SHF Holdings, Inc.

Greetings and welcome to Safe Harbor Financial's second quarter 2023 earnings conference call. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Erica Kay from KCSA. Thank you. You may begin.

Thank you. Good afternoon, everyone, and welcome to the second quarter 2023 earnings conference call for Safe Harbor Financials. 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. The 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 made available on Safe Harbor's investor relations website. All dollar amounts expressed today are in U.S. currency. Presenting today will be Sunday Seyfried, Chief Executive Officer, and Jim Denedy, Chief Financial Officer of Safe Harbor. I'll now hand the call over to Sunday. Sunday, please go ahead.

Thank you, Erica, and welcome to our 2023 second quarter earnings call. We have been deeply focused in the last quarter on leveraging the unique capabilities of our proven FinTech platform and our expertise in providing licensed cannabis-related businesses, or CRBs, access to the most robust suite of compliant financial solutions to support their financial growth. Safe Harbor Financial, now in our ninth year, prides itself on being the most reliable long-term financial service provider to the cannabis industry while building out our new services. As you know, our FinTech platform provides a single point of access for commercial deposit accounts, access to payment services and treasury management for licensed ERVs throughout our network of financial partners. I am pleased to report that for a second consecutive year, we processed a record amount of quarterly deposits, over $1 billion, through our partner financial institutions, allowing us to further scale our business, which is driving our top-line growth. Since inception, we have processed nearly $20 billion in cannabis-related funds, providing accountability and transparency for CRBs. In addition, our deposit growth is driving our ability to expand into new high margin revenue channels and achieve greater levels of interest and investment income as well as depository fee income. Before diving deeper into our operating results, I would like to take a step back to describe the current state of the market and discuss how Safe Harbor's position within the financial service ecosystem is both unique and increasingly in demand to support the growth of companies operating within cannabis. As the cannabis industry continues to expand, with medical and adult use now legal in 37 and 22 states respectively, the need for a national platform to support the industry's financial growth has never been greater. Despite the industry's strong growth, CRBs continue to face barriers due to the complexity of state-by-state cannabis regulations, a lack of national standards, high risk, and banking limitations due to the Bank Secrecy Act. Safe Harbor operates at the intersection of CRBs and financial institutions, providing CRBs with access to secure, low risk, and compliant banking services, as well as affording financial institutions access to increased deposits and servicing fees. It is important to note that even when the Safe Banking Act is passed, cannabis banking will remain complex. Positioning Safe Harbor for continued success grounded in our proprietary and fully compliant financial service platform, as well as in our ability to scale our business and expand our suite of financial services. From a market standpoint, We are seeing solid credit opportunities, focusing on real estate deals where our loan to values are under 65% and range from $1 million to $10 million. As you can see, we underwrite credit like a financial institution because we are utilizing the financial institution's balance sheet. This is an important distinction as compared to other market lenders that consider more investment-focused loans. Our objective remains focused on establishing a solid foundation of real estate loans, building our relationships with our clients, and then considering expanding the lending base as they succeed and grow. Safe Harbor is offering rates that result in us building long-term relationships so that our clients don't feel the need to secure other financing opportunities and ultimately remain within Safe Harbor's network of financial institutions. We are also seeing a number of opportunities to reduce CRB's interest rate expense for the simple reason that we are able to offer better terms than our customers are able to secure from our competitors. Currently, we are able to extend terms in the 9 to 14% range, whereas our competitors are lending at rates as high as 18 to 36%. And it's not just about interest rates. It's also due to the fact we don't charge additional on our fees or other hidden fees. We hope to put hard money lending to the industry in the rear view mirror, focusing on normalized credit options. Also, given the current rise in interest rate environment, we are experiencing the benefit of increased investment income on deposits held at our financial institution partners with no additional risk. This increased income, along with our lending income, diversifies the composition of our total income, allowing us to be less dependent on deposit fee income. Furthermore, additional income allows us to be more competitive on pricing with other products for our clients. Turning to our key metrics, following our record year first quarter deposit activity, we were equally successful in the second quarter, increasing total deposits by 36% to $1.1 billion in the second quarter. This compares to $808 million in quarter two, 2022. Similarly, our balances on deposits increased 60% to $230.7 million in the second quarter of 2023, compared to 143.8 million in the second quarter of 2022, significantly increasing our balance from which we lend. Our active average accounts increased 64.5% to 1,002 in the second quarter of 2023 from 609 in second quarter of 2022. With our managed deposit base and number of active accounts continuing to grow during the second quarter of 2023, deposit fees increased by 90%, to $2.56 million, compared to $1.34 million in the same period last year. One of the keys to Safe Harbor's long-term success is the growing strength of our partnerships with cannabis-friendly financial institutions. This network currently includes partner Colorado Credit Union, Five Star Bank, and Pacific Valley Bank. When combined, provides Safe Harbor and its customers access to a growing national footprint. We expect these partnerships will continue to provide Safe Harbor with additional growth opportunities. A prime example of the strength of our growing banking network is the recent partnership we announced with Five Star Bank in May. Not only does Five Star have the capacity to manage a billion dollars plus of deposits, it also allows us to offer CRBs access to interest-bearing money market accounts and opens the door to additional loan options. Given the significant increase in our access to deposit capacity, combined with the record number of onboarded deposits this quarter, we have increased our balance from which to lend and are advancing a number of new opportunities to grow the number and value of CRB accounts. This is particularly important given the state of the industry where lenders are scaling back their loan activity, especially acute in the cannabis industry. While we continue to grow our financial institution partner network with larger multi-billion dollar banks with national charters, we recently terminated our banking relationship with Central Bank of Arkansas. While Central Bank has been an important partner to us in the past five years, our objective is to focus on fewer, larger, regional financial institutions that provide greater balance sheet growth opportunities for State Harbor clients. While the transaction with ABACA brought Central Bank, the relationship was Arkansas-centric and didn't offer a national platform. At the same time, Epica brought us the five-star relationship. In doing so, Safe Harbor can now offer new products on the national platform, including interest-bearing accounts, real estate-backed lending, and lines of credits for our cannabis businesses. These were products that we could not offer with Central Bank of Arkansas. We are confident these additional products and the revenues derived from them were more than offset by any loss of revenue from the dissolution of the relationship with Central Bank of Arkansas. Currently, we are working diligently to ensure our shared customers with the Central Bank of Arkansas are properly supported through the transition and have uninterrupted access to all the Safe Harbor services upon which they've come to rely. Our Safe Harbor team is working to ease the transition process for our clients in order to provide them access to more technology, lines of credits, and interest-bearing money market accounts. We are excited to share the benefit of large regional banking access With our safe harbor clients. As a part of the ongoing advocate integration, we have nearly completed our post acquisition integration, which allows for greater efficiencies and the reduction of redundancies. We will certainly realize the benefits of such actions in our bottom line by year end. These reductions and improved efficiencies were already underway prior to the dissolution of our agreement with central bank. While we are going to be taking a very conservative approach to how we view the potential revenue reduction due to the termination of our agreement with Central Bank over the next two quarters, we anticipate limited net effect for our overall business. However, we will see some top-line reduction at the revenue level. Turning to our growing lending practice, in the second quarter, we strengthened our pipeline of nationwide lending opportunities to over $300 million. and originated over $15 million of senior secured loans for CRPs. In May, we closed $5.5 million in first mortgage-backed loans for four properties in key limited license markets, with terms to support financing for up to nine additional properties across several states. The following month, we originated $6.7 million first lien secured loan for a global real estate investment firm, And we originated $2.9 million first lien secured loan on a key cultivation facility, expanding our lending and deposit relationship with a tier one multi-state operator to the total amount of aggregate credit originated and issued to $12.7 million. Not only does our relationship with this top performing MSO advance our steady credit origination and placement activity into the third quarter, It also supports our effort to further diversify our collateral. We continue to build our lending platform and add additional staff as we are seeing increased origination and placement business. The lending of our business is rapidly growing and we are seeing greater contribution of quarterly revenues coming from loan interest, income, and fees, reducing our dependence on depository income. Loan interest income and fees have increased from 7% annual income in quarter two 2022 to 12% of annual income in quarter two 2023. Going forward, we believe we will see a continued increase in loan activity based on our ability to consistently increase deposits and believe this business segment will become even larger contributor to our total revenue. As our lending platform grows in volume, we will begin providing metrics for the average loan balance, average life to repayment, and average effective interest rate and loan status. I also want to highlight our continued support of entrepreneurs disproportionately impacted by Canada's prohibitions and enforcement. In May of 2023, we expanded our social equity program, which supports social equity licensees with a 20% discount off account application and monthly fees. opening 13 new accounts with new social equity operators across three states. This fantastic program was envisioned by Sophia Dennis, who has served as a relationship manager at Safe Harbor, and we are committed to expanding this program and ensuring the cannabis industry is fair and equitable. Finally, I would like to share our plan to further scale our revenue and growth opportunities that we will believe we believe will help drive us to the next stage of growth. Lending remains a high priority as we look to start doubling production between now and year end, increasing revenue to support other growth activities. Building deposit balances now that we have a new partner bank will also allow us to increase investment income on deposits that were previously limited due to a balance sheet constraint. Account growth activities, while having always been a primary focus, has been organized to increase efficiencies, allowing our staff to double present production while streamlining the entire onboarding process. M&A opportunities continue to present opportunities for our expansion, and we will continue to focus on acquiring other portfolios that will accelerate account growth, deposit growth, and lending capacity. With those comments complete, I'd like to turn the call over to Jim to discuss our financial results as of June 30th, 2023. Jim?

Thank you, Sundy, and good afternoon, everyone. Our second quarter fiscal 2023 total revenue was $4.6 million, representing a more than 145% increase from total revenue of $1.85 million in the comparable prior year period. And for the six months ending June 30, 2023, Total revenue was $8.75 million, representing more than a 145% increase from total revenue of $3.5 million in the comparable prior year period. The increase in total revenue was driven by higher investment income, loan interest income, and deposit income. Moving down the income statement, operating expenses in the second quarter of fiscal 2023 were $22.5 million. Excluding the impairment charges to goodwill and long live debt and tangible assets, operating expenses for the quarter were $5.6 million versus $1.5 million in the comparable prior year period and $5.8 million in the prior quarter of 2023. We will discuss the impairment matter in more detail in a moment. Operating expenses in the quarter unrelated to the impairment matter were driven by higher than planned stock-based compensation expense and professional service expenses. The $16.9 million impairment charge in the second quarter stems from the termination of the relationship with Central Bank. The company's goodwill and long-lived intangible assets were derived from the acquisition of Rockview Digital Solutions or Africa. Goodwill and intangible assets are tested for impairment at least annually unless any events or circumstances indicate it's more likely than not that the fair value of these assets are less than their carrying values. Based on the likely termination to the relationship with Central Bank, the company considered the possible decline in the operating margins and cash flow being impairment indicators for both goodwill and long-lived assets, and determined it was appropriate to perform a quantitative assessment of the goodwill and long-lived intangible assets as of June 30, 2023. The change in the carrying amount of goodwill in the amount of $19.3 million on December 31, 2022 is $13.2 million, resulting in a carrying value of goodwill on June 30, 2023 of $6.1 million. The change in the carrying amount of long-lived intangible assets in the amount of $10.6 million on December 31, 2022 is $3.7 million, resulting in a carrying value of long-lived assets on June 30, 2023, of $6.2 million. Fair value determination of goodwill and long-lived assets requires considerable judgment and is sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that these estimates and assumptions made for purposes of the quantitative impairment test will prove to be an accurate prediction of future results. These factors are discussed in more detail in the Form 10-Q filed today. Consequently, net loss in the second quarter of 2023 was $17.6 million compared to net income of $336,000 in the comparable prior year period. And for the six months ending June 30, 2023, the company reported a net loss of $19 million compared to net income of $838,000 in the first half of 2022. 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 through adjusted EBITDA is provided in the press release and AK filed earlier today. Adjusted EBITDA for the quarter ending 30 June 2023 was $850,000 versus $564,000 in the comparable prior year period. And for the six months ending 30 June 2023, the company reports adjusted EBITDA of $1.3 million versus $1.1 million for the first half of 2022. Moving to the balance sheet, at 30 June 2023, the company reported cash and cash equivalents of $8.2 million compared to $8.4 million at December 31, 2022. Cash used in operating activities through the second quarter of 2023 was $945,000 versus $1.2 million in cash provided by operating activities in the comparable prior year period. This was mainly due to the previously cited higher-than-normal run rate for compensation and employee benefits in the first half of 2023, as well as higher-than-normal run rate for professional services expenses. Turning to our liquidity, the company reported a networking capital deficit on 30 June 2023 of $9.4 million versus $39.3 million at year-end 2022. A working capital deficit of $9.4 million includes $11.9 million associated with the deferred consideration owed to the sellers of Abaca in the form of common stock of the company. Excluding the common stock portion of deferred consideration, the company would have had a positive working capital of approximately $2.5 million. Looking ahead to the balance of 2023, We expect to report full-year revenue for 2023 in the range of $15.3 million to $16.3 million. With that, I will now turn the call back to the operator to open the call for questions. Gordon?

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. I show there are no questions in queue at this time. I'd like to turn the call back over to Ms. Sundy Seyfried, CEO, for closing remarks.

I would like to thank everyone again for joining us on today's call and for your interest in Safe Harbor Financial. This was a strong quarter for our company, and we believe our ongoing financial institution partnerships are enhancing our position as the premier provider of banking solutions for companies operating within the legal cannabis industry. We look forward to updating you on our continued progress on our next quarterly conference call. Thank you, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a good day.