SHF Holdings, Inc.

Hello, and welcome to Safe Harbor Financial's 2023 First Quarter Earnings Conference Call. I am joined this afternoon by Sundy Seyfried, Chief Executive Officer, and Jim Dennedy, Chief Financial Officer. Before we start, please note that remarks made today include forward-looking statements, including statements with respect to the company's outlook and the company's expectations regarding its market opportunities and other financial operational matters. Each forward-looking statement discussed on today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication for future performance. Additional information regarding these factors appears under the heading Risk Factors in the Company's Filings with the Securities and Exchange Commission, or the SEC, which are available at www.sec.gov and on our website at ir.shfinancial.org. The forward-looking statements in this call will speak only as of today's date. and the company undertakes no obligation to update or revise any of these statements. Also during the call, Safe Harbor will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on the company's investor relations website or on the SEC website. Today's call is being recorded, and a copy of the recording will be available on Safe Harbor's Investor Relations website. All dollar amounts expressed today are in U.S. currency. I would now like to turn the conference over to your host, Ms. Sundy Seyfried, Chief Executive Officer of Safe Harbor Financial. You may begin.

Thank you, Operator, and welcome, everyone, to our 2023 First Quarter Earnings Call. For those of you new to our story, Safe Harbor has developed a proven compliant cannabis finance onboarding, monitoring, and compliance infrastructure to meet the needs of cannabis related businesses or CRBs that are seeking dependable financial services, including depository and credit solutions through our banking clients. Our proprietary FinTech platform is automated, making it highly reliable and scalable. and an ideal foundation on which to grow alongside the country's cannabis industry, which has lacked reliable access to such services. In addition to organic growth, our growth strategy includes five key components. Acquiring client portfolios from other financial institutions or fintech platforms wishing to partner with Faith Harbor or exit the space altogether. acquiring other reliable cannabis service platforms that complement our service and product offerings with a focus on other pioneers that have perfected their operations and have industry expertise. Expanding our CRV accounts in new legalizing markets and the 13 states that have legal cannabis on the ballot for 2023. Offering lending as a featured product alongside depository services through our banking partners, further engaging more national cannabis companies, and optimizing our presence in current legal markets utilizing a new sales and business development team and marketing staff to provide education on Safe Harbor and our services. The cannabis industry has never presented a greater opportunity for our national expansion. with medical and adult use legal in 37 and 22 states respectively, with at least four states likely to legalize in the midterm. Our ability to easily expand upon our present national platform allows us to meet the needs of the industry at the same pace of industry growth. While some believe the industry is flattening out, we do not see this evidence. We do not see evidence of this in our portfolio performance nor growth metrics. Legalization across the country only expands our ability to grow. As a solid example, we processed a record $1.1 billion in deposits during the first quarter through our partner financial institutions, the greatest amount recorded in our nearly nine-year history, which represents a 33% increase over quarter one last year. Likewise, our monthly average number of accounts held with financial institution clients increased 68% to 993 compared to 590 in quarter one 2022. The slight decrease of the number of accounts held since year end 2022 is the result of closing our zero balance accounts. We reported record monthly average deposits on deposits held by our financial institutions. of $213.6 million, a 55% increase from the $137.7 million in Q1 2022. This growth is both organic and the result of last year's ADICA acquisition, which brought on a dedicated sales and business development team that is currently focused on building out our national presence. For the first eight years of our operations, we grew our business only by word of mouth, but have recently added a robust marketing program that has accelerated our growth and will continue to drive expansion of our national program. All of this growth and activity leads us to believe no better time exists for the national expansion of Safe Harbor Financial. Our ability to expand is further enhanced by our new partnership with Five Star Bank, a New York-based subsidiary of Nasdaq Traded Financial Institutions, Inc., which increases our capacity to onboard deposits by up to $1 billion. This partnership enables us to provide CRVs with the most robust and affordable cannabis banking solutions available, including greater access to credit facilities. For MSOs in particular, this partnership makes it possible for them to consolidate their financial operations under one financial institution and one banker. And in addition to supporting Safe Harbor's continued investment in deposit growth income, our increased capacity to onboard deposits means we can grow the number of and value of PRV accounts, which in turn improves our loan underwriting expertise with lower cost of funds compared to what the market is used to securing. Turning to our lending program, we made program enhancements during the quarter by adding a full-time originator with 20 years of commercial banking and underwriting experience in the banking sector. His experience, coupled with our COO, who has done legal work on commercial loans and restructuring, are well suited to meet the conservative standards required by our financial institution partners. The team has successfully built out a pipeline of nationwide lending opportunities exceeding $300 million with a focus on senior secured debt. We lead with strong real estate-based lending, and as we build client relationships to determine their ability to repay and the success of their operations, we will consider other collateral. We also continue to build out functionality by bringing servicing in-house. This allows for additional income for operations and the ability to work more closely with our borrowers, which creates less confusion and efficient monitoring of the portfolio. We are selectively building out a network of financial institutions that provides us with the opportunity to consider much larger credit facilities. as these institutions open their appetite to cannabis banking and lending. As we build out the full function of our internal lending platform, we are focused on operational efficiencies that will expedite closure to best support our clients' success in building out their businesses. As you've heard in recent news, the State Banking Act is gaining support in Washington, D.C., While this legislation would add protective measures to financial institutions, creating a safe harbor and removing the risk of prosecution of officers and directors, I want to stress that the passing of this act will not impact our ability to expand, nor do we anticipate that it will significantly increase competition for safe harbor. The real cause of financial institutions barrier to entry is the Bank Secrecy Act. or VSA, that has for decades been an ominous banking regulation. This resource-intensive regulation serves to protect the entire financial system while allowing law enforcement to eliminate illicit enterprises across the country. Enforcement actions and associated fines for weak VSA programs can lead to tens of millions of dollars in penalties. Even with the passing of the Banking Act, the BSA will continue to dictate how financial institutions serve the cannabis industry, posing the greatest risk to those financial institutions opting to bank cannabis clients. We believe this will increase a need for our compliance and monitoring services. Faith Arbor Financial has nearly a nine-year advantage of building out our BSA activities under the watchful eye of regulators while refining our program over the course of 16 state and federal examinations. So we are confident that CRBs who choose to bank with our financial institution partners will not be negatively impacted. Lastly, I want to address the banking situation across the country. Certainly, a few banks are facing difficult times, but that does not mean all will face similar difficulties. Not all banks have the risk appetite of those facing negative regulatory actions or closure. As I stated earlier, we are selective with our bank partnerships and monitor their financial position. While we cannot be certain of all activities of our financial institution clients and the risks associated, we will continue to be highly selective and proactive. And should we sense any issue, carefully move our client base between financial institutions to manage the risk over several financial institutions. Because we are in the financial service sector via FinTech model, we must and do plan for methodical and careful growth, facing our growth alongside regulated financial institutions that do the same. Our in-house banking experience only further enhances our ability to protect the stability of the financial system in coordination with our partner banks and credit unions. I will outline the key objectives we are focusing on for the remainder of 2023 in my closing remarks, but will now hand the line to Jim, who will walk us through our financial results for first quarter. Jim?

Thank you, Sundy. Total revenue in the first quarter of 2023 increased 150% to $14.2 million compared to $1.7 million in the comparable prior year period, primarily attributable to higher investment income and higher deposit activity and onboarding income. Operating expense in the first quarter of 2023 increased more than fourfold to $5.8 million compared to $1.2 million in the comparable prior year period. The higher operating expenses in the first quarter were primarily driven by significantly higher compensation and employee benefits, stock-based compensation expense, professional service expense, advertising and marketing expense, and amortization and depreciation expense and business insurance. Net loss in the first quarter of 2023 was $1.4 million versus net income of $500,000 in the prior year period. primarily due to the higher expense previously discussed and accrued interest on the PCCU or Partner Colorado Credit Union payable prior to restructuring that payable at the end of March of this year. When adjusting net income for interest, taxes, and depreciation and amortization expense, and further adjustments to exclude non-cash, unusual and or infrequent costs, we compute an adjusted EBITDA. which management believes is a measure to evaluate our operating performance. A reconciliation of net income to adjusted EBITDA as provided in the press release and 8K filed earlier today. Adjusted EBITDA for the quarter ending March 31, 2023 was $410,000 versus $571,000 in 2022. Moving to the balance sheet at March 31, 2023, The company reported cash and cash equivalents of $8.6 million compared to $8.4 million at December 31, 2022. Cash used in operating activities for 2023 first quarter was $226,000 versus $506,000 in cash provided in the prior year period. This was mainly due to the previously cited higher-than-normal run rate compensation and employee benefits expense in the quarter as well as higher than normal run rate for professional services expense associated with assessing the changes in value and the complex financial instruments and the activities associated with negotiating our expense payables to a lower value and resolving a partner Colorado credit union payable with serviceable level of debt and stock turning to our liquidity and our net working capital deficit decreased to $9 million from $39.3 million at year-end 2022. The improvement in our working capital is primarily attributable to the negotiation and settlement of the current portion of the long-term payable owed to Partner Colorado Credit Union. Since the beginning of the year, we've made significant balance sheet improvements, resolving approximately $68.6 million in debt obligations representing a more than 60% decrease in our total debt obligations. We restructured approximately $64.7 million of total payment obligations owed to the Department of Colorado Credit Union from our September 8, 2022 business combination. And subsequent to the quarter end, we announced that an additional approximately $3.9 million in accrued expenses and deferred underwriting fees were resolved via payments of approximately $1.7 million in cash and a $700,000 payable over the next 12 months with no interest on that $700,000. Regarding our working capital deficit of $9 million reported at March 31, 2023, $11.7 million is associated with the deferred consideration owed to the sellers of Avica in the form of common stock of the company. Excluding the stock portion of a deferred consideration from the working capital calculations, the company would have reported a positive working capital of approximately $2.7 million. Looking ahead for the balance of 2023, we expect full-year revenue for 2023 to grow in excess of 50% over the $9.4 million reported in the full year of 2022. Further, for the full year of 2023, We expect to generate positive adjusted EBITDA and positive cash flow from operating activities. As the year progresses, we look forward to updating our outlook and providing more specific revenue, adjusted EBITDA, and operating cash flow guidance. With that, I will now turn the call back over to Sundy for closing remarks. Sundy?

Thank you, Jim. Sounds good to me. As you have heard from Jim and me today, the team has been dedicated to strategically positioning Safe Harbor for future growth. Along with the ABACA acquisition and integration, which completed our FinTech platform, and our recent debt restructuring, expense negotiations, and deposit onboarding capacity expansion, we are poised for continued success in 2023 and beyond. For the remainder of this year, we will focus on three priorities. to continue to grow our business. Further increase our account growth and subsequent onboarding of deposit balances, which will well position us to execute our lending strategy with a competitive pricing strategy. We expect lending will both increase our profitability and customer retention rates. Continue to build our internal lending function and optimize income from originating, underwriting, and servicing credit facilities. which will enable us to expedite our processes and scale the lending portfolio alongside our depository growth. And optimize our financial institution relationships to secure more product and service offerings for our CRB accounts with expanded balance sheet capacity and a syndication network for financing larger credit facilities. With that, I'll open up the call for questions. Operator?

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Michael Albanese from EF Hutton.

Yeah, hey, guys. Nice quarter, and congratulations on the partnership there with Five Star. Just a couple questions from me. I guess first off on the deposit side and the increase in the monthly average balances held with clients, can you just provide a little insight as to what's driving this? I mean, is this just ABACA? Is there more underneath there?

uh any additional color that would be helpful sure i'll go ahead and take that this uh this is sunday and so it is it's a combination of both but it was not totally abaca we've just seen a good growth in our deposit base held mostly by partner colorado credit union at this point in time so a lot of organic growth is in there as well the abaca acquisition brought probably, you know, $30 to $40 million, $50 million at the most to the table. So there's organic growth there as well.

Got it. Thank you. That's helpful. And then, you know, just regarding the deal with Five Star and the additional $1 billion in deposit capacity, obviously this is significant for you guys. And so, I guess first in relation to that, I mean, what does this do for you guys strategically in regards to, you know, potential MSO business? And then, you know, just beyond that, I mean, what does the health of the lending pipeline look like at the current moment? I think you kind of alluded to in your prepared remarks, you know, I'm paraphrasing, but demand is holding up pretty well. Just you know, some additional color in terms of what you're seeing there and how you can kind of attack that market opportunity?

Well, first, I think that the financial institutions with whom we're partnering at this point in time really are looking toward that longer-term relationship and the ability to enter the market through Safe Harbor and get those lending opportunities with us, whether they participate directly on those loans or they actually allow us to utilize their balance sheet. So I think that it's a combination there of what we're able to do with them. Otherwise, I don't know that they would actually be looking toward us just for the cannabis services. However, deposits are attractive. Now, we don't loan out 100% of our deposits. Obviously, we keep a good portion of them liquid, certainly, because we work within the confines of the regulated institutions with whom we work. I think what we're seeing is that these new financial institutions, seeing banks come to the table, are willing to offer additional commercial services to our clients, which we find very attractive. Anything, as an example, from a line of credit to interest-bearing accounts. So while we have worked under the partner Colorado Credit Union and smaller banks up to this point in time, we are now expanding into these. larger opportunities. The billion dollars or up to billion dollar access that we can utilize or work with a five star bank on allows us to take a client that may have 20 million dollars in deposit as an MSO in their corporate account and put it on that balance sheet where At Partner Colorado, we have maxed out that balance sheet as we have with other partners that we are using at this point in time. So it gives us the opportunity to now expand our client base with larger funds on the balance sheet and negotiate with those financial institutions how we can use those accounts or that balance.

Got it. No, that's really helpful and that's really great. I mean, just, you know, I guess in layman's terms, you know, you're now set up, you now have the infrastructure in place to really be able to you know, provide services to MSOs, right? And, you know, that's an attractive setup for you guys. So what is the – this might be a question for Jim, but where does the lending book stand today? I didn't see it in the press release. I might not have just gone in-depth enough there, and I'm not sure if you said it, so my apologies if you're repeating yourself.

Jim, I'll let you answer that.

I don't know that we report it. Yeah, thank you, Michael. I don't know that we reported it specifically. We had a small increase in the loan book in the first quarter, not a material increase, but I think we have some news upcoming, so please stay tuned.

Yeah, and I mean, this is prior to the announcement with Five Star anyway, so... That being March 31st. Okay, that's really all I have on my end. Thanks, guys. And again, congratulations on a nice quarter here.

Thank you. I would now like to turn the conference back over to Ms. Seyfried.

Thank you, Operator. We are excited about our first quarter accomplishments and look forward to sharing our continued progress and updates on our strategy during our next call. Thank you all for joining today.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.