SHF Holdings, Inc. — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. SHF provides compliance, onboarding, monitoring, banking access and lending services to financial institutions serving cannabis-related businesses (CRBs); it does not hold customer deposits. The September 2022 SPAC business combination and November 2022 Abaca acquisition materially changed the company and make year-over-year comparisons less directly comparable. The financial statements received an unqualified audit opinion, with an explanatory paragraph citing substantial doubt about the company’s ability to continue as a going concern.
Key financial metrics
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Revenue | $9.48 million | $7.01 million | Up 35.3% |
| Operating expenses | $11.68 million | $3.72 million | Up 214.0% |
| Operating income (loss) | $(2.20) million | $3.29 million | Operating margin approximately (23.2%) |
| Net income (loss) | $(35.13) million | $3.29 million | Net loss per share was $(1.85); substantially affected by fair-value charges |
| EBITDA / Adjusted EBITDA | $(43.39) million / $1.30 million | $3.29 million / $3.29 million | Adjusted EBITDA is non-GAAP; review the company’s reconciliation and adjustments |
| Cash from operating activities | $1.70 million | $2.95 million | Down from prior year |
| Cash and cash equivalents | $8.39 million | $5.50 million | At year end |
| Total assets / total liabilities | $99.34 million / $94.23 million | $7.52 million / $0.18 million | Increase principally reflects the business combination and Abaca acquisition |
| Working capital | $(39.34) million | $5.92 million | Deficit includes seller consideration and Abaca deferred consideration |
Revenue growth came mainly from investment income, which rose to $2.12 million from $0.38 million, and loan interest income, which rose to $1.13 million from $0.10 million. Deposit, activity and onboarding income was essentially flat at $6.06 million. Investment income benefited from higher interest rates. Operating costs rose with compensation and benefits, professional and transaction-related fees, marketing, insurance, account-hosting costs and loan-loss provisions.
The net loss included $33.32 million of expense from the change in fair value of the forward purchase agreement and $9.00 million from the forward purchase option derivative, partly offset by a $0.94 million warrant fair-value gain and a $9.25 million income-tax benefit. The year-end balance sheet included a $51.59 million net deferred tax asset; its realization depends on future taxable income.
Material changes and transactions
- Business combination: Closed September 28, 2022. PCCU received shares and cash consideration, including $56.95 million of deferred cash obligations. PCCU held 43.2% of outstanding Class A shares following the closing, according to the filing.
- Abaca acquisition: Closed November 15, 2022, for reported fair-value consideration of $28.40 million. The filing describes cash and share consideration, deferred payments and future share issuance. The acquisition added technology, customer accounts and financial-institution relationships; it also resulted in $19.27 million of goodwill and $10.62 million of net intangible assets at year end.
- Customer and deposit concentration: Average active accounts increased 80.8% to 967, while average account balance fell 36.2% to $215,259 and average fees per account fell 45.0% to $6,154. Management attributed the decline to churn of larger clients and replacement by smaller businesses. Substantially all CRB deposits remained at PCCU; the company reported a 93% account-retention rate.
- Lending: SHF reported $1.30 million of net loans on its balance sheet and $18.90 million of PCCU-funded loans it indemnified at year end. It recorded a $0.51 million loan-loss provision, including a $0.50 million indemnity liability. All reported loans were performing at December 31, 2022, but a $3.1 million indemnified loan became past due in January 2023.
Liquidity, debt and outlook
Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern for at least 12 months from issuance of the financial statements. Cash was $8.39 million, but working capital was negative $39.34 million. The company cited significant losses and obligations including $56.95 million due to PCCU and $14.36 million of current Abaca deferred consideration. Operating cash flow was positive, but lower than in 2021. Management described cost reductions and payment-term negotiations, while acknowledging that these measures did not fully eliminate the going-concern doubt.
On March 29, 2023, after year end, SHF and PCCU agreed to restructure the deferred obligations. The agreement included a five-year, $14.5 million senior secured promissory note at 4.25%, a first-priority security interest in substantially all company assets, and issuance of 11.2 million Class A shares to PCCU. Following issuance, PCCU was expected to own 54.93% of outstanding Class A shares. Investors should distinguish this subsequent restructuring from the December 31, 2022 balance-sheet amounts.
No formal financial guidance or quantified revenue or earnings forecast is provided. Management said it expects methodical lending-portfolio growth based on its pipeline, plans to expand financial-institution relationships and marketing, and intends to build an internal lending function. These plans depend on securing additional funding and deposit-hosting relationships, executing acquisitions and growth initiatives, and navigating cannabis-related legal and regulatory uncertainty.
Risks, contingencies and unusual items
- Cannabis remains federally illegal; changes in enforcement, regulation or state and federal law could impair the business. BSA/AML compliance demands and potential penalties are significant.
- Dependence on PCCU for deposit hosting, funding, servicing and administrative support exposes SHF to counterparty, capacity and relationship risks. A substantial portion of receivables and revenue also relates to PCCU.
- Commercial CRB loans are concentrated and collateral enforcement may be difficult or delayed by cannabis laws and licensing rules. SHF’s indemnities expose it to losses on loans funded by PCCU.
- The company reported four material weaknesses in internal control over financial reporting: deferred tax assets, going concern, revenue recognition and complex financial instruments. Management said it had begun remediation; controls were not effective at December 31, 2022.
- The filing reports a $750,000 irrevocable letter of credit and ordinary-course litigation and claims. Management said pending legal liabilities were not expected to be material, but outcomes remain uncertain.
- Nasdaq notified the company in March 2023 of a minimum-bid-price deficiency, with a stated deadline of September 12, 2023 to regain compliance. The filing also describes potential dilution from preferred-stock conversions, warrants, Abaca consideration and the PCCU share issuance.
- A $1.45 million deferred underwriter fee was reported as payable at year end. The company disclosed a related default notice and said it settled with EF Hutton in March 2023 for $550,000.
Most important facts for investors to verify
- Review the full audited statements and notes, particularly the going-concern disclosure, cash needs, current liabilities and PCCU restructuring terms and implementation.
- Confirm the status and remaining balances of the $14.5 million secured note, PCCU share issuance, Abaca deferred consideration and other payment obligations.
- Assess the quality, collateral, concentration and subsequent payment status of both on-balance-sheet loans and PCCU-funded indemnified loans, including the past-due $3.1 million exposure.
- Examine the assumptions and accounting behind the $51.59 million deferred tax asset and the Level 3 forward-purchase valuation; these materially affect reported results and assets.
- Track remediation of all four material weaknesses, future filing reliability, Nasdaq listing compliance and the potential dilution and control effects of share issuances and conversions.