Business Overview and History
SHF Holdings, Inc. (NASDAQ:SHFS), a pioneering financial technology company, has established itself as a trusted partner in the rapidly evolving cannabis industry. With its innovative financial services platform and a deep understanding of the regulatory landscape, SHF Holdings has carved out a unique position in this dynamic market.
SHF Holdings, Inc., headquartered in Golden, Colorado, was initially developed as a credit union service organization and asset of Partner Colorado Credit Union (PCCU). In 2021, a strategic reorganization consolidated select assets and activities from PCCU into SHF LLC under SHF Holding Co., LLC. This transition laid the foundation for the company's subsequent growth and expansion.
On September 28, 2022, Northern Lights Acquisition Corp. acquired SHF, changing its name to SHF Holdings, Inc. This business combination aimed to enhance the company's financial services and market footprint in the cannabis sector. The pivotal moment not only changed the company's name but also strengthened its position in the industry.
Further expanding its capabilities, SHF acquired Rockview Digital Solutions, Inc. dba Abaca on October 31, 2022. This merger positioned Abaca as a wholly-owned subsidiary, bolstering the company's fintech offerings and market reach.
SHF 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 include access to business checking and savings accounts, cash management, commercial lending, courier services, remote deposit services, ACH payments, and wire payments. SHF generates revenue from fee income, investment income, loan interest income and by offering compliance services to certain financial institutions serving the cannabis industry.
Today, SHF Holdings is a leading provider of financial services, including deposit compliance, loan origination, and ongoing deposit activity compliance, to cannabis-related businesses (CRBs) and financial institutions serving the cannabis industry. The company's proprietary technology platform enables its clients to manage their finances effectively while ensuring regulatory compliance.
Business Segments
SHF Holdings operates in two primary business segments: Financial Services and Commercial Banking.
The Financial Services segment forms the core of SHFS's business, offering a wide array of financial technology solutions tailored to the cannabis industry. Through its proprietary software platform, the company enables its financial institution partners to provide compliant banking services to cannabis-related businesses (CRBs). These services encompass deposit accounts, cash management, commercial lending, and other financial products.
This segment generates the majority of SHFS's revenue, with key streams coming from account servicing fees, investment income on CRB deposits, and loan interest income. As of September 30, 2024, the company managed $89.00 million in CRB-related deposits, down from $129.35 million at the end of 2023. This decline was primarily due to the termination of an agreement with the Central Bank of Arkansas. However, SHFS anticipates this trend to shift as it focuses on growing its commercial lending program, which requires borrowers to maintain deposit accounts with SHFS's partner institutions.
The Commercial Banking segment provides traditional commercial banking services, including commercial real estate loans, to non-cannabis businesses. As of September 30, 2024, the company's commercial real estate loan portfolio totaled $396.40 thousand, slightly down from $404.58 thousand at the end of 2023. Loan performance has remained strong, with no loans past due or classified as non-accrual as of the reporting date.
Financial Performance and Ratios
SHF Holdings' financial performance has been marked by both challenges and opportunities. For the fiscal year ended December 31, 2023, the company reported revenue of $19.17 million, a significant decline from the previous year's revenue of -$32.70 million. This decrease can be attributed to the ongoing challenges faced by the cannabis industry, including pricing pressures, excess supply, and increased competition as new states legalized cannabis.
Despite these headwinds, SHF Holdings has demonstrated its ability to navigate the market effectively. The company's net income for the fiscal year 2023 stood at -$17.28 million, compared to -$35.13 million in the previous year. The company's operating cash flow for the fiscal year 2023 was -$832,144, while its free cash flow was -$1.04 million.
It is worth noting that the company's financial ratios have also been impacted by the challenging market conditions. As of December 31, 2023, SHF Holdings' current ratio stood at 0.98, indicating a strong liquidity position, while its debt-to-equity ratio was 0.44, suggesting a moderate level of leverage.
Quarterly Performance and Outlook
In the first quarter of 2024, SHF Holdings reported a significant turnaround in its financial performance. The company's revenue for the quarter was $4.1 million, slightly down from $4.2 million in the same period of the previous year. However, the company's loan interest income saw a substantial increase of over 250%, rising from $466,000 in Q1 2023 to $1.6 million in Q1 2024.
The company's net income for the first quarter of 2024 was nearly $2 million, a significant improvement from the net loss of $1.4 million reported in the prior-year period. Additionally, SHF Holdings' adjusted EBITDA for the quarter increased by 165.3% to approximately $1.1 million, reflecting the company's efforts to optimize its operations and control costs.
For the third quarter of 2024, SHF Holdings reported revenue of $3.48 million, representing a 19.6% decrease year-over-year. This decline was primarily attributed to lower deposit activity and onboarding fees. Despite the revenue decrease, the company's net income improved significantly to $0.35 million, compared to a net loss of $0.75 million in the prior year quarter. This improvement was driven by reduced operating expenses. The company's loan interest income continued to show strong growth, increasing by 48% year-over-year.
Operating cash flow for Q3 2024 was $0.50 million, with free cash flow also at $0.50 million, indicating improved operational efficiency and cash management.
For the first nine months of 2024, SHF Holdings generated $11.57 million in total revenue, compared to $13.09 million in the same period of 2023. This decrease was primarily due to lower deposit, activity, and onboarding fees, which offset growth in loan interest income. The company's focus on reducing operating expenses led to an increase in operating income to $802,010 for the first nine months of 2024, compared to an operating loss of $19.00 million in the prior-year period.
Looking ahead, the company's management has provided guidance for the full year of 2024, expecting revenue to be in the range of $15 million to $15.5 million. This projection suggests that SHF Holdings is well-positioned to capitalize on the continued growth of the cannabis industry, which is expected to reach $33.6 billion in market size by 2024, with a CAGR growth rate of 12.1% from 2024 through 2030, according to a report from Grand View Research.
Liquidity and Capital Resources
As of September 30, 2024, SHF Holdings reported cash and cash equivalents of $5.86 million. The company's liquidity position remains a focus area, with a current ratio of 0.83 and a quick ratio of 1.24. The debt-to-equity ratio stood at 0.45, indicating a moderate level of leverage.
The company has a $14.5 million senior secured promissory note with PCCU, of which $3.11 million is classified as current and $8.66 million as long-term debt. SHF Holdings continues to face going concern risks due to historical trends of negative operating income and negative working capital. As of September 30, 2024, the company had a net working capital deficit of $2.52 million. Management acknowledges the need to closely monitor the company's financial performance in upcoming quarters to mitigate these risks.
Regulatory Environment and Challenges
The cannabis industry, in which SHF Holdings operates, is heavily influenced by the regulatory landscape. The company's financial services and lending activities are subject to strict compliance requirements, as the cannabis industry remains federally illegal in the United States.
In July 2024, the company submitted comments to the Justice Department, supporting the proposed rule to reclassify cannabis from Schedule I to Schedule III of the Controlled Substances Act. This potential reclassification could have a significant impact on the industry, as it could reduce tax burdens and level the playing field for cannabis businesses relative to other sectors.
Despite the regulatory challenges, SHF Holdings has demonstrated its ability to navigate the complex environment and maintain its position as a trusted financial partner for the cannabis industry. The company's strong compliance practices and innovative solutions have allowed it to overcome these obstacles and continue to grow its business.
Acquisition and Strategic Partnerships
SHF Holdings' growth strategy has been further bolstered by strategic acquisitions and partnerships. The acquisition of Abaca in 2022 has strengthened the company's fintech offerings and expanded its market reach. Additionally, the company's recent partnership with BIPOCann, a Denver-based consulting firm, aims to support the development and growth of minority-owned small businesses and entrepreneurs in the cannabis sector.
These strategic initiatives have not only enhanced SHF Holdings' capabilities but also demonstrate the company's commitment to fostering a more inclusive and equitable cannabis industry. By leveraging its financial expertise and technological solutions, SHF Holdings is well-positioned to continue its growth trajectory and capitalize on the evolving regulatory landscape.
Geographic Markets
SHF Holdings primarily operates in the United States, providing financial services to cannabis-related businesses across 41 states. This broad geographic coverage allows the company to tap into various regional cannabis markets and diversify its revenue streams while navigating the complex regulatory landscape that varies from state to state.
Conclusion
SHF Holdings, Inc. (NASDAQ:SHFS) has firmly established itself as a leading fintech provider in the rapidly growing cannabis industry. With its innovative financial services platform, strategic acquisitions, and partnerships, the company has navigated the complex regulatory environment and delivered a turnaround in its financial performance.
As the cannabis market continues to expand, SHF Holdings is poised to capitalize on the emerging opportunities. The company's focus on compliance, lending, and supporting minority-owned businesses positions it as a crucial player in the industry's evolution. While facing challenges such as working capital deficits and regulatory uncertainties, SHF Holdings has demonstrated resilience and adaptability in its operations.
Investors seeking exposure to the cannabis financial services sector may find SHF Holdings an intriguing investment opportunity worth further research and consideration. However, they should carefully weigh the potential risks, including the company's current financial position and the evolving regulatory landscape of the cannabis industry.