Q2 2023 SHF Holdings Inc Earnings Call

Greetings and welcome to Safe Harbor Financial's second quarter 2023 earnings Conference call.

Under this conference is being recorded it is now my pleasure to turn the call over to Erica K from K C. S. E. Thank you you may begin.

Thank you good afternoon, everyone and welcome to the second quarter 2023 earnings conference call for Safe Harbor financial before we start. Please note that remarks made today include forward looking statements, including statements with respect to the company's outlook and the copies expectations regarding its market opportunities and other financial operational matters each.

Forward looking statements discussed on today's call are 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.

Results were timing predicted or implied by such forward looking statements and reported results should not be considered as an indication for future performance.

More information regarding these factors appears under the heading risk factors in the company's filings with the Securities and Exchange Commission for the at the state which are available at Www Dot at D. C Dot Gov and on our website at IR thought S. H financial Dot work. The forward looking statements in this call speak only as of today's date and the company.

<unk> takes no obligation to update or revise any of these statements.

Also during the call Safe Harbor, we'll 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's website. Today's call is being recorded and a copy of the recording will be made available on safe harbors Investor Relations web.

All dollar amounts expressed today are in U S currency.

Presenting today will be Sunday, So afraid Chief Executive Officer, and Jim Kennedy, Chief Financial Officer of the 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.

I've 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 crb's 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 license Crv's throughout our network of financial 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 and cannabis related funds, providing accountability and transparency for CRB. 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 depository as well as depository fee income.

Before diving deeper into our operation operating results I would like to take a step back to describe the current state of the market and discuss how safe harbors position within the financial services 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 and 37 in 22 states respectively. The need for a national national platform to support the industry's financial growth has never been greater.

Despite the industry's strong growth Crb's continued 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 CRB and financial institutions, providing <unk> 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 each.

Even when the Safe Banking Act is cast Kevin just thinking 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 extend 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 final.

<unk> institutions 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.

<unk> as they succeed and grow safe Harbor is offering rates that results in us in building long term relationships. So that our clients don't feel the need to secure other financing opportunities and ultimately remain within safe harbors 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 and 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.

Our lending at rates as high as 18% to 36% and.

And it's not just about interest rates. It's also due to the fact, we don't charge additional onerous fees or other hidden fees, we hope to put hard money lending to the industry in the rearview mirror focusing on normalized credit options.

Also given the current rising 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.

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 800 and 800 million in quarter. Two 2022, Similarly, our balances on deposits increased 60%.

<unk> 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 learned.

Our active average accounts increased 64, 5% to 1002 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.

<unk> fees increased by 90% to $2 50.

<unk> $52 $5 6 million compared to 134 million in the same period last year.

One of the keys to safe harbors long term success as the growing strength of our partnerships with cannabis friendly financial institution.

This network currently includes partner, Colorado Credit Union, five Star Bank and Pacific Daily Bank, when combined provide 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.

An example of the strength of our growing banking networks is the recent partnership we announced with five Star Bank in May not only does five star had the capacity to manage 1 billion $1 billion plus of deposits. It also allows us to offer crb's access to interest bearing money market accounts.

And opens the door to additional loan options.

Given the significant increase in our access to two deposit capacity combined with the record number of on boarded deposits. This quarter, we have increased our balance from which to land and are advancing a number of new opportunities to grow the number and value of CRB accounts. This is particularly important given the stay.

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 multibillion 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 safe Harbor clients, while the transaction with abaca brought.

Central Bank the.

The relationship with Arkansas centric and didn't offer a national platform.

At the same time abaca brought us besides start relationship and doing so safe harbored 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 are products that we could not offer with central Bank of Ireland.

We are confident these additional products and the revenues derived some of 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 departments 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 <unk>.

<unk>, we will certainly realize the benefits of such actions and 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 <unk>.

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 national nationwide lending opportunities to over $300 million and originated over $15 million of senior secured loans.

For Crp's 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 loans.

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.

The total amount of aggregate credit originated and issued to $12 7 million.

Not only does our relationship with this top performing NSO advance our steady credit origination and placement activity into the third quarter. It also supports our effort to further diversity versus by our collateral.

We continue to build out our lending platform and add additional staff as we are seeing increased origination and placement business the lending.

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 Inc.

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 vol.

We will begin providing metrics, where the average loan balance average life to repayments, an average effective interest rate and loan status.

I also wanted to highlight our continued support of entrepreneurs disproportionately impacted by candidates prohibition and enforcement in May of 2023, we expanded our social equity program, which supports social equity licensees with a 20% discount off account application in monthly fees opening.

13, new accounts with new social equity operators across three states. This fantastic program was envisioned by Sofia dentists, who has served as a relationship manager at Safe Harbor, and we are committed to extending this program and ensuring the cannabis industry has fared.

Fair and equitable.

Finally, I would like to share our plan to further scale, our revenue and growth opportunities that we will believe we.

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 constraints.

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.

Opportunities continue to present opportunities.

For our expansion and we will continue to focus on acquiring other portfolios that will accelerate account growth.

The growth in lending capacity.

With those comments complete I would like to turn the call over to Jim to discuss our financial results as of June 32023, Jim.

Thank you Sandy and good afternoon, everyone.

Our second quarter fiscal 2023 total revenue.

It was $4 $6 million representing.

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 32023.

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 or $22 $5 million.

Excluding the impairment charges to goodwill and long lived intangible asset operating expenses for the quarter were $5 $6 million.

Versus $1 $5 million in the comparable prior year period.

$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 rock through 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.

Fair value of these assets are less than their carrying values.

Based on our likely termination to the relationship with Central Bank. The company consider 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.

Tangible assets as of June 32023.

Okay.

The change in the carrying amount of goodwill in the amount of $19 3 million on December 31 2022.

This $13 2 million.

<unk> had a carrying value of goodwill on June 32023 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, 2020 to $3 $7 million, resulting in a carrying value of long lived assets on June 32023 of $6 2 million.

Fair value determination of goodwill and long lived assets requires considerable judgment.

And are sensitive to changes in underlying assumptions and factors as.

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 our future results.

These factors are discussed in more detail in our Form 10-Q filed today.

Consequently, net loss in the second quarter of 2023 was $17 6 million.

Compared to net income.

$336000 in the comparable prior year period.

And for the six months ending June 32023, the company reported a net loss of $19 million compared to net income of $838000 in the first half of 2022.

When adjusting net income for interest taxes, and depreciation and amortization expense and further adjustments to exclude noncash unusual and are in frequent costs. We computed adjusted EBITDA, which management believes is a 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, ending 30 June 2023, $850000 versus $564000 in the comparable prior year period and for the six months ending 30 June 2023, the company reported adjusted EBITDA of $1 $3 million.

$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 during the second quarter of 2023 was $945000 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 net working capital deficit on 30 June 2023 of $9 $4 million.

Versus $39 3 million at year end 2022.

Our working capital deficit of $9 $4 million includes $11 9 million associated with FERC consideration owed to the sellers of abaca in the form of common stock of the company.

Excluding the common stock portion of the FERC 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, and 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 Sandy seafood.

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.

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.

[music].

Yeah.

Okay.

[music].

Sure.

[music].

Okay.

Yeah.

Okay.

Yeah.