SHF Holdings Inc. Q1 2023 Earnings Call

May 15, 2023

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Hello, and welcome to the Safe Harbor Financial 2023 first quarter earnings Conference call. I Am joined this afternoon by Sunday, Siegfried Chief Executive Officer, and Jim Kennedy 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 statement.

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 are additional information regarding these factors appears under the heading risk factors in the company's filings.

With the Securities and Exchange Commission or the S. E C, which are available at Www Dot S. E C dot Gov and on our website at IR Dot S. H financial Dot Org. The forward looking statements in this call speak only as of today's date and the company undertake.

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 S. E. C website today's call is being Ricky.

Courted and a copy of the recording will be available on safe harbors 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 Sunday Seafood, Chief Executive Officer of Safe Harbor financial you may begin.

Thank you operator, and welcome everyone to our 'twenty to 'twenty three 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 Kansas related businesses or Crb's that are seeking dependable financial services, including depository and credit.

<unk> through our banking clients are for.

Prior theory, Fintech platform and automated making it highly reliable and scalable and an ideal foundation on which to grow alongside the country's cannabis industry, which is lactary by reliable access to such services.

In addition to organic growth our growth strategy includes five key components.

Winery in client portfolios from other financial institutions, or Fintech platforms wishing to partner with safe Harbor or exit the space altogether.

Acquiring other reliable Canada 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, and new legalizing markets and the 13 states that have legal candidates 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 and 37 and 22 states respectively with at least four states likely to legalized in the midterm.

Our ability to easily expand upon our president national platform allows us to meet the needs of the industry at the same pace of industry growth.

Some believe the industry is flattening out we do not see this evidenced we didn't not see evidence of this.

In our portfolio performance, nor growth metrics legalization across the country only extends our ability to grow.

Is 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, as a result of closing our zero.

<unk> balance accounts.

We reported record monthly average deposits on deposits held by our financial institutions of $213 6 million a.

A 55% increase from the $137 7 million in quarter, one 2022.

This growth is both organic and the result of last year's <unk> acquisition, which brought on a dedicated sales and business development team is currently focused on building out our national presence for.

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 CRB.

With the most robust and affordable, Kansas 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.

And in addition to supporting Safe harbors continued investment in deposit growth income or increased capacity to onboard deposits means we can grow the number and value of CRB accounts, which in turn improves our loan underwriting expertise with lower cost of funds compared to what the market is huge.

Securing.

Turning to our lending program, we made program enhancements during the quarter by adding a fulltime originator with 20 years of commercial banking and underwriting experience in the banking sector has experienced coupled with our C. O O who has done legal work on commercial loans and restructuring are well suited to <unk>.

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 candidates banking and lending as we build out the full function of our internal lending platform.

We are focused on operational efficiencies that will expedite closer.

Best support to best support our client success in building out their businesses.

As you've heard in recent news to say thinking 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 DSA 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.

Elicit enterprises across the country.

Enforcement actions and associated fines for weak BSA programs can lead to tens of millions of dollars in penalties.

Even with the passing of say thinking 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 candidates clients. We believe this will increase a need for our compliance and monitoring services.

Yes.

Safe Harbor 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 crb's, who choose to bank with our financial institution 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 had the risk appetite of those facing negative regulatory actions or closure as I stated earlier, we are selective with our bank partners.

<unk> ships 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.

Carefully moves our client base between financial institutions to manage the risk over several financial institutions.

Because we are in the financial service sector Fintech model, we must and do plan for methodical and careful growth pacing 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.

Outlines key objectives, we are focusing on for the remainder of 2023 and my closing remarks, but we'll now hand, the line to Jim who will walk us through our financial results for first quarter Jim.

Thank you Sandy.

Total revenue in the first quarter of 2023 increased to 150%.

The $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 four 4% 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.

Versus net income of $500000 in the prior year period, primarily due to the higher expense previously discussed and accrued interest on our <unk>, our 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 noncash unusual and or infrequent costs, we compute in adjusted EBITDA.

Management believes the measure to evaluate our operating performance.

A reconciliation of net income to adjusted EBITDA is provided in the press release and 8-K filed earlier today.

Adjusted EBITDA for the quarter ended March 31, 2023 was $410000 versus $571000 in.

In 2022.

Moving to the balance sheet at March 31, 2023.

The company reported cash and cash equivalents of $8 6 million compared.

Compared to $8 4 million at December 31, 2022.

Cash used in operating activities for 2023 first quarter.

It was $226000 versus $506000 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 in the complex financial instruments.

And the activities associated with negotiating our expense payables.

At a lower value and resolving the partner, Colorado credit Union payable with serviceable level of debt and stock.

Turning to our liquidity, our networking capital deficit decreased to $9 million from $39 3 million at year end 2022.

Proven on our working capital is primarily attributable to the negotiation and settlement of the current portion of long term payable owed to partner, Colorado credit Union.

So at the beginning of the year, we 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 partner, Colorado credit Union from our September eight 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 $700000 $700000 payable over the next 12 months with no interest on that.

<unk> hundred $1000.

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 abaca in the form of common stock of the company.

Excluding the stock portion of the deferred consideration.

From the working capital calculations, but company would have reported a positive working capital of approximately $2 $7 million.

Looking ahead to 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 Sandy for closing remarks Sandy.

Thank you Jim It sounds good to me as.

As you have heard from Jim and each day. The team has been dedicated to strategically positioning safe harbor for future growth.

Along with the <unk> acquisition, and integration, which completed our Fintech platform and our recent debt restructuring expense negotiations and deposit on boarding capacity expansion. We are poised for continued success in 2023 and beyond.

For the remainder of this year, we will focus on three priorities.

We 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 continued 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 our 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 one one on your telephone and wait for your name to be announced.

Withdraw your question. Please press star one one again.

Please stand by while we compile the Q&A roster.

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

Yes, Hey, guys nice quarter and congratulations on the partnership there with five star.

Couple of questions for me I guess.

First off on the deposit side and the increase in the monthly average balance of how the 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.

Any additional color there would be helpful.

Sure I'll go ahead and take that.

This is sandy and two it.

It's a combination of both but it was not totally abaca, we've just seen a good growth in our deposit base helped mostly by partner, Colorado credit unions at this point in time, so a lot of organic growth isn't there as well.

Abaca acquisition.

Probably third.

$30 million 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.

Just regarding the deal with five star and the additional $1 billion in deposits.

Obviously this is significant for you guys.

So I guess first in relation to that I mean, what does it do for you guys strategically in regard to potential MSR business.

And then just beyond that I mean, what is the health of the lending pipeline look like at the current moment I think you kind of alluded to in your prepared remarks.

I'm paraphrasing, but demand is holding up pretty well.

Just.

Some additional color in terms of what Youre seeing there and how you can kind of.

Tack that market opportunity.

Well first I think that the financial institutions with whom we're partnering at this point in time really 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 are they.

Actually allow us to utilize their balance sheet. So I think that it's a combination there of what we would be 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 now 100% of our deposits obviously, we keep.

Good portion of them liquid certain certainly because we work within the confines of the regulated institutions with whom we work.

Think what we're seeing is that these new financial institutions being banks come to the table are willing to offer additional commercial services to our clients, which we find very attractive anything for as an example from our line of credit to interest bearing accounts. So while we have worked under the partner, Colorado credit Union and <unk>.

<unk>.

Banks up to this point in time, we are now expanding entities larger opportunities the $1 billion or up to $1 billion access that we can utilize or worked with five star bank on allows us to take a client that may have $20 million in deposit essent NSO in their corporate account.

And put it on that balance sheet.

And its 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.

Our that balance I don't know Thats really that's really helpful and that is really great.

In layman's terms.

Now set up you now have the infrastructure in place to really be able to.

Provide services to MSR right and that's an attractive set up 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 that might not have just gone in depth enough there and I'm not sure. If you said it on my apology the therapeutic yourself.

Jim I don't know that we reported.

Yes. Thank you Michael I don't know that we reported it specifically we had a small increase in the loan book.

First quarter not a material.

A material increase but I think we'll have some.

Some news upcoming so please stay tuned yes, yes, and I mean this is this is prior to the announcement.

Five star anyway. So.

Yes.

That being March 31, so 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 Mr. Jeffrey.

Okay.

Thank you operator.

We are excited about our first quarter accomplishments and look forward to sharing our continued progress and update on our strategy. During our next call and thank you all for joining today.

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

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SHF Holdings Inc. Q1 2023 Earnings Call

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