SHF Holdings, Inc. — Q2 2023 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2023. SHF provides banking, compliance, account-servicing and lending-related services to financial institutions serving cannabis-related businesses. It does not hold customer deposits. Results include the Abaca business acquired in November 2022, so comparisons with 2022 may not be fully comparable.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $4.57 million, up 147% year over year | $8.75 million, up 148% |
| Operating loss | $17.91 million | $19.53 million |
| Net income (loss) | $(17.60) million, versus $0.34 million income | $(19.02) million, versus $0.84 million income |
| Adjusted EBITDA (non-GAAP) | $0.85 million, versus $0.56 million | $1.26 million, versus $1.14 million |
- Revenue growth reflected higher deposit/account fees, investment income and loan interest income. For the first half, investment income was $2.84 million and loan interest income was $1.07 million. Management attributed investment-income growth partly to higher interest rates.
- Operating expenses were $22.49 million in Q2 and $28.29 million in the first half. The first-half total included $13.21 million of goodwill impairment and $3.68 million of finite-lived intangible impairment, both noncash.
- Cash was $8.24 million at June 30, compared with $8.39 million at year-end. Operating cash flow was negative $0.95 million for the first half; investing activities provided $0.79 million. Ending cash was $8.24 million.
- Total liabilities were $44.73 million and total assets were $72.08 million. Debt includes a $14.5 million senior secured note to PCCU bearing 4.25% interest, with a first-priority security interest over substantially all company assets. The filing also reports $17.46 million of deferred consideration, principally related to Abaca.
- Net working capital was negative $9.42 million, improved from a $39.34 million deficit at December 31, 2022. The June deficit includes $11.88 million of noncash equity consideration payable for Abaca.
Material changes and management commentary
- In March 2023, SHF restructured deferred obligations to PCCU: it issued PCCU 11.2 million Class A shares and replaced part of the obligation with the five-year, $14.5 million secured note. The transaction reduced the PCCU-related payment burden but increased dilution and secured debt.
- Average monthly ending deposits rose 58.8% year over year to $226.8 million for the first half, and average active accounts increased 69.8% to 1,010. Average account balances and average fees per account declined 6.5% and 9.8%, respectively. Management said larger-client churn and replacement with smaller accounts contributed to the decline.
- Management stated there is substantial doubt about SHF’s ability to continue as a going concern for at least 12 months after issuance. It cited operating losses and the working-capital deficit; the PCCU restructuring did not remove the doubt. Management said cost reductions, supplier payment extensions, asset sales or curtailment of expansion could be required if operations cannot be sustained.
- A Central Bank agreement serving cannabis businesses, primarily in Arkansas, is to terminate effective October 1, 2023. The termination triggered impairment testing and the Q2 impairment charges. Management expected an orderly transition with minimal customer disruption; further impairment could be material if assumptions or business performance weaken.
- Credit risk includes a PCCU-funded, indemnified loan with a $3.1 million balance that was more than 120 days delinquent; management was discussing workout options. The indemnity liability rose to $1.66 million from $0.50 million at year-end.
- SHF operates solely in the cannabis sector, which remains illegal under U.S. federal law. It substantially relies on PCCU for deposits and loan funding, and 78% of trade receivables were due from PCCU at quarter-end.
- Disclosure controls were deemed ineffective at June 30 because of material weaknesses in revenue recognition, complex financial instruments and credit-loss accounting. The filing says prior weaknesses related to going-concern analysis and deferred taxes were remediated.
- No numerical revenue or earnings guidance is provided. The filing reports no material change to previously disclosed risk factors and no legal proceedings under Part II, while also describing potential ordinary-course litigation contingencies.
Most important facts for investors to verify
- Liquidity runway, cash burn and management’s plans to address the stated going-concern uncertainty.
- Central Bank termination’s actual customer, revenue and cash-flow impact, and whether additional impairment is required.
- Recoverability of the $3.1 million delinquent indemnified loan and adequacy of the $1.66 million indemnity liability.
- Terms, repayment schedule and collateral coverage of the PCCU note, as well as the full dilution effect of PCCU and Abaca-related share issuance.
- Share-count disclosures: the balance sheet reports 46,265,317 Class A shares outstanding at June 30, while portions of the MD&A report materially different figures. Reconcile against the company’s share ledger and subsequent filings.
- Progress in remediating the three remaining internal-control material weaknesses, and the assumptions underlying positive adjusted EBITDA despite substantial GAAP losses.