Note 7 - Loan Portfolio Indemnification Obligations

Under the Second Amended CAA, the Company indemnifies PCCU for up to 65% of default-related losses on PCCU’s CRB loan portfolio.

The obligation is recognized as two independent, coexisting liabilities that do not offset each other: (i) a noncontingent stand-ready guarantee liability under ASC 460, measured at fair value at inception, and (ii) a contingent expected credit loss (benefit) liability under ASC 326-20, representing the Company’s up to 65% share of estimated lifetime expected credit losses (benefit) on the PCCU CRB portfolio. Each liability is recognized with a corresponding contract asset under ASC 340-40-25-2, as the indemnification costs are directly related to the Second Amended CAA and are expected to be recovered through the Company’s up to 65% share of loan program income.

ASC 460 - Guarantee Liability

The issuance of a guarantee imposes a noncontingent obligation to stand ready to perform and initial recognition is required at inception regardless of whether payment is probable. The stand-ready liability is recognized separately from the ASC 326 liability.

The stand-ready liability is measured at fair value at inception under ASC 820-10 using a market-based insurance pricing approach that is classified as Level 3 due to the absence of observable market inputs for cannabis lending guarantees. The fair value of a guarantee at inception reflects the premium that a market participant (analogized to a specialty insurance carrier) would charge in an arm’s-length transaction to underwrite the same risk. Because no direct market comparable exists for cannabis CRB loan portfolio guarantees, management estimated the standalone selling price by constructing the premium components a specialty financial guarantor would require. The fair value incorporates three components: (a) the expected loss element, representing the probability-weighted losses the guarantor expects to absorb; (b) a stand-ready risk premium, representing the additional compensation a market participant would require for uncertainty, volatility, and the uncapped nature of the commitment beyond expected losses; and (c) a time value adjustment.

Key Level 3 inputs as of December 31, 2025 are as follows:

 Schedule of Significant Unobservable Input

For loans entered into subsequent to October 1, 2025, the effective date of the Second Amended CAA, management evaluates the stand-ready guarantee on a specific identification basis, separate from the pooled tranche inputs presented above. Loans originated under this methodology are evaluated using the tranche-specific assumptions determined at each loan’s origination date, as follows:

The maximum potential amount of future payments under the guarantee across all loans evaluated on a specific identification basis is approximately $33.4 million and $33.8 million as of June 30, 2026 and December 31, 2025, respectively, representing 65% of the total outstanding CRB loan portfolio balance. The indemnification percentage is subject to reduction, at management’s discretion, under the Second Amended CAA’s listing-related adjustment clause.

Each stand-ready guarantee liability tranche is reduced through amortization on a straight-line basis over its respective weighted average payout period, determined at origination and disclosed in the table above. The release period and release pattern for each tranche are reassessed at least annually. If material changes in the portfolio composition at inception, loan paydowns, or maturities indicate that the weighted average life assumption is no longer appropriate, the Company adjusts the release period and pattern prospectively.

ASC 326-20 - Financial Indemnification Liability

The financial indemnification liability is estimated using a probability of default (“PD”) × loss given default (“LGD”) framework, with the indemnified portfolio segmented by management’s internal risk rating scale into three tranches. Key assumptions are independently developed by management, incorporating cannabis industry-specific risk factors through a 17.5% qualitative LGD premium applied across all pooled tranches and individual evaluation of Tranche C loans.

The indemnified portfolio is segmented into three tranches. Loans rated 8 or higher are individually evaluated rather than included in the pooled analysis.

The expected credit loss liability as of June 30, 2026 is as follows:

 Schedule of Expected Credit Loss Liability

The expected credit loss liability as of December 31, 2025 is as follows:

There is a single loan within Tranche C that continues to be individually evaluated due to its commercial and industrial (C&I) structure and collateral-dependent status. Following an independent risk review completed by the loan’s third-party servicer in May 2026, which considered debt-service coverage trends, revenue growth, and a sustained history of current payments, and applied a conservative override to the loan’s quantitatively-indicated rating the loan’s risk rating was upgraded from 9 (Doubtful) to 8 (Substandard) as of June 30, 2026. In connection with this upgrade, management revised the PD applied to the loan to 19.0% to reflect the improved risk profile; the LGD assumption of 50% was not changed, as the collateral composition and expected recovery in a default scenario are unaffected by the payment-performance improvement. As a result, the reserve on this loan decreased from $0.4 million as of December 31, 2025 to $0.2 million as of June 30, 2026. The loan remains current on all scheduled payments, and interest income continues to be recognized.

Loans in the portfolio are secured primarily by real estate used for cannabis-specific purposes, including cultivation facilities, processing facilities, and retail dispensaries, and in certain cases by business assets under UCC filings. Because cannabis-use properties have limited alternative-use marketability under current federal law, management applies a two-step discount to collateral values: (i) elimination of the cannabis license premium (the “green tax”), reflecting that a non-cannabis buyer would not ascribe value to the cannabis operating license embedded in the appraised value; and (ii) a reduction to the remaining value to reflect proceeds realizable from a liquidation sale to a non-cannabis buyer. As of June 30, 2026 and December 31, 2025, this methodology results in adjusted portfolio collateral of approximately $48.4 million and $44.1 million against a gross balance of $51.5 million and $52.1 million, respectively.

The portfolio has experienced minimal credit losses since program inception. Management supplements this limited loss history with cannabis industry benchmarks and peer data. Cannabis industry-specific risk including 100% single-industry concentration, Schedule I federal status, and collateral marketability constraints is reflected through an embedded qualitative LGD premium across all pooled tranches.

Expected credit losses are estimated using historical loss rates derived from a five-year lookback period, reflecting 2 restructured loans out of 28 over that period. Management determined that reasonable and supportable forecasts of future economic conditions beyond the historical loss experience could not be made for this portfolio given its limited loss history and the significant uncertainty surrounding the cannabis regulatory and legal environment. Accordingly, the historical loss rates are applied without forward-looking adjustment, with immediate reversion to historical rates.

The financial indemnification liability is remeasured quarterly; changes are recognized as credit loss expense or income per ASC 326-20-35-8. The inception-date contract asset is reduced as underlying loans pay down or mature and is not subject to straight-line amortization. The 65% indemnification percentage is subject to reduction under the Second Amended CAA’s listing-related adjustment clause if the Company fails to maintain Nasdaq listing standards. A reduction would result in a partial release of the ASC 460 liability to income, a downward remeasurement of the financial indemnification liability, and an impairment assessment of the related contract assets.

Rollforward of Stand-Ready Guarantee Liability and Financial Indemnification Liability

Schedule of Rollforward of Stand-Ready Guarantee Liability and Financial Indemnification Liability

As of June 30, 2026, $0.7 million and $0.2 million of the stand-ready guarantee liability and financial indemnification liability, respectively, are classified as current, with the remaining $0.9 million and $0.5 million classified as non-current. As of December 31, 2025, $0.7 million and $0.4 million of the stand-ready guarantee liability and financial indemnification liability, respectively, were classified as current, with the remaining $1.2 million and $0.7 million classified as non-current.