction
close. On September 19, 2022, the parties entered into the first amendment to the purchase agreement to extend the date by which the
closing had to occur from August 31, 2022 until September 28, 2022 and provide for the deferral of $30 million of the $70 million in
cash due at the closing. On September 22, 2022, the parties entered into the second amendment to the purchase agreement to provide for
the deferral of a total of $50 million of the $70 million due at the closing. On September 28, 2022, the parties entered into the third
amendment to the purchase agreement to provide for the deferral of a total of $56,949,800 of the $70,000,000 due at the closing.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
On
September 28, 2022, the parties consummated the Business Combination, resulting in NLIT, consistent with the aforementioned
parameters, purchasing all of the issued and outstanding membership interests of the SHF, LLC in exchange for an aggregate of $185,000,000,
consisting of (i) 11,386,139 shares of the Company’s Class A common stock with an aggregate value equal to $115,000,000 and (ii)
$70,000,000 in cash, $56,949,801 of which will be paid on a deferred basis.
In connection with the closing
of the Business Combination, the status of PCCU has changed from Parent to majority shareholder of the Company pursuant to its ownership
of 60.8% of the Company.
The Company generates both
interest income and fee income through providing a variety of services to financial institutions desiring to service the cannabis industry
including, among other things, Bank Secrecy Act and other regulatory compliance and reporting, onboarding, responding to account inquiries,
responding to customer service inquiries relating to CRB depository accounts held at PCCU, and sourcing and managing loans. In addition
to PCCU, the Company provides these similar services and outsourced support to other financial institutions providing banking to the cannabis
industry. These services are provided to other financial institutions under the Safe Harbor Master Program Agreement.
Pursuant to the purchase agreement, the Company entered into an amended services agreements under similar terms as
the July 2021 agreements. In addition, in conjunction with the purchase agreement, SHF and PCCU entered into an Amended and Restated Loan Servicing Agreement.
Refer to Note 7 for additional information.
The
purpose of the aforementioned $56,949,800 deferral is to provide SHF Holdings, Inc. with additional cash to support its post-closing
activities. Pursuant
to the third amendment to the unit purchase agreement, the Company will pay the deferred consideration in one payment of $21,949,801
on or before December 15, 2022, and the $35,000,000
balance in six equal installments of $6,416,667,
payable beginning on the first business day following April 1, 2023 and on the first business day of each of the following five
fiscal quarters, for a total of $38,500,002,
including interest of $3,500,002. Furthermore, PCCU agreed to defer $3,143,388,
representing certain excess cash of SHF, LLC due to PCCU under the definitive unit purchase agreement, and the reimbursement
of certain reimbursable expenses under the definitive unit purchase agreement.
On
October 26, 2022, SHF Holdings, Inc., entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and
Luminous Capital USA Inc. (“Luminous”). As per the terms of the agreement, PCCU has agreed to defer all payments owed by
the Company pursuant to the Purchase Agreement for a period of six (6) months from the date hereof while the Parties engage in good
faith efforts to renegotiate the payment terms applicable to the Deferred Obligation (the “Forbearance
Period”).
Basis
of Presentation
Financial
statements have not historically been prepared for the Carved-Out Operations. For the nine months ended September 30, 2021,
the combined financial statements consist of the balances of SHS and SHF as prepared on a stand-alone basis and the balances of the Branches
on a “carve-out” basis. For the three and nine months ended September 30, 2022, the financial statements represent SHF on
a stand-alone basis as the period is post reorganization. All intercompany transactions have been eliminated for all periods presented.
These combined financial statements reflect the Company’s historical financial position, results of operations and cash flows as
they have been historically managed in conformity with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”).
All
depository asset accounts and liabilities are retained by PCCU as the Carved-Out Operations are not organized as a chartered financial
institution. Accordingly, none of the cash of PCCU has been attributed to these combined financial statements. Asset and liabilities
maintained by SHS and SHF have been included in these financial statements along with any specific assets and liabilities associated
with the Branches.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Revenue
and expenses for the Branches were included based on specific identification as they relate to customer deposits, professional services,
compensation and employee benefits, rent expense, provision for loan losses and other general and administrative expenses. Corporate
allocations such as information technology, customer support, marketing, executive compensation and other general and administrative
expenses are attributed to the Branches proportionately based on the size of the specifically identifiable CRB’s deposit balances,
deposit activity and accounts relative to the totals of the consolidated PCCU entity. This allocation method was consistent for all periods
prior to July 2021. Beginning in July 2021, a services agreement was entered into between Newco and PCCU (see Note 7). In exchange for
services provided to PCCU via the Carved-Out Operations, Newco receives 100% of CRB related revenue. PCCU receives (and Newco pays) a
monthly per account fee, split loan servicing fees and split investment income associated with Carved-Out Operations depository accounts.
The fees are meant to represent PCCU’s cost for hosting depository accounts and funding related loans and providing certain limited
infrastructure support.
Management
has considered the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided
to or the benefits received by the Branches during the periods presented.
All
revenue and expenses of SHS and SHF are specific to the entity. Corporate
allocations were attributed for the nine months ended September 30, 2021.
Liquidity and Going Concern
As of September 30, 2022, the Company had $7,273,012
in cash and net working capital of ($28,241,810),
as compared to $5,495,905
in cash and net working capital of $5,922,023
at December 31, 2021. The driver of the working capital deficit is the current portion of the long-term payable owed to the Seller,
PCCU, from the aforementioned business combination. To permit the business combination transaction to be completed, PCCU agreed to
an unsecured future payment obligation of $56,949,800,
the current portion of which is $33,616,468.
This large payment is offset by $4,090,000
in proceeds the Company expects pursuant to the PIPE offering currently held in escrow to be released when its currently pending
registration statement on Form S-1 becomes effective, as well as proceeds from the Forward Purchase Agreement subsequent to the
effectiveness of the pending Form S-1. Furthermore, PCCU has agreed to a six-month deferral while the Company and PCCU negotiate a
solution regarding the Company’s payment obligation to PCCU.
The Company has not incurred significant cumulative consolidated operating losses and does not have negative cash
flows. As of September 30, 2022, the Company has retained earnings of $243,981; furthermore, for the nine months ended September 30, 2022,
the Company generated $1,894,179 in net income and $1,972,803 in operating cash flows. The Company also has the potential ability to renegotiate
its aforementioned payable with PCCU, thus eliminating any working deficit. These factors, however, do not remove substantial doubt regarding
the Company’s ability to continue as a going concern. If the Company is not able to sustain its present level of operations, it
may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail
planned expansion programs. Any of these actions could materially harm the Company’s business, results of operations and future
prospects. The accompanying unaudited combined financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification
of liabilities that may result should the Company not continue as a going concern. If the current terms of the aforementioned PCCU payable are enforced as
contemplated, management does not believe they have sufficient cash
for the next twelve months from the date of this report to continue as a going concern without maintaining its present level of business
activity. The Company also believes that its pending business combination transaction, which will add additional depository accounts, incremental revenue, and
additional deposits, that was agreed to on October 31, 2022 (refer to
the “Subsequent Events” section within Note 14 below) will be consistent with allowing the Company to continue as a going
concern.
Despite the going concern disclosure, we have determined not to take a
valuation allowance on the Deferred Tax Asset (“DTA”). The Company does not have a history of operating loss or tax credit
carry forwards expiring unused; no losses expected in early future years given that the Company is presently profitable; no unsettled
circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future
years; no adverse carry back or carry forward periods; and no business cyclicality concerns. The Company also has enhanced lending capacity
pursuant to increased deposits and greater credit pools, additional interest income, and more service fees accentuate the Company’s
stance that a DTA valuation allowance is not required.
Note
2. Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Material estimates that are particularly subject to change in
the near term include the determination of the allowance for loan losses, and the fair value of financial instruments. Actual results
could differ from the estimates.
Cash and Cash Equivalents
Cash
and cash equivalents include cash on hand, amounts due from financial institutions, and investments with maturities of three months or
less.
Concentrations
of Risk
The
Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash. Cash balances are
maintained principally in accounts at PCCU which is insured by the National Credit Union Share Insurance Fund (“NCUSIF”)
up to regulatory limits. From time to time, cash balances may exceed the NCUSIF insurance limit. The Company has not experienced any
credit losses associated with its cash balances in the past.
Currently
the Company only services the cannabis industry. Cannabis remains illegal under federal law, and therefore, strict enforcement of federal
laws regarding cannabis would likely result in our inability to execute our business plan.
Currently
the Company substantially relies on PCCU to hold customer deposits and fund its originated loans. As of this time, substantially
all of the Company’s revenue is generated by deposits and loans hosted by PCCU pursuant to various services agreements.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Accounts Receivable-PCCU and Allowance for Doubtful Accounts
Accounts
receivable are recorded based on account fee schedules. While fees are generated from individual CRB related accounts, amounts are initially
collected by the financial institutional partners and remitted in the subsequent month. As of September 30, 2022, and December 31, 2021,
100% of the Accounts Receivable, respectively is due from PCCU. Effective January 2021 through June 2021, PCCU elected to
transfer account servicing from SHS to the Branches. In accordance with this change, a policy was adopted wherein substantially all cash
was collected by PCCU and retained by PCCU outside of the Branches and SHS. This policy was eliminated in conjunction with the July 2021
reorganization and execution of the Account Servicing Agreement and Support Servicing Agreement discussed at Note 7. The Company maintains
allowances for doubtful accounts for estimated losses as a result of a customers’ inability to make required payments. The Company
estimates anticipated losses from doubtful accounts based on days past due as measured from the contractual due date and historical collection
history. The Company also takes into consideration changes in economic conditions that may not be reflected in historical trends, for
example customers in bankruptcy, liquidation or reorganization. Receivables are written-off against the allowance for doubtful accounts
when they are determined uncollectible. Such determination includes analysis and consideration of the particular conditions of the account,
including time intervals since last collection, customer performance against agreed upon payment plans, solvency of customer and any
bankruptcy proceedings.
At
September 30, 2022 and December 31, 2021, there were no recorded allowances for doubtful accounts.
Loans
Receivable
PCCU
originates mortgage, commercial and consumer loans to members and other businesses. Commercial CRB loans originated by the Company
and funded by PCCU are typically managed by the Company, inclusive of originated and funded loans that are on the PCCU balance sheet
only. Certain CRB Loans were contributed to the Carved-out Operations. Such loans where the Company has the intent and ability to
hold for the foreseeable future or until maturity or payoff are reported at principal balance outstanding, net of an allowance for
loan losses and net deferred loan origination fees and costs when applicable. Interest income on loans is recognized over the term
of the loan and is calculated using the simple-interest method on principal amounts outstanding.
Interest
income is not reported when full loan repayment is in doubt, typically when the loan is impaired, or payments are past due ninety days
or more. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received
on such loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts are satisfied to where the loan is less than ninety days past due and future
payments are reasonably assured.
Loans
are evaluated for charge-off on a case-by-case basis and are typically charged off at the time of foreclosure.
Past-due
status is based on the contractual terms of the loans. In all cases, loans are placed on nonaccrual status or charged-off at an earlier
date if the collection of principal and interest is considered doubtful.
Allowance for Loan Losses
The
allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the required allowance for loan losses balance using past loan loss experience,
known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral
values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the
entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The
allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually
classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and
is based on historical loss experience adjusted for current factors.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Due
to the nature of uncertainties related to any estimation process, management’s estimate of loan losses inherent in the loan portfolio
may change in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
A
loan is considered impaired when, based on current information and events, full payment under the loan terms is not expected. Impairment
is generally evaluated in total for smaller-balance loans of similar nature such as commercial lines of credit, but may be evaluated
on an individual loan basis if deemed necessary. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported,
net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment
is expected solely from the collateral.
The
loans SHF intends to originate will be secured by various types of assets of the borrowers, including real property and certain personal
property, including value associated with other assets to the extent permitted by applicable laws and the regulations governing the borrowers.
The documents governing the loans also include a variety of provisions intended to provide remedies against the value associated with
licenses. Collection procedures are designed to ensure that neither SHF nor its financial institution clients who provide funding for
a loan, nor a third-party agent engaged to assist with the liquidation or foreclosure process, will take possession of cannabis inventory,
cannabis paraphernalia, or other cannabis-related assets, nor will they take title to real estate used in cannabis-related businesses.
Upon default of a loan, a third-party agent will be engaged to work with the borrower to have the borrower sell collateral securing the
loan to a third party or to institute a foreclosure proceeding to have such collateral sold to generate funds towards the payoff of the
loan. Applicable regulations under state law that govern CRBs generally do not permit the taking of title to real estate involved in
commercial sales of cannabis, whether through foreclosure or otherwise, without prior regulatory approval. The sale of a license or other
realization of the value of licenses also requires the approval of state and local regulatory authorities. A defaulted loan may also
be sold if such a sale would yield higher proceeds or that a sale could be accomplished more quickly than a foreclosure proceeding while
yielding proceeds comparable to what would be expected from a foreclosure sale. Such sale of the loan would be conducted through a third-party
administrative agent. However, SHF can provide no assurances that a sale of such loans would be possible or that the sales price of such
loans would be sufficient to recover the outstanding principal balance, accrued interest, and fees.
Net Deferred Loan Origination Fees and Cost
When
included with a new loan origination, the Company receives loan origination fees in conjunction with new loans funded and any indemnified liabilities which are not recorded on the balance sheet from our financial institution
partners. Where applicable, the loan origination fee is netted with loan origination costs associated with originating a specific loan.
These loan origination costs are typically incremental direct costs (non-reimbursed) paid to third parties. Net loan origination fees
are initially deferred and recognized as interest income utilizing the interest method.
Indemnity
Liability
Effective
February 11, 2022, SHF entered into an Amended and Restated Loan Servicing Agreement with PCCU. Under the Loan Servicing Agreement, PCCU, in exchange for a
fee at an annual rate of 0.25% of the outstanding principal balance, funds certain loans. Under the Loan Servicing Agreement, SHF has
agreed to indemnify PCCU from all claims related to SHF’s cannabis-related business, including but not limited to default-related
loan losses as defined in the Loan Servicing Agreement. The indemnification component of the Loan Servicing Agreement (refer to Note
7) is accounted for in accordance with ASC 450-20 Loss Contingencies. In determining the applicability of ASC 450-20, we considered
that the agreement outlines a broad indemnification of all claims related to the cannabis-related business. The most immediate and potentially
significant of these are potential default-related loan losses. In the lending industry, it is inherently anticipated future loan losses
will result from currently issued debt. SHF’s indemnity obligation is subordinate to PCCU’s and other financial institution
clients’ other means of collecting on the loans including foreclosure of the collateral, recourse against personal and/or corporate
guarantors and other default remedies available in the loan agreements. Since borrowers are not party to the agreement between SHF and
PCCU, any indemnity payments do not relieve borrowers of their obligation to PCCU nor would such payments preclude PCCU’s right
to future recoveries from the debtor. Therefore, as defined in ASC 450-20, the indemnification clause represents a general loss contingency
in that it is an existing condition, situation or set of circumstances involving uncertainty as to possible loss to the Company that
will ultimately be resolved when one or more future events occur or fail to occur. SHF’s indemnity liability reflects SHF management’s
estimate of probable loan losses inherent under the agreement at the balance sheet date. Management uses a disciplined process and methodology
to establish the liability, and the estimates are sensitive to risk ratings assigned to individual loans covered by the agreement as
well as economic assumptions driving the estimation model. Individual loan risk ratings are evaluated quarterly by SHF management based
on each situation.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
In
addition to default-related loan losses, SHF continuously monitors all other circumstances pursuant to the agreement and identifies events
that may necessitate a loss contingency under the Loan Servicing Agreement. A loss contingency is reported when it is both probable that
a future event will confirm that a loss had been incurred on or before the related balance sheet date and the loss is reasonably estimable.
Property
and Equipment, net
Property
and equipment is recorded at historical cost, net of accumulated depreciation. Depreciation is provided over the assets’ useful
lives on a straight-line basis - 4-5 years for equipment and furniture and fixtures. Repairs and maintenance costs are expensed as incurred.
Management
periodically assesses the estimated useful life over which assets are depreciated or amortized. If the analysis warrants a change in
the estimated useful life of property and equipment, management will reduce the estimated useful life and depreciate or amortize the
carrying value prospectively over the shorter remaining useful life.
The
carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the period of disposal and the
resulting gains and losses are included in the results of operations during the same period.
Impairment
of Long-Lived Assets
The
Company evaluates the recoverability of tangible assets periodically by taking into account events or circumstances that may warrant
revised estimates of useful lives or that indicate the asset may be impaired. There were no impairments for the three and nine months
ended September 30, 2022 and the year ended December 31, 2021.
Other Investments
These investments are accounted for at cost minus impairment, if any, plus
or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Fair
Value Measurements
The
Company utilizes the fair value hierarchy to apply fair value measurements. The fair value hierarchy is based on inputs to valuation
techniques that are used to measure fair values that are either observable or unobservable. Observable inputs reflect assumptions market
participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs
reflect a reporting entity’s pricing based upon its own market assumptions. The basis for fair value measurements for each level
within the hierarchy is described below:
Level
1 — Quoted prices for identical assets or liabilities in active markets.
Level
2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities
in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level
3 —Valuations derived from valuation techniques in which one or more significant inputs to the valuation model are unobservable.
With
the exceptions of loans receivable, warrants (public and private), and the derivative liability, the Company considers the carrying amounts
of its financial instruments (cash, accounts receivable and accounts payable) in the balance sheet to approximate fair value because
of the short-term or highly liquid nature of these financial instruments. The fair values of loans receivables, warrants, and derivative
are fully disclosed in Note 10.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Revenue
Recognition
The
Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).
The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASC
606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than required under previous accounting principles generally accepted in the United States of
America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted
ASC 606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect adjustment,
if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s financial statements
as of the date of adoption. As a result, a cumulative- effect adjustment was not required.
Revenue
is recorded at a point in time when the performance obligation is satisfied, and no contingencies exist. Revenue consists primarily of
fees earned on deposit accounts held at PCCU but serviced by the Company such as bank account charges, onboarding income, account activity
fee income and other miscellaneous fees.
In
addition, the Company recognizes revenue from the Master Program Agreement. The Master Program Agreement is a non-exclusive and non-transferable
right to implement and utilize the Safe Harbor Program. The Safe Harbor Program has two performance obligations; an implementation fee
recognized when the contract is effective, and a service fee recognized ratable over the contract term as the compliance program is executed.
Lastly,
the Company also records revenue for interest on loans and investment income allocated by PCCU based on specific customer balances.
Amounts
received in advance of the service being provided is recorded as a liability under deferred revenue on the combined balance sheets. Typical
Safe Harbor Program contracts are three-year contracts with amounts due monthly, quarterly or annually based on contract terms.
Customers
consist of financial institutions providing services to CRBs. Revenues are concentrated in the United States.
Contract Assets / Contract Liabilities
A contract asset is the Company’s right to consideration
in exchange for goods or services that the Company has transferred to a customer. Conversely, the Company recognizes a contract liability
if the customer’s payment of consideration precedes the reporting entity’s performance.
As
of September 30, 2022, the Company reported contract assets and contract liabilities of $7,676 and $14,583, respectively, from contracts
with customers. As of December 31, 2021, the Company reported a contract asset and liability of $18,317 and $8,333, respectively. During
the three and nine months ended September 30, 2022, the Company recognized revenue $18,987 and $59,081, respectively related to the contract
liability outstanding at December 31, 2021.
Advertising/Marketing
Costs
Advertising/marketing
costs are expensed as incurred. For the three and nine months ended September 30, 2022, advertising/marketing costs were $81,130 and
$231,970, respectively. For the three and nine months ended September 30, 2021, advertising/marketing costs were $21,327 and $48,730, respectively.
Software
Development Cost
The
Company applied agile development methodologies to their software development projects, which are characterized by a more dynamic development
process with more frequent and iterative revisions to the product features and functions as the software is being developed. Due to the
shorter development cycle and focus on rapid production associated with agile development, the costs incurred to get to, and have incurred
after the achievement of technological feasibility, have been expensed as incurred.
Software
development costs amounted to $35,880 and $88,550 for the three and nine months ended September 30, 2022, respectively. Software development
costs amounted to $30,973 and $88,499 for the three and nine months ended September 30, 2021, respectively.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Warrants
Liability
The
Company accounts for the warrants assumed in the business combination in accordance with the guidance contained in ASC Topic 815, “Derivatives
and Hedging” (“ASC 815”), under which warrants that do not meet the criteria for equity classification and must be
recorded as derivative liabilities. Accordingly, the Company classifies the warrants as liabilities carried at their fair value and adjusts
the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the
warrants are exercised or expire, and any change in fair value is recognized in the consolidated statement of operations
Earnings
Per Share
Basic
and diluted earnings per share are computed and disclosed in accordance with FASB ASC Topic 260, Earnings Per Share. The Company utilizes
the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion
amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent dividend distributions, in substance,
to the noncontrolling interest holder as the holders have contractual rights to receive an amount upon redemption other than the fair
value of the applicable shares. As a result, earnings are adjusted to reflect this in substance distribution that is different from other
common shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as if all
of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment
awards that contain a non-forfeitable right to receive dividends and therefore are considered to participate in undistributed earnings
with common shareholders. Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common
shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by
dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted
for the potential dilutive effect of non-participating share-based awards.
Income
Tax
Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. Deferred tax assets and liabilities are adjusted through the provision for income taxes as changes
in tax laws or rates are enacted.
Effective September 28, 2022, the
Company complies with the accounting and reporting requirements of ASC Topic 740, which requires an asset
and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed
for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
PCCU was exempt from most federal, state, and local taxes under the provisions
of the Internal Revenue Code and state tax laws. However, PCCU was subject to unrelated business income tax. The Carved-Out Operations
were wholly owned by PCCU and therefore, were exempt from most federal and state income taxes. The ASC Topic 740, “Income Taxes,”
under US GAAP clarifies accounting for uncertainty in income taxes reported in the financial statements. The interpretation provides criteria
for assessment of individual tax positions and a process for recognition and measurement of uncertain tax positions. Tax positions are
evaluated on whether they meet the “more likely than not” standard for sustainability on examination by tax authorities. The
Company’s Management has determined there are no material uncertain tax positions.
ASC
740-270-25-2 requires that an annual effective tax rate be determined and such annual effective rate applied to year to date income
in interim periods. If management is unable to estimate a portion of its ordinary income, but is otherwise able to reliably estimate
the remainder, ASC 740-270-25-3 provides that the tax applicable to that item be reported in the interim period in which the item
occurs. The tax (or benefit) related to ordinary income (or loss) shall be computed at an estimated annual effective tax rate and
the tax (or benefit) related to all other items shall be individually computed and recognized when the items occur. Management is
unable to estimate a portion of its ordinary income and as a result had computed the company’s tax provision in accordance
with ASC 740-270-25-3. The Company’s effective tax rate was 0.00%
and 0.00%
for the three months ended September 30, 2022, and 2021, respectively, and 0.00%
and 0.00%
for the nine months ended September 30, 2022 and September 30, 2021, respectively. The effective tax rate differs from the statutory
tax rate of 21%
for the three months and nine months ended September 30, 2022 and 2021 primarily due to the aforementioned tax exemption available to PCCU.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
ASC
Topic 740 also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized
tax benefits, if any, as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties
as of September 30, 2022 and December 31, 2021. The Company is currently not aware of any issues under review that could result in significant
payments, accruals or material deviation from its position.
Offering
Costs Associated with the Initial Public Offering and PIPE Offering
Offering
costs consisted of legal, accounting, underwriting fees and other costs incurred that were directly related to the Initial Public Offering.
Offering costs are allocated to the separable financial instruments issued in the Initial Public Offering based on a relative fair value
basis, compared to total proceeds received. Offering costs associated with warrant liabilities are expensed as incurred, presented as
offering costs allocated to warrants in the statements of operations. Offering costs associated with the Public Shares were
charged to stockholders’ equity upon the completion of the Initial Public Offering.
Deferred
offering costs as of September 30, 2022 consisted of legal, accounting, underwriting fees and other costs incurred that were directly
related to the PIPE Offering.
Recently
Issued Accounting Standards
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting
bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards
that are not yet effective and are not expected to have a material impact on the Company’s financial position or results of operations
upon adoption.
Financial
Instruments—Credit Losses
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, which introduces a model based on expected losses to estimate credit losses for most financial assets and certain
other instruments. In November 2019, the FASB issued ASU No. 2019-10 Financial Instruments — Credit Losses (Topic 326), Derivatives
and Hedging (Topic 815), and Leases (Topic 842). The update allows the extension of the initial effective date for entities which have
not yet adopted ASU No. 2016-02. The standard is effective for annual reporting periods beginning after December 15, 2022 for private
companies and SEC filers classified as smaller reporting entities, with early adoption permitted. Entities apply the standard’s
provisions by recording a cumulative effect adjustment to retained earnings. The Company has not yet adopted ASU 2016-13 and is currently
assessing the impact of this new standard on its financial statements.
Collaborative
Arrangements
In
November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808). This update clarifies the interaction between ASC
808, Collaborative Arrangements and ASC 606, Revenue from Contracts with Customers (“ASU 2018-18”). The update clarifies
that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty
is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement
as revenue if the counterparty is not a customer for that transaction. ASU 2018-18 should be applied retrospectively to the date of initial
application of ASC 606 and early adoption is permitted.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
The
ASU’s amendments were effective for public business entities for fiscal years beginning after December 15, 2019, including interim
periods therein. The adoption of this standard did not have a material impact on the Company’s financial statements as the Company
does not have any collaborative agreements. However, there is a potential for the Company to enter into collaborative agreements in the
future, as it expands into additional markets.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842). FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and
quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. In June 2020, FASB
issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Deferral of the Effective Dates for
Certain Entities, which deferred the effective date of ASU 2016-02 to annual reporting periods beginning after December 15, 2021,
and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. Management is currently evaluating
this standard but anticipates the adoption of the new lease standard to be immaterial. Effective July 1, 2022, the Company amended its
existing lease to a month-to-month lease and therefore no asset or liability amounts are reported pursuant to ASC 842.
Business
Combination
The
Business Combination detailed in Note 1 above was accounted for as a reverse recapitalization, with no goodwill or other intangible
assets recorded, in accordance with accounting principles generally accepted in the United States of America. Under this method of
accounting, NLIT is treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the
Business Combination is treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a
recapitalization. The net assets of NLIT are recognized at fair value (which is expected to be consistent with carrying value), with
no goodwill or other intangible assets recorded.
Other
related events in connection with the Business Combination are summarized below:
| ● | The
2,875,000 of Founder Class B Stock converted at the closing to an equal number of shares
of Class A stock. |
| ● | Upon
closing of the Business Combination, 11,386,139 shares of Class A Stock were issued to the
Seller as set forth in and pursuant to the terms of the Purchase Agreement. |
The
Seller was due to receive a cash payment of $3.1 million at the consummation of the Business Combination, which represented the amount
of SHF’s cash on hand at July 31, 2021, less accrued but unpaid liabilities. In addition, pursuant to the terms of the purchase
agreement, the Company is responsible for reimbursing the Seller for its transaction expenses.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
● | Approximately
$56.9 million of the $70.0 million of cash proceeds due to PCCU was deferred and is due to
the Seller. Approximately $21.9 million of the amount is payable to PCCU beginning December
15, 2022. The residual $35.0 million is due in six quarterly instalments of $6.4 million
thereafter. Interest accrues at an effective annual rate of approximately 7.7%. A sum of
1,200,000 founder shares were escrowed until the amount is paid in full. |
| |
● | The Parent-Entity Net Investment appearing in the balance sheet of SHF amounting to $9,124,297 on the date of the
business combination was transferred to additional paid in capital. |
| ● | Immediately
prior to the Closing, 20,450 shares of Series A Convertible Preferred were purchased by the
PIPE Investors pursuant to the PIPE Securities Purchase Agreements for an aggregate value
of $20,450,000. The shares of Series A Convertible Preferred are convertible into 2,045,000
shares of Class A Stock assuming a purchase price of $10.00 per share of Class A Stock. Twenty
(20) percent of the aggregate value was deposited into a third party escrow account for purposes
of paying the PIPE Investors any required Registration Delay Payments. Upon the filing of
a registration statement 10 calendar days subsequent to closing, 17.5% of the escrow amount
will be released with the remaining amount released once all securities are included in an
effective registration statement. |
● |
For tax purposes, the transaction
will be treated as a taxable asset acquisition, resulting in an estimated tax basis Goodwill balance of $43,411,985, creating a deferred
tax asset reported as Additional Paid-in Capital in the equity section of the balance sheet as of the date of the business combination.
There is not any goodwill for book reporting purposes as no goodwill or other intangible assets are to recorded in accordance with
accounting principles generally accepted in the United States of America. |
|
|
● |
Preferred
Stock
The
Company is authorized to issue 1,250,000 preferred shares with a par value of $0.0001 per share with such designation, rights and
preferences as may be determined from time to time by the Company’s Board of Directors. As of September 30, 2022, there were
20,450 preferred shares issued or outstanding and no preferred shares outstanding on December 31, 2021. |
|
|
● |
Class
A Common Stock
The
Company is authorized to issue up to 125,000,000 shares of Class A Common Stock with a par value of $0.0001 per share. Holders of
the Company’s Class A Common Stock are entitled to one vote for each share. As of September 30, 2022 and December 31, 2021,
there were 18,715,912 and 0 shares, respectively, of Class A Common Stock issued or outstanding. As of September 30, 2022, 3,804,872
Class A Common Stock are held by the purchasers under that certain forward purchase agreement dated June 16, 2022 by and among the
Company and such purchasers. |
|
|
● |
Parent-Entity
Net Investment
Parent-Entity
Net Investment balance in the combined balance sheets represents PCCU’s historical net investment in the Carved-Out Operations.
For purposes of these combined financial statements, investing requirements have been summarized as “Parent-Entity Net Investment”
and represents equity as no cash settlement with PCCU is required. No separate equity accounts are maintained for SHS, SHF or the
Branches. |
Note
3. Loans Receivable
Commercial
real estate loans receivable, net consist of the following:
Schedule
of Commercial Real Estate Loans Receivable
| |
September
30,
2022 | | |
December
31,
2021 | |
| |
(Unaudited) | | |
(Audited) | |
Commercial real estate loans receivable, gross | |
$ | 1,443,060 | | |
| 1,478,301 | |
Allowance for loan losses | |
| (21,646 | ) | |
| (14,741 | ) |
Commercial real estate loans receivable, net | |
| 1,421,414 | | |
| 1,463,560 | |
Current portion | |
| (71,168 | ) | |
| (52,833 | ) |
Noncurrent portion | |
$ | 1,350,246 | | |
| 1,410,727 | |
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Note 4. Other Investment
At September 30, 2022, the Company had a $500,000
unsecured loan receivable amount that contained a conversion feature. The Company had the right to convert the outstanding balance
of the loan, including all accrued but unpaid interest, into equity of the borrower. In the event that no agreement for acquisition
is reached, the Company, in its sole and subjective discretion, may elect to proceed under the existing repayment schedule or
convert the loan to equity. Given this conversion feature, the amount receivable from the borrower is thus classified as an
“Other Investment” as of September 30, 2022.
Note
5. Allowance for Loan Losses
The
allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating
known and inherent risks in the loan portfolio. The allowance is provided based upon management’s analysis of the pertinent factors
underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency
levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability
may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential
alternative sources of repayment.
The
allowance may consist of specific and general components. While the allowance may consist of general and specific components, the allowance
is general in nature and is available for the loan portfolio in its entirety.
The
allowance for loan losses consists of the following activity for the three and nine months ended September 30, 2022 and 2021:
Schedule of Allowance For Loan Losses
| |
Unsecured
loan | | |
Commercial
real estate
loans | | |
Total | |
Nine Months ended September 30, 2022: | |
| | |
| | |
| |
Allowance for loan losses: | |
| | | |
| | | |
| | |
Beginning balance | |
$ | - | | |
$ | 14,741 | | |
$ | 14,741 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provision | |
| 10,500 | | |
| 6,905 | | |
| 6,905 | |
Ending balance | |
$ | 10,500 | | |
$ | 21,646 | | |
$ | 21,646 | |
| |
| | | |
| | | |
| | |
Three Months ended September 30, 2022: | |
| | | |
| | | |
| | |
Allowance for loan losses: | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Beginning balance | |
$ | 10,500 | | |
$ | 21,801 | | |
$ | 21,801 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provision (benefit) | |
| - | | |
| (155 | ) | |
| (155 | ) |
Ending balance | |
$ | 10,500 | | |
$ | 21,646 | | |
$ | 21,646 | |
| |
| | | |
| | | |
| | |
Loans receivable at September 30, 2022 | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | - | | |
$ | - | | |
$ | - | |
Collectively evaluated for impairment | |
| 500,000 | | |
| 1,443,060 | | |
| 1,443,060 | |
Total loans receivable | |
$ | 500,000 | | |
$ | 1,443,060 | | |
$ | 1,443,060 | |
| |
| | | |
| | | |
| | |
Allowance for loan losses at September 30, 2022 | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | - | | |
$ | - | | |
$ | - | |
Collectively evaluated for impairment | |
| 10,500 | | |
| 21,646 | | |
| 21,646 | |
Total allowance for loan losses | |
$ | 10,500 | | |
$ | 21,646 | | |
$ | 21,646 | |
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
| |
Unsecured
loan | | |
Commercial
real estate
loan | | |
Total | |
Nine Months ended September 30, 2021: | |
| | |
| | |
| |
Allowance for loan losses: | |
| | | |
| | | |
| | |
Beginning balance | |
$ | - | | |
$ | 13,342 | | |
$ | 13,342 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provision | |
| - | | |
| 12,441 | | |
| 12,441 | |
Ending balance | |
$ | - | | |
$ | 25,783 | | |
$ | 25,783 | |
| |
| | | |
| | | |
| | |
Three Months ended September 30, 2021: | |
| | | |
| | | |
| | |
Allowance for loan losses: | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Beginning balance | |
$ | - | | |
$ | 25,269 | | |
$ | 25,269 | |
Charge-offs | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| - | |
Provision | |
| - | | |
| 514 | | |
| 514 | |
Ending balance | |
$ | - | | |
$ | 25,783 | | |
$ | 25,783 | |
| |
| | | |
| | | |
| | |
Loans receivable at September 30, 2021 | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | - | | |
$ | - | | |
$ | - | |
Collectively evaluated for impairment | |
| - | | |
| 1,741,475 | | |
| 1,741,475 | |
Total loans receivable | |
$ | - | | |
$ | 1,741,475 | | |
$ | 1,741,475 | |
| |
| | | |
| | | |
| | |
Allowance for loan losses at September 30, 2021 | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | - | | |
$ | - | | |
$ | - | |
Collectively evaluated for impairment | |
| - | | |
| 25,783 | | |
| 25,783 | |
Total allowance for loan losses | |
$ | - | | |
$ | 25,783 | | |
$ | 25,783 | |
At
September 30, 2022 and September 30, 2021, no loans were past due, classified as non-accrual or considered impaired.
Indemnity Liability
As discussed at Note 7, and pursuant to PCCU Agreements,
PCCU funds loans originated and serviced by SHF either directly or through a third-party vendor. SHF retains the associated interest and
pays PCCU a fee at an annual rate of 0.25% of the outstanding loan principal. The below schedule details outstanding amounts funded by
PCCU and categorized as either collateralized loans or unsecured loans and lines of credit. No loans were funded by PCCU prior to January
1, 2022.
Schedule
of Outstanding Amounts
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
(Unaudited) | | |
(Audited) | |
Secured term loans | |
$ | 17,200,000 | | |
$ | - | |
Unsecured loans and lines of credit | |
| 528,042 | | |
| - | |
Total loans funded by Parent | |
$ | 17,728,042 | | |
$ | - | |
All amounts were performing at September 30, 2022.
Secured loans contained an interest rate ranging from 8.25% to 12.0%. Unsecured loans and lines of credit contain variable rates ranging
from Prime + 1.5% to Prime + 6%. Unsecured lines of credit had incremental availability of $996,958 and $225,000 at September 30, 2022
and December 31, 2021.
SHF’s indemnity liability reflects SHF management’s
estimate of probable loan losses inherent under the agreement at the balance sheet date. Management uses a disciplined process and methodology
to establish the liability, and the estimates are sensitive to risk ratings assigned to individual loans covered by the agreement as well
as economic assumptions driving the estimation model. Individual loan risk ratings are evaluated at least a quarterly based on each situation
by SHF management. Given the Company’s limited lending history, the estimate is based on risk adjusted national charge off rates
as published by the US Federal Reserve.
The indemnity liability activity on September 30,
2022 are as follows:
Schedule
of Indemnity Liability
| |
Three months ended September 30, 2022 | | |
Nine months ended September 30, 2022 | |
| |
| (Unaudited) | | |
| (Unaudited) | |
| |
| | | |
| | |
Beginning balance | |
| 288,505 | | |
| - | |
Charge-offs | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | |
Provision | |
| 88,500 | | |
| 377,005 | |
Ending balance | |
| 377,005 | | |
| 377,005 | |
All loans were current and considered performing at
September 30, 2022
SHF has agreed to indemnify PCCU from all claims related
to SHF’s cannabis-related business. Other than potential loan losses, no other circumstances were identified meeting the requirements
of a loss contingency.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Note
6. Property and equipment, net
Property
and equipment consist of the following:
Schedule
of Property and Equipment, Net
| |
September
30,
2022 | | |
December
31,
2021 | |
| |
(Unaudited) | | |
(Audited) | |
Equipment | |
$ | 41,815 | | |
$ | 28,080 | |
Office furniture | |
| 7,070 | | |
| 7,070 | |
Property and equipment, gross | |
| 48,885 | | |
| 35,150 | |
Less: accumulated depreciation | |
| (32,375 | ) | |
| (28,799 | ) |
Property and equipment, net | |
$ | 16,510 | | |
$ | 6,351 | |
Depreciation
expense was $3,576 and $1,264 for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Note
7. Related party transactions
Account
Servicing Agreement
Effective
July 1, 2021, SHF, LLC (“SHF”) entered into an Account Servicing Agreement with PCCU. SHF provides services as per the agreement
to CRB accounts at PCCU. In addition to providing the services, SHF assumes the costs associated with the CRB accounts. These costs include
employees to manage account onboarding, monitoring and compliance, rent and office expense, insurance and other operating expenses necessary
to service these accounts. Under the agreement, PCCU agrees to pay SHF all revenue generated from CRB accounts. Amounts due to SHF are
due monthly in arrears and upon receipt of invoice. The agreement is for an initial term of 3 years from the effective date. It shall
renew thereafter for 1-year terms until either SHF or PCCU provide sixty days prior written notice. The agreement was amended and restated
in conjunction with the contemplated Business Combination with substantially similar terms.
Pursuant
to this agreement, as amended and restated, the Company reported revenue of $2,340,716 and $5,777,446 for the three month and nine month
periods ended September 30, 2022 and $1,633,667 and $4,938,413 for the three and nine month periods ended September 30, 2021.
Support
Services Agreement
Effective
July 1, 2021, SHF entered into a Support Services Agreement with PCCU. In connection with PCCU hosting the depository accounts and the
related loans and providing certain infrastructure support, PCCU receives (and SHF pays) a monthly fee per depository account. In addition,
25% of any investment income associated with CRB deposits is paid to PCCU. The respective duties and obligations as per the agreement
commenced on the effective date and continue unless terminated by either SHF or PCCU upon giving sixty days prior written notice. The
agreement was amended and restated in conjunction with the contemplated Business Combination with substantially similar terms.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Pursuant
to these agreements and as amended and restated, the Company reported expense of $204,535 and $420,085 for the three-month and nine-month
periods ended September 30, 2022, and $93,285 and $261,496 for the three-month and nine-month periods ended September 30, 2021.
Significant
terms of the Amended and Restated Accounting Servicing Agreement and Support Services Agreement are as follows:
|
● |
Pursuant
to the Account Servicing Agreement, SHF’s fees for such services will equal all cannabis-related income, including all lending-related
income (such as loan origination fees, interest income on CRB-related loans, participation fees and servicing fees), investment income,
interest income, account activity fees, processing fees, flat fees, and other revenue generated from cannabis and multi-state hemp
accounts that are hosted on PCCU’s core system. The Account Servicing Agreement and Support Services Agreement are for an initial
term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of non-renewal, provided
that PCCU may not provide notice of non-renewal until 30 months following the signing date. The Account Servicing Agreement will
also terminate within 60 days of SHF no longer qualifying as a “credit union service organization” (a “CUSO”)
or within 60 days of the assumption by a third party of all CRB-related accounts. On May 23, 2022, SHF and PCCU entered into the
Second Amended and Restated Account Servicing Agreement and Support Services Agreement, which agreement amended and restated the
Amended and Restated Account Servicing and Support Services Agreements to remove the provision providing for the termination of the
agreements within 60 days of SHF no longer qualifying as a “credit union service organization,” as SHF ceased to
qualify as a CUSO following the closing of the Business Combination. |
|
● |
Pursuant
to the Support Services Agreement, as amended, PCCU will continue to provide to SHF certain operational and administrative services
relating to, among other things, human resources, employee benefits, IT and systems, accounting and marketing and capacity for CRB
depository accounts for a monthly fee equal to $30.96 per account in 2022 and $25.32 per account in 2023 and 2024. In addition, investment
income from CRB-related cash and investments (excluding loans) will be shared 25% to PCCU and 75% to SHF and SHF will reimburse PCCU
for any of its out-of-pocket expenses relating to the services provided to SHF. The Amended and Restated Support Services Agreement
also sets forth certain agreements of PCCU to limit bonus distributions to its members to $30,000,000 during any 12-month period
following the effective date of the agreement. Finally, under the Support Services Agreement PCCU will continue to allow its ratio
of CRB-related deposits to total assets to equal at least 65% unless otherwise dictated by regulatory, regulator or policy requirements.
The below schedule demonstrates PCCU’s deposit capacity at September 30, 2022 and December 31, 2021. |
Schedule
of Demonstrates Deposit Capacity
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
(Unaudited) | | |
(Audited) | |
PCCU total assets | |
$ | 636,482,187 | | |
$ | 575,170,939 | |
Capacity at 65% | |
| 413,713,422 | | |
| 373,861,110 | |
CRB related deposits | |
| 165,697,653 | | |
| 146,267,976 | |
Incremental capacity | |
$ | 248,015,769 | | |
$ | 227,593,134 | |
PCCU
policy also requires they maintain an internal ratio of net worth to total assets of at least 10%. CRB related deposit capacity maybe
limited if PCCU ratio declines below this threshold.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Loan
Servicing Agreement
Effective
February 11, 2022, SHF entered into an Amended and Restated Loan Servicing Agreement with PCCU. The agreement sets forth the application, underwriting and
approval process for loans from PCCU to CRB customers and the loan servicing and monitoring responsibilities provided by both PCCU and
SHF. PCCU will receive a monthly servicing fee at the annual rate of 0.25% of the then-outstanding principal balance of each loan funded
by PCCU. For the loans that are subject to this agreement, SHF originates the loans and performs all compliance analysis, credit analysis
of the potential borrower, due diligence and underwriting and all administration, including hiring and incurring the costs of all related
personnel or third-party vendors necessary to perform these services. Under the Loan Servicing Agreement, SHF has agreed to indemnify
PCCU from all claims related to default-related loan losses as defined in the Loan Servicing Agreement. The agreement is for an initial
term of three years and will renew for additional one-year terms unless a party provides 120 days’ notice of non-renewal or there
is a termination for cause, provided that PCCU may not provide notice of non-renewal until 30 months following the signing date. The
agreement was amended and restated in conjunction with the contemplated Business Combination with substantially similar terms.
SHF’s
loan program currently depends on PCCU as SHF’s largest funding source for new loans to CRBs. Under PCCU’s loan policy for
loans to CRBs, PCCU’s Board of Directors has approved aggregate lending limits at the lessor of 1.3125 times PCCU’s net worth
or 65% of total CRB deposits. Concentration limits for the deployment of loans are further categorized as i) real estate secured, ii)
construction, iii) unsecured and iv) mixed collateral with each category limited to a percentage of PCCU’s net worth. In addition,
loans to any one borrower or group of associated borrowers are limited by applicable National Credit Union Association regulations to
the greater of $100,000 or 15% of PCCU’s net worth.
The
below schedule demonstrates the ratio of CRB related loans funded by PCCU to the relative lending limits at September 30, 2022. No amounts
were funded prior to January 1, 2022.
Schedule
of Demonstrates Deposit Capacity
| |
September
30,
2022 | | |
December
31,
2021 | |
| |
(Unaudited) | | |
(Audited) | |
CRB related deposits | |
$ | 165,697,653 | | |
$ | 146,267,976 | |
Capacity at 65% | |
| 107,703,474 | | |
| 95,074,184 | |
PCCU net worth | |
| 97,656,494 | | |
| 61,925,336 | |
Capacity at 1.3125 | |
| 128,174,148 | | |
| 81,227,003 | |
Limiting capacity | |
$ | 128,174,148 | | |
$ | 81,227,003 | |
PCCU loans funded | |
| 17,728,042 | | |
| - | |
Amounts available under lines of credit | |
| 996,958 | | |
| 225,000 | |
Incremental capacity | |
$ | 109,449,148 | | |
$ | 81,002,003 | |
Pursuant
to this agreement, the Company reported expenses of $9,160 and $14,264 for the three-month and nine-month periods ended September 30,
2022 and $0 for the three-month and nine-month periods ended September 30, 2021.
Collectively
the Account Servicing Agreement, Support Servicing Agreement and Loan Servicing Agreement are referred to as the “Parent Agreements.”
Operating
leases
Effective
July 1, 2021, SHF entered into a one-year gross lease with PCCU to lease space in its existing office at a monthly rent of $5,400. Effective
July 1, 2022, the Company amended its existing lease to a month-to-month lease and therefore no asset or liability amounts are reported
pursuant to ASC 842.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Note
8. Revenue
Disaggregated
revenue
Revenue
by type are as follows:
Schedule
of Disaggregated Revenue
For the three-month period ended September 30, | |
2022 | | |
2021 | |
| |
(Unaudited) | | |
(Unaudited) | |
Deposit, activity, onboarding income | |
$ | 1,369,559 | | |
$ | 1,494,204 | |
Safe Harbor Program income | |
| 38,598 | | |
| 83,194 | |
Investment income | |
| 558,860 | | |
| 111,052 | |
Loan interest income | |
| 412,297 | | |
| 28,411 | |
Total Revenue | |
$ | 2,379,314 | | |
$ | 1,716,861 | |
For the nine-month period ended September 30, | |
2022 | | |
2021 | |
| |
(Unaudited) | | |
(Unaudited) | |
Deposit, activity, onboarding income | |
$ | 4,179,323 | | |
$ | 4,588,471 | |
Safe Harbor Program income | |
| 125,767 | | |
| 359,044 | |
Investment income | |
| 935,993 | | |
| 271,113 | |
Loan interest income | |
| 662,130 | | |
| 78,829 | |
Total Revenue | |
$ | 5,903,213 | | |
$ | 5,297,457 | |
Note
9. Commitments and contingencies
From
time to time, the Company is subject to claims in legal proceedings arising in the normal course of business. The Company does not believe
that it is currently party to any pending legal action that could reasonably be expected to have a material adverse effect on our business
or operating results.
Note
10. Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. The fair value hierarchy ranks the inputs used in measuring fair value as follows:
|
○ |
Level 1 –
Observable, unadjusted quoted prices in active markets |
|
○ |
Level 2 – Inputs
other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability |
|
○ |
Level 3 – Unobservable
inputs with little or no market activity that require the Company to use reasonable inputs and assumptions |
The
Company uses fair value measurements to record adjustments to certain financial assets and liabilities on a recurring basis. The Company
may be required to record certain assets at fair value on a nonrecurring basis in specific circumstances, such as evidence of impairment.
Methodologies used to determine fair value might be highly subjective and judgmental in nature; therefore, valuations may not be precise.
If the Company determines that a valuation technique change is necessary, the change is assumed to have occurred at the end of the respective
reporting period.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Assets
and Liabilities Reported at Fair Value on a Recurring Basis
Public and Private Placement Warrants:
Public and private placement warrants are recorded
at fair value on a recurring basis. The Company obtains dealer quotes, Level 1 and Level 3 inputs, based on observable data to value these
warrants.
Forward purchase option derivative:
Forward purchase option derivative are recorded at
fair value on a recurring basis. The Company obtains dealer quotes, Level 3 inputs, based on observable data to value these warrants.
The following tables summarize financial assets and liabilities recorded
at fair value on a recurring basis, by the level of valuation inputs in the fair value hierarchy on September 30, 2022:
Schedule of Fair Value Assets and Liabilities Measured on Recurring Basis
| |
Total Fair
Value |
|
|
Quoted
Prices
in Active
Markets
(Level 1) | | |
Significant
Other
Unobservable
Inputs
(Level 3) | |
| |
|
|
|
|
| | |
| |
Description | |
|
|
|
|
| | | |
| | |
Liabilities: | |
|
|
|
|
| | | |
| | |
Public warrants | |
$ |
704,375 |
|
|
$ | 704,375 | | |
| - | |
Private placement warrants | |
$ |
32,682 |
|
|
| - | | |
$ | 32,682 | |
Assets: | |
|
|
|
|
| | | |
| | |
Forward purchase option derivative | |
$ |
1,085,839 |
|
|
| - | | |
$ | 1,085,839 | |
Assets
Measured at Fair Value on a Nonrecurring Basis
There
were no assets or liabilities recorded at fair value on a nonrecurring basis for the periods ended September 30, 2022, and December 31,
2021.
Fair
Value of Financial Instruments
The
Company uses various methodologies and assumptions to estimate the fair value of certain financial instruments. With the exceptions of
loans receivable, warrants and forward purchase option derivatives, the Company considers the carrying amounts of its financial instruments
(cash, accounts receivable and accounts payable) in the balance sheet to approximate fair value because of the short-term or highly liquid
nature of these financial instruments.
The
following tables present the carrying amounts and fair values of financial instruments, by the level of valuation inputs in the fair
value hierarchy, as of the dates indicated:
Schedule
of Carrying Amounts and Fair Values of Financial Instruments by the Level of Valuation Inputs in the Fair Value Hierarchy
| |
| | |
| | |
| | |
| | |
| |
| |
As on September 30, 2022 | |
| |
| | |
| | |
Fair value measurement using | |
| |
Carrying amount | | |
Fair value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
| 7,273,012 | | |
| 7,273,012 | | |
| 7,273,012 | | |
| - | | |
| - | |
Accounts receivable – trade | |
| 813,257 | | |
| 813,257 | | |
| 813,257 | | |
| - | | |
| - | |
Contract assets | |
| 7,676 | | |
| 7,676 | | |
| 7,676 | | |
| - | | |
| - | |
Prepaid expenses | |
| 941,478 | | |
| 941,478 | | |
| 941,478 | | |
| - | | |
| - | |
Accrued interest receivable | |
| 25,422 | | |
| 25,422 | | |
| 25,422 | | |
| - | | |
| - | |
Forward purchase derivative assets | |
| 1,085,839 | | |
| 1,085,839 | | |
| 1,085,839 | | |
| - | | |
| 1,085,839 | |
Loans | |
| 1,421,414 | | |
| 1,280,815 | | |
| - | | |
| - | | |
| 1,280,815 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts payable | |
| 2,263,746 | | |
| 2,263,746 | | |
| 2,263,746 | | |
| - | | |
| - | |
Accrued expenses | |
| 5,569,026 | | |
| 5,569,026 | | |
| 5,569,026 | | |
| - | | |
| - | |
Contract liabilities | |
| 14,583 | | |
| 14,583 | | |
| 14,583 | | |
| - | | |
| - | |
Public Warrants | |
| 704,375 | | |
| 704,375 | | |
| 704,375 | | |
| - | | |
| - | |
Private Placement Warrants | |
| 32,682 | | |
| 32,682 | | |
| - | | |
| - | | |
| 32,682 | |
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
| |
| | |
| | |
| | |
| | |
| |
| |
As on December 31, 2021 | |
| |
| | |
| | |
Fair value measurement using | |
| |
Carrying amount | | |
Fair value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
| 5,495,905 | | |
| 5,495,905 | | |
| 5,495,905 | | |
| - | | |
| - | |
Accounts receivable – trade | |
| 522,896 | | |
| 522,896 | | |
| 522,896 | | |
| - | | |
| - | |
Contract assets | |
| 18,317 | | |
| 18,317 | | |
| 18,317 | | |
| - | | |
| - | |
Prepaid expenses | |
| 6,021 | | |
| 6,021 | | |
| 6,021 | | |
| - | | |
| - | |
Accrued interest receivable | |
| 7,556 | | |
| 7,556 | | |
| 7,556 | | |
| - | | |
| - | |
Loans | |
| 1,463,560 | | |
| 1,417,637 | | |
| - | | |
| - | | |
| 1,417,637 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts payable | |
| 43,626 | | |
| 43,626 | | |
| 43,626 | | |
| - | | |
| - | |
Accrued expenses | |
| 129,546 | | |
| 129,546 | | |
| 129,546 | | |
| - | | |
| - | |
Contract liabilities | |
| 8,333 | | |
| 8,333 | | |
| 8,333 | | |
| - | | |
| - | |
The
change in the assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value are
presented in the following table:
| |
| | | |
| | |
| |
As on September 30, 2022 | |
| |
Warrants
Liability | | |
Forward purchase derivative assets | |
Balance at the beginning of the period | |
| - | | |
| - | |
Acquired under business combination | |
| 1,605,529 | | |
| 1,687,530 | |
Fair value adjustment | |
| (868,472 | ) | |
| (601,691 | ) |
Balance at the end of the period | |
| 737,057 | | |
| 1,085,839 | |
Transfers
to/from Levels 1, 2 and 3 are recognized at the end of the reporting period in which a change in valuation technique or methodology occurs.
The Warrants are measured at fair value on a recurring basis. The Warrants were initially valued using a Modified Monte Carlo
Simulation. As of September 30, 2022, the warrants were valued using the instrument’s publicly listed trading price as of
the balance sheet date, which is a Level 1 measurement due to the use of an observable market quote in an active market.
The
fair value of the forward purchase option derivative was estimated using a Monte-Carlo Simulation in a risk-neutral framework (a special
case of the Income Approach). Specifically, the future stock price is simulated assuming a Geometric Brownian Motion (“GBM”).
For each simulated path, the forward purchase value is calculated based on the contractual terms and then discounted at the term-matched
risk-free rate. Finally, the value of the forward is calculated as the average present value over all simulated paths. The Company measured
the fair value of the forward purchase option derivative upon execution of the Forward Purchase Agreement and as of September 30, 2022,
with the respective fair value adjustments recorded within its Statements of Operations. The Company will continue to monitor
the fair value of the forward option derivative each reporting period with subsequent revisions to be recorded in the Statements
of Operations.
The
following table provides quantitative information regarding Level 3 fair value measurements inputs as it relates to the warrants as of
their measurement dates:
Schedule of Level 3 Fair Value Measurement Inputs
| |
September 30,
2022 | |
Exercise price | |
| 11.50 | |
Share Price | |
| 6.99 | |
Expected term (years) | |
| 4.99 | |
Probability of Acquisition | |
| 100.0 | % |
Volatility | |
| 11.3 | % |
Risk-free rate | |
| 4.06 | % |
Dividend yield (per share) | |
| 0.00 | % |
The
following table provides quantitative information regarding Level 3 fair value measurements inputs as it relates to the forward purchase
agreement as of their measurement dates:
Schedule
of Level 3 Fair Value Measurement Inputs
| |
September 30,
2022 | |
Share Price | |
| 6.99 | |
Expected term (years) | |
| 3 | |
Probability of Acquisition | |
| 100 | % |
Volatility | |
| 11.3 | % |
Risk-free rate | |
| 4.25 | % |
BB Bond rate | |
| 7.72 | % |
C bond rate | |
| 15.63 | % |
Fair value measurement input | |
| 15.63 | % |
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Note
11. Earnings Per Share
Basic
net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders’ by the
weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted
net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders’ by the weighted
average number of common shares and potentially dilutive securities outstanding for the period. For the Company’s diluted earnings
per share calculation, the Company uses the “if-converted” method for preferred stock and convertible debt and the “treasury
stock” method for Warrants and Options.
As
the Business Combination and related transactions are being reflected as if they had occurred at the beginning of the period presented,
the calculation of weighted average shares outstanding for basic and diluted net income per share assumes that the shares issued in connection
with the Business Combination have been outstanding for the entire period presented.
Schedule
Of Earning Per Shares, Basic And Diluted
| |
2022 | | |
2021 | |
| |
For
the Nine Months Ended
September 30, | |
| |
2022 | | |
2021 | |
Net income | |
| 1,894,179 | | |
| 2,568,537 | |
Weighted average shares outstanding – basic | |
| 18,715,912 | | |
| 18,715,912 | |
Basic net earnings per share | |
| 0.10 | | |
| 0.14 | |
Weighted average shares outstanding – diluted** | ** |
| 20,760,912 | | |
| 18,715,912 | |
Diluted net earnings per share | |
| 0.09 | | |
| 0.14 | |
| |
2022 | | |
2021 | |
| |
For
the Three Months Ended
September 30, | |
| |
2022 | | |
2021 | |
Net income | |
| 1,056,235 | | |
| 946,063 | |
Weighted average shares outstanding – basic | |
| 18,715,912 | | |
| 18,715,912 | |
Basic net earnings per share | |
| 0.06 | | |
| 0.05 | |
Weighted average shares outstanding – diluted** | ** |
| 20,760,912 | | |
| 18,715,912 | |
Diluted net earnings per share | |
| 0.06 | | |
| 0.05 | |
| |
2022 | | |
2021 | |
Weighted average share calculations, basic | |
As of, | |
| |
September 30, 2022 | | |
September 30, 2021 | |
Company public shares | |
| 3,926,598 | | |
| 2,568,537 | |
Company initial stockholders’ | |
| 3,403,175 | | |
| 18,715,912 | |
SHF stockholders’ | |
| 11,386,139 | | |
| 11,386,139 | |
Weighted average shares outstanding – basic | |
| 18,715,912 | | |
| 18,715,912 | |
| |
2022 | | |
2021 | |
Weighted average shares calculations, diluted | |
As of, | |
| |
September 30, 2022 | | |
September 30, 2021 | |
Company public shares | |
| 3,926,598 | | |
| 2,568,537 | |
Company initial stockholders’ | |
| 3,403,175 | | |
| 18,715,912 | |
PIPE Investors** | |
| 2,045,000 | | |
| - | |
SHF stockholders’ | |
| 11,386,139 | | |
| 11,386,139 | |
Weighted average shares outstanding – diluted | |
| 20,760,912 | | |
| 18,715,912 | |
** | | PIPE
investors initial shares represent preferred stock without voting rights. Preferred stock initially converts at $10
per share which would result in an additional 2,045,000
shares of Class A Stock. |
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Note
12. Forward Purchase Agreement
On
June 16, 2022, NLIT entered into a Forward Purchase Agreement with Midtown East Management NL, LLC (“Midtown East”). Subsequent
to entering into the Forward Purchase Agreement, the Company, NLIT, and Midtown East entered into assignment and novation agreements
with Verdun Investments LLC (“Verdun”) and Vellar Opportunity Fund SPV LLC – Series 1 (“Vellar”), pursuant
to which Midtown East assigned its obligations as to 1,666,666
shares of the shares of Class A Stock to be purchased
under the Forward Purchase Agreement to each of Verdun and Vellar. As contemplated by the Forward Purchase Agreement:
● | Prior
to the Closing, Midtown East, Verdun and Vellar purchased approximately 3.8 million shares
of NLIT Class A common stock directly from investors at market price in the public market.
Midtown East and other counter parties waived their redemption rights with respect to the
acquired shares; |
| |
| ● | One
business day following the Closing, NLIT paid approximately $39.3 million from the cash held
in its trust account to Midtown East; Verdun and Vellar for the shares purchased and approximately
$0.3 million in related expense amounts. |
| ● | At
any time prior to the Maturity Date (defined as the earlier of i) the third anniversary of
the Closing of the Business Combination, ii) the shares are delisted from The Nasdaq Stock
Market or (iii) during any 30 consecutive Scheduled Trading Day-period following the closing
of the Business Combination, the Volume Weighted Average Share Price (VWAP) Price for 20 Scheduled Trading Days during such period
shall be less than $3.00 per share), Midtown East, Verdun and Vellar may elect an optional
early termination to sell some or all of the shares (the “Terminated Shares”)
of Class A Stock in the open market. If Midtown East, Verdun and Vellar sell any shares prior
to the Maturity Date, the pro-rata portion of the Reset Price will be released from the escrow
account and paid to SHF. Midtown East, Verdun and Vellar shall retain any proceeds in excess
of the Reset Price that is paid to SHF. |
| ● | At
the Maturity Date, Midtown East, Verdun and Vellar shall be entitled to (1) the product of
the shares then held by them multiplied by the Forward Price, and (2) an amount, in cash
or shares at the sole discretion of NLIT, equal to (a) in the case of cash, the product of(i)(x)
3.8 million shares less (y) the number of Terminated Shares and (ii) $2.00 (the “Maturity
Cash Consideration”) and (b) in the case of shares, (i) the Maturity Cash Consideration
divided by (ii) the VWAP Price for the 30 Scheduled Trading Days prior to the Maturity Date.
|
Note
13. Warrant Liability
As
of September 30, 2022, the Company has 5,750,000 Warrants and 264,088 Private Placement Warrants; there are no warrants as of December
31, 2021.
Warrants
may only be exercised for a whole number of shares. No fractional warrants will be issued upon separation of the units and only whole
warrants will trade.
The
Warrants will become exercisable on the later of (i) the date of the completion of a Business Combination and (ii) 12 months from the
closing of the Initial Public Offering, and will expire five years after the completion of a Business Combination or earlier upon redemption
or liquidation.
The
Company will not be obligated to deliver any shares of Class A Common Stock pursuant to the exercise of a warrant and will have no obligation
to settle such warrant exercise unless a registration statement under the Securities Act covering the issuance of the shares of Class
A common issuable upon exercise of the warrants is then effective and a current prospectus relating to those shares of Class A Common
Stock is available, subject to the Company satisfying its obligations with respect to registration. No warrant will be exercisable for
cash or on a cashless basis, and the Company will not be obligated to issue any shares to holders seeking to exercise their warrants,
unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising
holder, or an exemption from registration is available.
Redemption
of warrants become exercisable when the price per Class A Common Stock equals or exceeds $18.00. Once the warrants become exercisable,
the Company may redeem the Warrants:
|
● |
in whole and not in part; |
|
● |
at a price of $0.01 per Warrant; |
|
● |
upon not less than 30 days’ prior written notice
of redemption to each warrant holder; and |
|
● |
if, and only if, the reported
last sale price of the Class A Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations,
recapitalizations and the like and certain issuances of Class A Common Stock and equity-linked securities) for any 20 trading days
within a 30-trading day period commencing no earlier than the date the warrants become exercisable and ending on the third business
day before the date on which the Company sends the notice of redemption to the warrant holders. |
If
and when the warrants become redeemable by the Company, the Company may exercise its redemption rights; this is also the case if the
Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If
the Company calls the Warrants for redemption, management will have the option to require all holders that wish to exercise the Warrants
to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A
Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend,
or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of Class A Common
Stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants. If
the Company is unable to complete a Business Combination within the Combination Window and the Company liquidates the funds held in the
Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution
from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire
worthless.
The
Placement Warrants are identical to the Warrants underlying the Units sold in the Initial Public Offering, except that the Placement
Warrants and the Class A Common Stock issuable upon the exercise of the Placement Warrants are not transferable, assignable or saleable
until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Placement Warrants
are exercisable on a cashless basis and non-redeemable so long as they are held by the initial purchasers or their permitted transferees.
If the Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Placement Warrants
will be redeemable by the Company and exercisable by such holders on the same basis as the Warrants.
SHF
Holdings, Inc.
COMBINED
NOTES TO FINANCIAL STATEMENTS
Note
14. Subsequent events
Subsequent events are events or transactions that occur after the balance
sheet date but before the financial statements are issued. The Company noted the following subsequent events that occurred after the balance
sheet date of September 30, 2022:
|
● |
On October 26, 2022, SHF
Holdings, Inc., entered into a Forbearance Agreement (the “Forbearance Agreement”) with PCCU and Luminous Capital USA
Inc. (“Luminous”). As per the terms of the agreement, PCCU has agreed to defer all payments owed pursuant to the Purchase
Agreement for a period of six (6) months from the date hereof while the Parties engage in good faith efforts to renegotiate the payment
terms applicable to the Deferred Obligation (the “Forbearance Period”). |
|
|
|
|
● |
On October 29, 2022, SHF
Holdings, Inc., entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the PCCU, SHF Merger
Sub I and a direct wholly-owned subsidiary of Parent (“Merger Sub I”), SHF Merger Sub II, LLC, and a direct wholly-owned
subsidiary of Parent (“Merger Sub II” and, together with Merger Sub I, the “Merger Subs”), Rockview Digital
Solutions, Inc., d/b/a Abaca (the “Company”) and Dan Roda, solely in such individual’s capacity as the representative
of the Company Security Holders (the “Company Stockholders’ Representative”). The Merger Agreement provides that
the Parent will acquire the Company in exchange for (a) cash consideration in an amount equal to (i) $9,000,000 ($3,000,000 is payable
at closing, with an additional $3,000,000 payable at each of the one-year and two-year anniversaries of the closing); and (b) $21,000,000
of validly issued, fully paid and non-assessable shares of the Parent’s common stock, $0.0001 par value per share, payable
in two installments of $8,400,000 on the closing date of merger and $12,600,000 on the first anniversary of the closing year. This
transaction is expected to close in the fourth quarter of 2022. |
|
|
|
|
● |
On
November 2, 2022, EF Hutton, a division of Benchmark Investments, LLC (“EF Hutton”) issued a notice of default to the
Company towards a promissory note (the “Note”) entered with the company on September 28, 2022, amounting to $2,166,250.
The Note provides that the Company was obligated to pay EF Hutton the principal sum of $2,166,250
on the following schedule: (i) $715,750
on October 14, 2022 and (ii) $362,625 on
each of October 31, 2022, November 30, 2022, December 31, 2022, and January 31, 2023. The legal notice indicates that the principal
balance of the $1,450,500
is immediately due and payable with default interest of 24%
per annum, and that EF Hutton intended to pursue legal action if full payment was not received by November 7, 2022. EF Hutton
claimed that SHF defaulted on the Note by failing to pay the $362,625
instalment payment due on October 31, 2022. The Company is currently investigating available remedies and intends to defend itself
against any claims. |
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As noted in Note 12 above,
on June 16, 2022, NLIT entered into a Forward Purchase Agreement with Midtown East. Subsequent to entering into the Forward Purchase
Agreement, the Company, NLIT, and Midtown East entered into assignment and novation agreements with Verdun and Vellar pursuant to
which Midtown East assigned its obligations as to 1,666,666 shares of the shares of Class A Stock to be purchased under the Forward
Purchase Agreement to each of Verdun and Vellar. As contemplated by the Forward Purchase Agreement, should the Volume Weighted Average
share Price (VWAP) Price for 20 Scheduled Trading Days be less than $3.00 prior to the maturity date, Midtown East, Verdun and Vellar
may elect an optional early termination to sell some or all of the shares (the “Terminated Shares”) of Class A Stock
in the open market. If Midtown East, Verdun and Vellar sell any shares prior to the Maturity Date, the pro-rata portion of the Reset
Price will be released from the escrow account and paid to SHF. Midtown East, Verdun and Vellar shall retain any proceeds in excess
of the Reset Price that is paid to SHF. The Company will continue to monitor the aforementioned VWAP during the fourth
quarter of 2022. |