SHF Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 14, 2022. SHF provides banking-compliance, account-servicing and lending support to financial institutions serving cannabis-related businesses (CRBs). The September 28, 2022 SPAC business combination changed the company’s reporting structure; 2021 comparative results include carved-out operations and are not fully comparable.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2022 | $2.38 million | $5.90 million |
| Revenue, 2021 | $1.72 million | $5.30 million |
| Operating income, 2022 | $0.83 million | $1.66 million |
| Net income, 2022 | $1.06 million | $1.89 million |
| Net income, 2021 | $0.95 million | $2.57 million |
| Basic / diluted EPS, 2022 | $0.06 / $0.06 | $0.10 / $0.09 |
Quarterly revenue grew 38.6% year over year; nine-month revenue grew 11.4%. Nine-month net income fell 26.2%. Operating margin was approximately 34.7% for Q3 and 28.2% for the nine-month period, compared with 55.1% and 48.5%, respectively, in 2021. Higher investment and loan interest income supported revenue, while operating expenses rose 101.6% in Q3 and 55.4% year to date. Management attributes expense growth mainly to staffing, public-company and consulting costs, hosting and marketing expenses, and increased loan-loss provisions.
Investment income rose with Federal Reserve rate increases; loan interest income increased as SHF expanded lending. Deposit/account activity and Safe Harbor Program revenues declined. The company reported 659 average active accounts in Q3, up 20.7%, but average account balances fell 31.8% and average fees per account fell 20.9%. Management said larger-client churn was replaced by smaller businesses.
Cash, liquidity and obligations
- Cash was $7.27 million at September 30, 2022, versus $5.50 million at December 31, 2021. Nine-month cash from operations was $1.97 million; investing used $0.48 million; financing provided $0.29 million; cash increased $1.78 million.
- Net working capital was negative $28.24 million, compared with positive $5.92 million at year-end 2021. Current liabilities were $41.46 million, including $33.62 million due to seller PCCU; another $23.33 million was classified long term. Total seller consideration deferred was approximately $56.95 million, with interest accruing at an effective rate of about 7.7% under the stated payment terms.
- Reported total assets of $98.88 million include a $43.41 million deferred tax asset and a $39.29 million forward purchase receivable, alongside $7.27 million cash. Total liabilities were $68.18 million. No conventional bank debt balance is identified in the presented balance sheet.
- SHF disclosed substantial doubt about its ability to continue as a going concern. Management stated that, if PCCU payment terms were enforced as contemplated, available cash would not be sufficient for the next 12 months without maintaining current business activity. PCCU subsequently agreed to a six-month payment forbearance while the parties renegotiate.
Business combination, outlook and risks
- The September 28 business combination consideration was $185 million: 11.39 million Class A shares valued at $115 million and $70 million cash, of which approximately $56.95 million was deferred. PCCU held 60.8% of the company after closing. SHF also issued $20.45 million of convertible preferred stock to PIPE investors; $4.09 million was reported due from PIPE investors and subject to release conditions tied to an effective registration statement.
- A forward purchase arrangement involved approximately 3.8 million shares and a reported $39.3 million payment from the SPAC trust to counterparties after closing. The agreement has market-price-related early termination and maturity provisions; SHF recorded a $1.09 million derivative asset and $39.29 million receivable.
- On October 29, 2022, SHF agreed to acquire Abaca for $9 million cash and $21 million in stock, with staged payments; closing was expected in Q4 2022. The filing gives no operating forecast or formal financial guidance.
- On November 2, EF Hutton issued a notice alleging default on a $2.17 million promissory note after a missed $362,625 installment. It claimed $1.45 million was immediately due, plus 24% default interest, and threatened legal action. SHF said it was evaluating remedies and intended to defend itself.
- Material risks include reliance on PCCU for substantially all revenue, customer deposits and loan funding; PCCU’s regulatory and lending-capacity limits; SHF’s indemnification of PCCU for certain loan losses; and federal illegality of cannabis, which could disrupt the business if federal laws are strictly enforced. SHF reported $17.73 million of PCCU-funded loans outstanding, all performing at quarter-end, and a $377,005 indemnity liability.
- Disclosure controls were reported ineffective at September 30, 2022. The company identified material weaknesses involving complex financial instruments, deferred-tax-asset calculations and going-concern analysis, and said it was undertaking remediation. The filing also says earlier identified weaknesses had been remediated; the newer weaknesses remain important.
Most important facts to verify
- Whether the PCCU forbearance led to revised, sustainable payment terms and how the $56.95 million deferred consideration will be funded.
- Release and collection of PIPE funds and forward-purchase amounts, and the conditions, timing and actual cash available to SHF.
- Status of the EF Hutton default notice, any payment, litigation or negotiated resolution, and the resulting interest or liability.
- Whether the Abaca acquisition closed, its financing and dilution effects, and any subsequent operating results.
- Reconciliation of the cash-flow disclosure: the financial statements report $1.97 million of operating cash flow, while MD&A separately cites $2.35 million and describes a decrease despite the comparison presented. Confirm the correct figure and explanation.
- Recoverability and assumptions for the $43.41 million deferred tax asset and $39.29 million forward-purchase receivable, plus progress remediating reported control weaknesses.