SHF Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 13, 2024. SHF provides financial-institution partners with compliance, account onboarding and servicing, and lending services focused on cannabis-related businesses (CRBs). Its business remains substantially dependent on Partner Colorado Credit Union (PCCU).
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Revenue | $4.05 million | $4.18 million, down 3.1% |
| Operating income (loss) | $325,000 | $(1.62) million |
| Net income (loss) | $2.05 million | $(1.41) million |
| Net cash from (used in) operations | $1.48 million | $(232,000) |
| Cash and cash equivalents | $5.63 million | $4.89 million at December 31, 2023 |
| Net working capital | $319,000 | $(135,000) at December 31, 2023 |
| Senior secured promissory note | $13.27 million | $14.01 million at December 31, 2023 |
- Operating expenses fell 35.8% to $3.73 million, led by lower compensation and employee benefits (down 37.7%) and general and administrative expense (down 36.0%).
- Revenue mix shifted: loan interest income rose to $1.64 million from $466,000, while deposit, activity and onboarding income fell to $1.62 million from $2.25 million and investment income declined to $774,000 from $1.42 million. Safe Harbor Program income was $19,000 versus $51,000.
- Net income includes significant non-operating and tax items: a $1.26 million gain from the change in fair value of warrant liabilities, a $185,000 gain from deferred consideration remeasurement, and a $439,000 income tax benefit. Accordingly, the reported profit is not a direct measure of recurring operating performance.
- Investing activities provided $3,000; financing activities used $741,000, primarily for note repayments. Cash increased by $738,000 during the quarter.
- Management-reported non-GAAP EBITDA was $1.96 million and Adjusted EBITDA was $1.09 million, compared with $(983,000) and $410,000, respectively, in Q1 2023. These measures exclude items and should be considered alongside GAAP results.
Material changes and financial exposures
- Average monthly ending deposits fell 39.2% year over year to $135.5 million; average active accounts declined 26.9% to 744. Management attributes the decline primarily to termination of an agreement with Central Bank and says it expects lending-led activity to help reverse the trend.
- SHF reported servicing 22 loans in Q1 2024 versus eight a year earlier. PCCU-funded loans totaled approximately $58.2 million, against which SHF has indemnification exposure; the recorded indemnity liability was $1.32 million. The indemnified portfolio included $3.30 million rated substandard (risk rating 8), compared with none in that category at year-end. Management said all loans were current and performing at March 31.
- The PCCU note is secured by a first-priority interest in substantially all Company assets, bears 4.25% interest, and is payable in installments. The filing schedules $2.27 million of principal payments for 2024. Lease liabilities totaled $978,000.
- Other notable balance-sheet items include a $44.28 million deferred tax asset, $6.06 million goodwill, a $4.58 million forward purchase receivable, and a $7.31 million forward purchase derivative liability. The forward purchase receivable’s value could be reduced by certain share issuances below its $1.25 reset price.
Outlook, risks, contingencies and unusual items
- Going concern: Despite positive operating income and working capital in Q1, management states that substantial doubt exists about the Company’s ability to continue as a going concern for at least 12 months after issuance, citing historical operating losses and working-capital deficits. Management says it may reduce spending, extend supplier payment terms, liquidate assets, or curtail expansion if operations cannot be sustained. No formal financial guidance is provided.
- Nasdaq listing: After quarter-end, Nasdaq notified the Company that its share price had remained below the $1.00 minimum bid requirement for 30 consecutive business days. The compliance period runs through October 2, 2024; the Company may consider a reverse stock split. Delisting remains a risk if compliance is not regained.
- Business and concentration risks: Cannabis remains illegal under federal law. SHF relies substantially on PCCU for holding customer deposits and funding originated loans; the filing says most revenue is associated with deposits and loans hosted by PCCU. PCCU held $5.0 million of SHF’s $5.63 million cash balance at March 31.
- Controls: Disclosure controls were not effective as of March 31, 2024. Material weaknesses remained in revenue-recognition reviews for PCCU allocations and management review of complex financial instruments, including warrants, deferred consideration, forward purchase arrangements and stock compensation. The credit-loss control weakness was reported as remediated during the quarter.
- Other items: The Company recorded no new goodwill or intangible-asset impairment in Q1, citing no triggering events; substantial impairment charges had been recorded in 2023. The filing notes ordinary-course legal proceedings but reports no material change in risk factors other than the Nasdaq notice.
Most important facts for investors to verify
- Whether SHF can sustain positive operating results and cash generation, given the explicit going-concern warning and the non-operating items supporting Q1 net income.
- Trends in deposits, active accounts, account fees and lending revenue, and whether lending growth offsets declines in deposit-related and investment income.
- PCCU’s continuing role, the terms and capacity of the relationship, the secured note repayment schedule, and SHF’s exposure under its indemnification commitments.
- Progress toward Nasdaq’s $1.00 bid-price requirement by October 2, 2024, including any reverse stock split decision.
- Whether the Company’s remediation efforts resolve the two remaining material weaknesses and improve the reliability of revenue recognition and complex-instrument valuations.
- The assumptions supporting the large deferred tax asset, indemnity liability, warrant and forward-purchase valuations, and goodwill and intangible-asset carrying values.