SHF Holdings, Inc. quarterly report, Q3 FY2023

SHF Holdings, Inc. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023; filed November 14, 2023. Financial statements are unaudited. SHF provides compliance, account servicing, technology and lending support to financial institutions serving cannabis-related businesses. It does not hold customer deposits itself.

Financial performance

Metric	Q3 2023	Nine months 2023	Comparable 2022 period
Revenue	$4.33 million	$13.09 million	$2.38 million Q3; $5.90 million nine months
Operating income (loss)	$531,449	$(19.00) million	$825,456 Q3; $1.66 million nine months
Net income (loss)	$(748,067)	$(19.77) million	$1.06 million Q3; $1.89 million nine months
Operating cash flow	Not presented by quarter	$(225,032)	$1.97 million provided for nine months

• Q3 revenue rose 82% year over year; nine-month revenue rose 122%. Growth reflected higher account-related revenue, investment income and loan interest income. Nine-month Safe Harbor Program income declined 62%.
• Q3 operating margin was approximately 12%; nine-month operating results were materially affected by $13.21 million of goodwill impairment and $3.68 million of finite-lived intangible impairment. These charges were noncash and recorded in the nine-month period.
• Q3 net loss included $860,735 of expense from the change in fair value of warrant liabilities and $356,840 of interest expense. The company reported non-GAAP Adjusted EBITDA of $1.05 million for Q3 and $2.31 million for nine months, versus $1.02 million and $2.15 million, respectively, in 2022.
• Cash and cash equivalents were $8.95 million at September 30, up from $8.39 million at December 31, 2022. Total assets were $72.38 million and total liabilities $45.35 million. Current assets of $10.59 million were below current liabilities of $19.97 million; management reported a $9.38 million working-capital deficit.
• Debt included a $14.5 million, five-year senior secured note to PCCU at 4.25%, secured by substantially all company assets. The note requires 54 monthly principal-and-interest payments of $295,487 beginning November 2023. Balance-sheet liabilities also included $17.58 million of deferred consideration, primarily related to Abaca, and $1.02 million of lease liabilities.

Material changes and business developments

• In March 2023, SHF restructured approximately $62.5 million of deferred obligations to PCCU through a $14.5 million secured note and issuance of 11.2 million Class A shares. PCCU held approximately 46% of outstanding common shares at September 30.
• Average active accounts for the first nine months increased 63% year over year to 1,010, while average monthly ending deposits rose 53% to $226.8 million. Management said average account size declined as some larger clients were replaced by smaller businesses.
• SHF reported $41.36 million of PCCU-funded loans at September 30. One indemnified loan, with approximately $3.1 million outstanding, was more than 120 days delinquent and on non-accrual; the company was discussing workout options. The indemnity liability was $1.47 million.
• The company terminated its Central Bank Master Services and Revenue Sharing Agreement effective October 1, 2023. The termination prompted the 2023 impairment testing and charges; management anticipated an orderly transition with minimal customer impact.

Liquidity, outlook and risks

• Management stated that substantial doubt remained about SHF’s ability to continue as a going concern for at least 12 months after issuance of the statements. The working-capital deficit includes $12.01 million of Abaca equity consideration payable, which management characterized as noncash. Management warned that spending reductions, extended supplier terms, asset sales or curtailed expansion might be necessary if operations are not sustained.
• No numerical revenue or earnings guidance was provided. Management described continued focus on expanding lending and anticipated that lending relationships could support deposit growth.
• Key exposures include dependence on PCCU: substantially all revenue was generated from deposits and loans hosted by PCCU, and cash was maintained substantially at PCCU. Cannabis remains illegal under federal law, creating significant regulatory and business risks. Cannabis lending also has limited historical loss data, requiring substantial judgment in credit-loss estimates.
• Nasdaq granted an extension through March 11, 2024 to regain the $1 minimum bid-price requirement. The company said it might consider a reverse stock split; continued listing compliance is not assured.
• Disclosure controls were deemed ineffective at September 30, 2023. Outstanding material weaknesses concerned revenue recognition, complex financial instruments and credit losses. Management reported remediation efforts but had not declared these weaknesses remediated.
• After quarter-end, an October 26 amendment to the Abaca merger agreement set future stock consideration at 5,835,822 shares, added a $1.5 million third-anniversary payment payable in cash, stock or both, and provided for warrants covering 5 million shares at a $2.00 exercise price. These terms create potential dilution and future payment obligations.

Important facts for investors to verify

• Whether operating cash generation and available liquidity can support obligations, including monthly note payments and Abaca consideration.
• Performance and collection status of the delinquent indemnified loan, and whether the $1.47 million indemnity liability adequately reflects exposure.
• Progress on reducing dependence on PCCU and the business impact of the Central Bank agreement termination.
• Whether the Abaca amendment’s share issuance, warrants and cash consideration have been completed or otherwise changed, and the resulting dilution.
• Remediation of the three material weaknesses and the company’s ability to regain Nasdaq’s minimum bid-price compliance by March 11, 2024.