| Summary of Significant Accounting Policies | 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 Equivalent 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 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 ASC 450-20 Loss Contingencies 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 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 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 14,583 18,317 8,333 18,987 59,081 Advertising/Marketing
Costs Advertising/marketing
costs are expensed as incurred. For the three and nine months ended September 30, 2022, advertising/marketing costs were $ 81,130 231,970 21,327 48,730 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 88,550 30,973 88,499 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 0.00 0.00 0.00 21 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) Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Deferral of the Effective Dates for
Certain Entities 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
● Upon
closing of the Business Combination, 11,386,139 The
Seller was due to receive a cash payment of $ 3.1 SHF
Holdings, Inc. COMBINED
NOTES TO FINANCIAL STATEMENTS
● Approximately
$ 56.9 70.0 21.9 35.0 6.4 7.7 1,200,000
● The Parent-Entity Net Investment appearing in the balance sheet of SHF amounting to $ 9,124,297
● Immediately
prior to the Closing, 20,450 20,450,000 2,045,000 10.00
● 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
● Preferred
Stock The
Company is authorized to issue 1,250,000 0.0001 20,450 no
● Class
A Common Stock The
Company is authorized to issue up to 125,000,000 0.0001 18,715,912 0 3,804,872
● 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. |
