SHF Holdings (SHFS) risk factors, FY2025 10-K

Risks Related to the Company’s Business

1. 01Our revenue has declined significantly in recent periods, and we cannot guarantee that the economics of the Second Amended CAA will fully restore our financial performance
2. 02Our revenue has declined due to account attrition, lower pricing, introduction of money market accounts that share interest earned with the depositor and reduced transaction activity within the cannabis industry
3. 03Volatility in interest rates may adversely affect our revenues, profitability, and competitive position
4. 04Our recurring operating losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern

Risks Related to the Second Amended CAA

1. 05PCCU’s loan program is substantially dependent on the regulatory restrictions placed on PCCU, which may limit the types, terms, and amounts of loans offered
2. 06The Second Amended CAA reinstates an indemnification obligation of up to 65% of loan loss
3. 07We are required to maintain sufficient balance sheet resources to support our indemnification obligations under the Second Amended CAA
4. 08Our indemnification obligation is unlimited in amount, and our actual losses could exceed our current estimates and our available cash
5. 09We are required to maintain sufficient cash and cash equivalents to support our indemnification obligations under the Second Amended CAA
6. 10PCCU retains final loan approval authority and may decline loans that meet our underwriting standards, which could limit our revenue growth
7. 11One borrower represents approximately 18% of the total loan portfolio and carries the second highest risk classification
8. 12The CRB loan portfolio is concentrated entirely in the cannabis industry, and cannabis-specific collateral is subject to significant valuation discounts, legal uncertainties, and a limited buyer pool in a foreclosure or forced sale
9. 13Certain provisions in the Second Amended CAA create a direct link between our listing compliance and our revenue
10. 14The initial fair value measurement of our stand-ready guarantee liability at inception under the Second Amended CAA involves significant estimates and judgment and is subject to material uncertainty
11. 15Our ongoing expected financial indemnification liability under the Current Expected Credit Loss (“CECL”) standard (ASC 326) requires quarterly ongoing remeasurement and is subject to material uncertainty
12. 16We are dependent on third parties, including PCCU and other service providers, for certain critical services, and disruptions at PCCU would directly and immediately impair our operations
13. 17Loan program income (formerly loan interest income) could decline under the Second Amended CAA if the indemnity reserve would cause our shareholders’ equity to drop below the Nasdaq Listing Requirements to maintain compliance

Risks Related to the Cannabis Industry and Regulatory Environment

1. 18We have agreements with financial institutions that provide banking services to CRBs, which exposes us to additional liabilities, regulatory compliance costs, and reputational risk
2. 19Cannabis remains a Schedule I controlled substance under federal law, and changes in federal enforcement policy or the scheduling status of cannabis could affect our business in unpredictable ways
3. 20The Company, our financial institution customers, and our CRB clients are subject to complex federal and state laws governing financial transactions related to cannabis, which could subject them to legal claims or restrict their activities
4. 21State-level regulatory changes, including market saturation, license non-renewals, and changes to cannabis program structures could impair borrower viability and increase the credit risk in the portfolio we indemnify
5. 22Because cannabis remains federally illegal, CRB borrowers generally cannot access bankruptcy protections but instead work through the receivership process, which complicates loan workouts and could increase our loss given default
6. 23Service providers to cannabis businesses may be subject to unfavorable U.S. federal income tax treatment, including potential disallowance of ordinary business deductions under Section 280E
7. 24Cannabis businesses may be subject to civil asset forfeiture under federal law, which could result in the loss of collateral securing loans in our portfolio
8. 25We may have difficulty enforcing certain of our commercial agreements and contracts related to cannabis-adjacent services
9. 26Because we serve cannabis-related businesses, we may have difficulty obtaining certain insurance coverages, which could expose us to additional financial liability
10. 27The conduct of third parties, including our CRB clients and their financial institution providers, may jeopardize our regulatory compliance and business relationships
11. 28Directors, officers, employees, and investors who are not U.S. citizens may face cross-border travel restrictions into the United States due to their involvement in the cannabis industry
12. 29We may be subject to marketing and advertising constraints on promoting our services to cannabis-related businesses, which could limit our growth

Risks Related to Nasdaq Listing Compliance

1. 30Our Common Stock has previously traded below $1.00 per share, and if it were to trade below $1.00 in the future it could create an imminent risk of a Nasdaq minimum bid price deficiency notice
2. 31A proposed new Nasdaq rule would delist companies whose market capitalization falls below $5 million for 30 or more consecutive trading days
3. 32A delisting of our Common Stock could materially impair our ability to make future draws under the ELOC

Risks Related to Our Capital Structure and Securities

1. 33The conversion of our Series B Preferred Stock, exercise of Series B Warrants, and future draws under the ELOC could result in substantial dilution to existing holders of our Common Stock
2. 34The ELOC is an active financing facility, its pricing and redemption mechanics significantly reduce our net proceeds on each draw and increase dilution to existing stockholders
3. 35Our Series B Preferred Stock and Series B Warrants contain anti-dilution and reset provisions that could further dilute common stockholders
4. 36Our Common Stock price may be highly volatile, and stockholders may not be able to sell their shares at or above their purchase price
5. 37The soundness of our financial institution customers and partners could adversely affect us
6. 38Our investment in preferred securities of ADTX is illiquid, subject to impairment, and may result in a partial or total loss

Risks Related to Internal Controls and Financial Reporting

1. 39The Second Amended CAA introduces significant new accounting complexity that involves material judgment and estimation uncertainty
2. 40One material weakness in revenue recognition related to our activity fee income from deposits held at PCCU has been remediated, however sufficient time hasn’t passed for us to conclude that its operating effectively
3. 41We have identified a material weakness in internal control over financial reporting related to our loan documentation and expected credit loss estimation process, which could result in a material misstatement of our financial statements

Risks Related to Legal Proceedings and Regulatory Compliance

1. 42An adverse outcome in litigation to which we are or may become a party could materially and adversely affect us
2. 43Changes in laws, regulations, or rules applicable to cannabis banking, financial services, or public company reporting could adversely affect our business and results of operations
3. 44An interruption in, or breach of security of, our information systems could adversely affect us
4. 45We may suffer uninsured losses or losses in excess of our insurance limits

Risks Related to Our Securities

1. 46There can be no assurance that we will be able to comply with the continued listing standards of Nasdaq
2. 47The market for our securities has been volatile and may continue to be volatile, which would adversely affect the liquidity and price of our securities
3. 48The Company may issue additional shares of common or preferred stock under the Amended and Restated - 2022 Equity Incentive Plan (the “Equity Incentive Plan” or the “Plan”) or otherwise, any one of which would dilute the interest of the Company’s stockholders and likely present other risks
4. 49Our operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price
5. 50If securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, or its market, or if they change their recommendations regarding our Common Stock adversely, then the price and trading volume of the Common Stock could decline
6. 51We may be unable to obtain additional financing to fund our operations and growth
7. 52Anti-takeover provisions contained in our Second Amended and Restated Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, could impair a takeover attempt, which could limit the price investors might be willing to pay in the future for our Common Stock
8. 53The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies
9. 54The Certificate of Designation governing our Series B Preferred Stock contains covenants that may limit our business flexibility