SHF Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. SHF provides compliance, deposit-account servicing, and lending services to financial institutions serving cannabis-related businesses (CRBs). Its acquisition of Abaca in November 2022 expanded its technology platform and customer base, so the prior-year comparison is not fully like-for-like.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $4.18 million | $1.67 million in Q1 2022; up 150% |
| Operating expenses | $5.80 million | $1.17 million in Q1 2022 |
| Operating income (loss) | $(1.62) million | $501,600 income in Q1 2022 |
| Net income (loss) | $(1.41) million; $(0.06) per share | $501,600 income in Q1 2022 |
| Operating cash flow | $(226,436) | $506,454 provided in Q1 2022 |
| Cash and cash equivalents | $8.63 million | $8.39 million at December 31, 2022 |
| Working capital | $(9.00) million deficit | $(39.34) million deficit at December 31, 2022 |
| Total assets / liabilities | $89.12 million / $45.12 million | $99.34 million / $94.23 million at December 31, 2022 |
Revenue growth included higher deposit, activity and onboarding income ($2.25 million), investment income ($1.42 million), and loan interest income ($466,293). Investment income increased as interest rates rose. Expenses grew faster than revenue, particularly compensation and benefits, general and administrative costs, and professional services. Management cited higher staffing and stock compensation, compliance and reporting costs, account-hosting costs, insurance, marketing, and depreciation and amortization.
Cash increased by $238,557 during the quarter: operating activities used $226,436, investing activities provided $464,993, and financing activities were nil. The filing’s MD&A gives a different operating-cash-use figure; the cash-flow statement reports $(226,436).
The company reported $14.50 million of senior secured promissory notes: $1.23 million current and $13.27 million long term. Other material obligations include $17.27 million of deferred consideration, $1.05 million of lease liabilities, and a $7.31 million forward-purchase derivative liability. The balance sheet also reports a $4.58 million forward-purchase receivable. The senior note bears 4.25% interest, is payable over five years, and is secured by a first-priority interest in substantially all company assets.
Non-GAAP adjusted EBITDA was $409,918, versus $571,981 in Q1 2022; EBITDA was $(792,207), versus $502,417. These measures are not substitutes for GAAP results.
Material changes and unusual items
- On March 29, 2023, SHF and PCCU restructured deferred transaction obligations. The arrangement included a $14.50 million five-year secured note and issuance of 11.2 million Class A shares to PCCU. This converted a substantial prior seller payable into debt and equity; the filing records $38.41 million of equity value for the share issuance after stated adjustments.
- The restructuring reduced the working-capital deficit substantially, but the company still reported a deficit of $9.00 million. It included $11.69 million of non-cash equity consideration payable for the Abaca acquisition.
- Q1 results include $1.57 million of stock-based compensation. A $433,148 gain from the change in fair value of warrant liabilities partly offset other expenses.
- SHF adopted the current expected credit loss (CECL) standard on January 1, 2023. Adoption increased the indemnity liability by $566,341 and reduced retained earnings by $581,321, with a separate loan allowance adjustment.
- One PCCU-funded, indemnified loan with a $3.1 million outstanding balance was more than 120 days delinquent and considered impaired. The borrower was reportedly seeking to sell a building; SHF said it was discussing workout options and that the loan had sufficient collateral. The company’s indemnity liability was approximately $1.15 million at quarter-end.
Liquidity, outlook, and risks
Management stated that substantial doubt remains about SHF’s ability to continue as a going concern for at least twelve months from issuance of the financial statements. The PCCU restructuring helped address the prior large payable, but management said it did not fully remove the doubt. The company cited cost reductions and efforts to negotiate lower amounts or extended terms for payables; it may also reduce spending, liquidate assets, or curtail expansion if operations cannot be sustained. No quantified revenue, earnings, or cash-flow guidance is provided.
Key business risks include the federal illegality of cannabis, reliance on PCCU for customer deposits, loan funding and a substantial portion of revenue, and limited historical data for estimating cannabis-sector credit losses. SHF reported that 81% of trade receivables were due from PCCU at March 31, 2023. PCCU’s CRB-related deposit capacity is subject to its own asset, capital, regulatory, and policy limits.
Disclosure controls were deemed ineffective as of March 31, 2023. Management identified material weaknesses involving deferred tax assets, revenue recognition, complex financial instruments, and credit losses, and described remediation efforts. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether SHF can meet its liquidity needs despite the continuing going-concern warning and negative operating cash flow.
- The payment schedule, collateral terms, and covenant or default provisions of the PCCU secured note, and the implications of PCCU’s majority ownership following the share issuance.
- Progress on resolving the $3.1 million delinquent indemnified loan and whether the recorded credit-loss and indemnity reserves adequately reflect exposure.
- The amount and timing of Abaca-related share consideration and its potential dilution, as well as the terms and valuation sensitivity of the forward-purchase arrangements and preferred securities.
- Whether management remediates the four identified control weaknesses and improves the reliability of revenue, tax, fair-value, and CECL reporting.