Business Overview and History
Established in 2014, Safe Harbor Financial was initially developed as a credit union service organization, an asset of Partner Colorado Credit Union (PCCU). In 2021, the company underwent a strategic reorganization, consolidating select assets and activities from PCCU into SHF LLC, which was then consolidated under SHF Holding Co., LLC. The transformative moment came in 2022 when Northern Lights Acquisition Corp. acquired SHF, changing its name to SHF Holdings, Inc. and taking the company public through a business combination.
This pivotal event positioned Safe Harbor to enhance its financial services and expand its market footprint in the cannabis sector. Furthering its capabilities, the company acquired Rockview Digital Solutions, Inc., dba Abaca, in October 2022. This merger solidified Abaca as a wholly-owned subsidiary, bolstering Safe Harbor's fintech offerings and market reach.
Safe Harbor facilitates a range of financial services through its financial institution partners using a proprietary technology platform for deposit compliance and ongoing deposit activity compliance with banking regulations and regulators. These services include access to business checking and savings accounts, cash management, commercial lending, courier services, remote deposit services, ACH payments, and wire payments. The company generates revenue from fee income, investment income, loan interest income, and by offering compliance services to certain financial institutions serving the cannabis industry.
Despite its growth, Safe Harbor has faced challenges. In 2023, the company conducted an interim goodwill and intangible impairment assessment and recognized a $16.89 million non-cash impairment charge. Additionally, Safe Harbor has experienced periods of negative operating income and negative net working capital in the past, leading to substantial doubt about its ability to continue as a going concern. However, the company has worked to manage these challenges and continues to position itself as a leader in providing financial services to the regulated cannabis industry.
Business Segments
SHF Holdings, Inc. operates in two primary business segments: Financial Services and Commercial Lending.
The Financial Services segment is the core of SHF Holdings' operations. Through its proprietary financial services platform, the company provides regulatory compliance consulting and software-enabled services to help financial institutions maintain Know Your Customer (KYC) and Bank Secrecy Act (BSA) compliance when serving cannabis-related businesses (CRBs). The platform enables the onboarding, verification, and servicing of CRB deposit business on behalf of the company's partner financial institutions.
Under the Commercial Alliance Agreement (CAA) with Partner Colorado Credit Union (PCCU), SHF earns fees for various account-related services, including deposit account fees, activity fees, and onboarding income. In the nine months ended September 30, 2024, this segment generated $4.95 million in revenue from deposit, activity, and onboarding fees, representing 42.8% of the company's total revenue. The company also earned $1.75 million in investment income during this period, which is shared 75/25 with PCCU per the CAA.
The Commercial Lending segment focuses on originating, underwriting, servicing, and administering loans to CRBs and related entities. Loans are primarily funded through PCCU, with SHF earning the associated interest income. In the nine months ended September 30, 2024, the company generated $4.81 million in loan interest income, representing 41.6% of total revenue.
SHF has indemnified PCCU for losses on certain loans, and the company maintains an indemnity liability of $1.23 million as of September 30, 2024 to cover potential credit losses. The company closely monitors the credit quality of the indemnified loan portfolio, with the majority of the loans rated as average or better risk.
Financial Performance and Ratios
As of the latest reporting period, Safe Harbor Financial had $66.87 million in total assets and $39.35 million in stockholders' equity, reflecting a debt-to-equity ratio of 0.32. The company's current ratio stood at 0.83, indicating a solid short-term liquidity position. However, the company has experienced historical net losses, reporting a net loss of $17.28 million in 2023 and $35.13 million in 2022.
Safe Harbor's revenue has fluctuated in recent years, with $19.17 million in 2023, down from $32.70 million in 2022. The company's operating cash flow has been positive, with $225,000 in 2023 and $1.70 million in 2022. However, its free cash flow has been negative, at -$1.04 million in 2023 and $1.68 million in 2022.
In the most recent quarter, Safe Harbor reported revenue of $3.48 million, a 19.62% decrease compared to Q3 2023. However, the company achieved a net income of $353,817, a significant improvement from a net loss of $748,000 in Q3 2023, representing a 147% increase. The decrease in revenue was primarily attributable to a decline in deposit activity and onboarding income, as well as a decrease in investment income. This was partially offset by a 48% increase in loan interest income compared to Q3 2023.
For the nine months ended September 30, 2024, Safe Harbor reported total revenue of $11.6 million, a decrease of 11.6% from $13.1 million for the comparable prior year period. Net income for this period was $3.3 million, compared to a net loss of $19.8 million for the nine months ended September 30, 2023. Adjusted EBITDA for the same period was $2.8 million, compared to $2.3 million in the comparable prior year period.
Looking ahead, Safe Harbor expects to report revenue in the range of $15 million to $15.5 million for the full year 2024.
Liquidity
Safe Harbor's liquidity position, as indicated by its current ratio of 0.83, suggests that the company has a reasonably strong ability to meet its short-term obligations. The company's quick ratio is also 0.83, indicating that its liquid assets can cover its current liabilities. As of the latest reporting period, Safe Harbor had $5.86 million in cash and $897,170 in available credit under unsecured lines of credit.
However, the negative free cash flow in recent periods may pose challenges to the company's long-term liquidity if this trend continues. The company will need to carefully manage its cash flows and potentially seek additional funding sources to ensure sufficient liquidity for future operations and growth initiatives.
Navigating Regulatory Challenges and Industry Evolution
The cannabis industry's legal and regulatory landscape has been a constant challenge for Safe Harbor Financial. As the company operates in an environment where cannabis remains illegal at the federal level, strict enforcement of federal laws could impede the company's ability to execute its business plan. However, Safe Harbor has demonstrated its commitment to regulatory compliance, working closely with financial institution partners to ensure that its services adhere to applicable laws and regulations.
The company's success has been largely attributable to its innovative financial services platform, which enables it to facilitate banking services, deposit compliance, and ongoing deposit activity compliance for cannabis-related businesses (CRBs). Safe Harbor's platform provides CRBs with access to business checking and savings accounts, cash management, commercial lending, courier services, remote deposit services, ACH payments, and wire payments, all while ensuring regulatory compliance.
Diversifying Revenue Streams and Expanding Lending Capabilities
In addition to its fee-based services, Safe Harbor has also focused on growing its commercial lending program, which has become a significant revenue contributor. The company's robust CRB deposit base, facilitated through its partnerships with financial institutions, provides a strong foundation for lending capacity. Safe Harbor is continually seeking to expand its lending relationships beyond PCCU, aiming to directly fund a larger percentage of loans and improve the efficiency and profitability of this revenue stream.
Furthermore, Safe Harbor has been actively diversifying its revenue streams, including investment income and loan interest income. The company's investment hosting fees, generated from the investment of CRB deposits held at its financial institution partners, have become an important component of its overall revenue mix.
Weathering Market Challenges and Positioning for Growth
The cannabis industry has faced headwinds in recent years, including pricing pressures, excess supply, and increased competition as new states continue to legalize. These challenges have impacted Safe Harbor's revenue, particularly in deposit activity and onboarding fees. However, the company has demonstrated its ability to adapt, with loan interest income growing 143.5% year-over-year for the nine months ended September 30, 2024.
Looking ahead, Safe Harbor remains focused on expanding its customer base, delivering best-in-class service, and developing innovative offerings to capitalize on the expected market growth. The company is also exploring opportunities to acquire account portfolios from banks looking to exit the cannabis-related business, as well as adapting its platform to meet the evolving needs of CRBs.
According to an industry report from Grand View Research, the cannabis market size is expected to reach $33.6 billion in 2024 with a CAGR growth rate of 12.1% from 2024 through 2030. This projected growth in the industry could present significant opportunities for Safe Harbor to expand its services and increase its market share.
Regulatory Developments and Potential Reclassification
The cannabis industry's regulatory landscape continues to evolve, and Safe Harbor is closely monitoring these developments. The company is cautiously optimistic about the potential reclassification of cannabis from Schedule I to Schedule III, which could have a positive impact on the industry by reducing tax burdens and leveling the playing field for cannabis businesses relative to other sectors.
Additionally, the 2023 election results have brought a new administration to the White House, and Safe Harbor is hopeful that both sides of the aisle can find common ground to support cannabis-related businesses. The company believes that the incoming administration's stance on leaving cannabis legalization up to the states could present new opportunities for the industry.
Conclusion
SHF Holdings, Inc., operating as Safe Harbor Financial, has established itself as a leading fintech provider in the regulated cannabis industry. With over a decade of experience navigating the complexities of this dynamic market, the company has demonstrated its ability to adapt and innovate, diversifying its revenue streams and expanding its lending capabilities. While the cannabis industry has faced its share of challenges, Safe Harbor remains well-positioned to capitalize on the expected market growth, leveraging its robust financial services platform and strong partnerships with financial institutions.
The company's recent financial performance shows signs of improvement, with a significant increase in net income despite a decrease in revenue. Safe Harbor's guidance for full-year 2024 revenue in the range of $15 million to $15.5 million reflects cautious optimism about its future prospects. As the regulatory landscape continues to evolve, Safe Harbor's commitment to compliance and its status as a trusted industry partner will be crucial in driving its long-term success in the expanding cannabis financial services market.