SHF Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 15, 2023

There are 4 speakers on the call.

Operator

Hello, and welcome to Safe Harbor Financial's 2023 First Quarter Earnings Conference Call. I am joined this afternoon by Sundy Seifried, Chief Executive Officer and Jim Dennedy, Chief Financial Officer. Before we start, please note that remarks made today include forward looking statements, including statements with respect to the company's outlook and the company's expectations regarding its market opportunities and other financial operational matters. Each forward looking statement discussed on today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statement. After results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements and reported results should not be considered as an indication for future performance.

Operator

Additional information regarding these factors appears under the heading Risk Factors in the company's filings with the Securities and Exchange Commission or the SEC, which are available at www.sec.gov and on our website at ir.shfinancial.org. The forward looking statements in this call will speak only as of today's date, and the company undertakes no obligation to update or revise any of these statements. Also during the call, Safe Harbor will present both GAAP and non GAAP financial measures. A reconciliation of non GAAP to GAAP measures is included in today's earnings press release, which you can found on the company's Investor Relations website or on the SEC website. Today's call is being recorded and a copy of the recording will be available on Safe Harbor's Investor Relations website.

Operator

All dollar amounts expressed today are in U. S. Currency. I would now like to turn the conference over to your host, Ms. Sundee Seifried, Chief Executive Officer of Safe Harbor Financial.

Operator

You may begin.

Speaker 1

Thank you, operator, and welcome, everyone, to our 2023 Q1 earnings call. For those of you new to our story, Safe Harbor has developed a proven compliant cannabis finance onboarding, monitoring and Compliance Infrastructure to meet the needs of cannabis related businesses or CRBs that are seeking dependable financial services, including depository and credit solutions through our banking clients. Our proprietary FinTech platform is automated, making it highly reliable and scalable and an ideal foundation on which to grow alongside the country's cannabis industry, which has lacked reliable access to such services. In addition to organic growth, our growth strategy includes 5 Key components, acquiring client portfolios from other financial institutions or FinTech platforms wishing to partnering with Safe Harbor or exit the space altogether, acquiring other reliable cannabis service platforms that complement our service and product offerings with a focus on other pioneers that have perfected their operations and have industry expertise, expanding our CRB accounts in new legalizing markets and the 13 states that have legal cannabis on the ballot for 20 23, offering lending as a featured product alongside depository services through our banking partners, further engaging more national cannabis companies and optimizing our presence in current legal markets utilizing a new sales and business development team and marketing staff to provide education on Safe Harbor and our services.

Speaker 1

The cannabis industry has never presented a greater opportunity for our national expansion With medical and adult use legal in 3722 states respectively with at least 4 states likely to legalize in the midterm. Our ability to easily expand upon our present national platform allows us to meet the needs of the industry at the same pace of industry growth. While some believe the industry is flattening out, we do not see this evidence we do not see evidence of this In our portfolio performance nor growth metrics, legalization across the country only expands our ability to grow. As a solid example, we processed a record $1,100,000,000 in deposits during the Q1 through our partner financial The greatest amount recorded in our nearly 9 year history, which represents a 33% increase over quarter 1 last year. Likewise, our monthly average number of accounts held with financial institution clients increased 68% to 993 compared to 590 in quarter 1 2022.

Speaker 1

The slight decrease of the number of accounts held since year end 2022 is a result of closing our 0 balance accounts. We reported record monthly average deposits on deposits held by our financial institutions of 213,600,000 a 55% increase from the $137,700,000 in quarter 1, 2022. This growth is both organic and the result of last year's AbbVaca acquisition, which brought on a dedicated sales and business development team that is currently focused on building out our national presence. For the 1st 8 years of our operations, we grew our business only by word-of-mouth, but have recently added a robust marketing program that has accelerated our growth and will continue to drive expansion of our national program. All of this growth and activity leads us to believe no better time exists for the national expansion of Safe Harbor Financial.

Speaker 1

Our ability to expand is further enhanced by our new partnership with 5 Star Bank, a New York based subsidiary of NASDAQ Traded Financial Institutions Inc, which increases our capacity to onboard deposits by up to $1,000,000,000 This partnership enables us to provide CRVs with the most robust and affordable cannabis banking solutions available, including greater access to credit facilities. For MSOs in particular, this partnership makes it possible for them to consolidate their financial operations under 1 financial institution and 1 Banker. And in addition to supporting Safe Harbor's continued investment in deposit growth income, our increased capacity to onboard deposits means we can grow the number of and value of PRB accounts, which in turn Improves our loan underwriting expertise with lower cost of funds compared to what the market is used to securing. Turning to our lending program, we made program enhancements during the quarter by adding a full time originator with 20 years of commercial banking and underwriting experience in the banking sector. His experience, coupled with our COO, who has done legal work on commercial loans and restructuring are well suited to meet the conservative standards required by our financial institution partners.

Speaker 1

The team has successfully built out a pipeline of nationwide lending opportunities exceeding 300,000,000 with a focus on senior secured debt. We lead with strong real estate based lending and as we build client relationships to determine their ability to repay and the success of their operations, we will consider other collateral. We also continue to build out functionality by bringing servicing in house. This allows for additional income for operations and the ability to work more closely with our borrowers, which creates less confusion and efficient monitoring of the portfolio. We are selectively building out a network of financial institutions that provides us with the opportunity to consider much larger credit facilities as these institutions open their appetite to cannabis banking and lending.

Speaker 1

As we build out the full function of our internal lending platform, we are focused on operational efficiencies that will expedite closure to the best support to best support our clients' success in building out their businesses. As you've heard in recent news, the State Banking Act Gaining Support in Washington D. C. While this legislation would add protective measures to financial institutions, creating a safe harbor and removing the risk of prosecution of officers and directors. I want to stress but the passing of this act will not impact our ability to expand nor do we anticipate that it will significantly increase competition for safe harbor.

Speaker 1

The real cause of financial institutions' barrier to entry is the Bank Secrecy Act or PSA that has for decades been an ominous banking regulation. This resource intensive regulation serves to protect the entire financial system while allowing law enforcement to eliminate illicit enterprises across the country. Enforcement actions and associated fines for weak BSA programs can lead to tens of 1,000,000 of dollars in penalties. Even with the passing of the Banking Act, the BSA will continue to dictate how financial institutions serve the cannabis industry, posing the greatest risk to those financial institutions opting to bank cannabis clients. We believe this will increase a need for our compliance and monitoring services.

Speaker 1

Safe Harbor Financial has nearly a 9 year advantage of building out our VSA activities under the watchful eye of regulators, while refining our program over the course of 16 state and federal examinations. So we are confident that CRBs who choose to bank with our financial Lastly, I want to address the banking situation across the country. Certainly, a few banks are facing difficult times, but that does not mean all will face similar difficulties. Not all banks at the risk appetite of those facing negative regulatory actions or closure. As I stated earlier, we are selective with our bank partnerships and monitor their financial position.

Speaker 1

While we cannot be certain of all activities of our financial institution clients and the risks associated, We will continue to be highly selective and proactive. And should we sense any issue, carefully move our client base between financial institutions to manage the risk over several financial institutions. Because we are in the financial service sector Via FinTech model, we must and do plan for methodical and careful growth, pacing our growth alongside Regulated Financial Institutions that do the same. Our in house banking experience only further enhances our ability to protect the stability of the financial system in coordination with our partner banks and credit unions. I will outline the key objectives We are focusing on for the remainder of 2023 in my closing remarks, but will now hand the line to Jim, who will walk us through our financial results for Q1.

Speaker 1

Jim?

Speaker 2

Thank you, Sundy. Total revenue in the Q1 of 2023 increased 150% of $14,200,000 compared to $1,700,000 in the comparable prior year period, primarily attributable to higher investment income and higher deposit activity and onboarding income. Operating expense in the Q1 of 2023 increased more than 4 fold to $5,800,000 compared to $1,200,000 in the comparable prior year period. The higher operating expenses in the Q1 were primarily driven by significantly higher Seifried. Sledd:] I will now turn the call over to our operator for questions.

Speaker 2

Thank you, Sandy. Thank you, Sandy. Good morning, everyone. Advertising and marketing expense and amortization and depreciation expense and business insurance. Net loss in the Q1 of 2023 was $1,400,000 versus net income of $500,000 in the prior year period, primarily due to the higher expense previously discussed and accrued interest on the PCCU or Partner Colorado Credit Union payable prior to restructuring that payable at the end of March of this year.

Speaker 2

When adjusting net income for interest, Unusual and or infrequent costs we compute in adjusted EBITDA, which management believes is a measure to evaluate our operating performance. A reconciliation of net income to adjusted EBITDA is provided in the press release and 8 ks filed earlier today. Adjusted EBITDA for the quarter ending March 31, 2023 was $410,000 versus $571,000 in 2022. Moving to the balance sheet at March 31, 2023. The company reported cash and cash equivalents of $8,600,000 compared to $8,400,000 at December 31, 2022.

Speaker 2

Cash used in operating activities for 2023 Q1 It was $226,000 versus $506,000 in cash provided in the prior year period. This was mainly due to the previously cited higher than normal run rate for compensation and employee benefits expense in the quarter as well as higher than normal run rate for professional services expense associated with assessing the changes in value in the complex financial instruments and the activities associated with negotiating our expense payables to a lower value and resolving partner Colorado Credit Union Payable to a serviceable level of debt and stock. Turning to our liquidity. Our net working capital deficit decreased to $9,000,000 from $39,300,000 at year end 2022. The improvement in our working capital is primarily attributable to the negotiation and settlement of the current portion of the long term payable owed to Partner Colorado Credit Union.

Speaker 2

Since the beginning of the year, we made significant balance sheet improvements, resolving approximately $68,600,000 in debt obligations, representing a more than 60% decrease in our total debt obligations. We restructured approximately $64,700,000 of total payment obligations owed to partner with Colorado Credit Union from our September 8, 2022 business combination. And subsequent to the quarter end, we announced that an additional approximately $3,900,000 in accrued expenses Seifried. $700,000 payable over the next 12 months with no interest on that $700,000 Regarding our working capital deficit of $9,000,000 reported at March 31, 2023, dollars 11,700,000 is associated with the deferred consideration owed to the sellers of AbbVaca in the form of common stock of the company. Excluding the stock portion of the deferred consideration from the working capital calculations, the company would have reported a Positive working capital of approximately $2,700,000 Looking ahead for the balance of 2023, We expect full year revenue for 2023 to grow in excess of 50% over the $9,400,000 reported in the full year of 20 22.

Speaker 2

Further, for the full year of 2023, we expect to generate positive adjusted EBITDA and positive cash flow from operating activities. As the year progresses, we look forward to updating our outlook in providing more specific revenue, adjusted EBITDA and operating cash flow guidance. With that, I will now turn the call back over to Sundi for for closing remarks. Sundy?

Speaker 1

Thank you, Jim. Sounds good to me. As you have heard from Jim and me Today, the team has been dedicated to strategically positioning Safe Harbor for future growth, along with the AbbVaca acquisition and integration, which completed our FinTech platform and our recent debt restructuring, expense negotiations and deposit onboarding capacity expansion, We are poised for continued success in 2023 and beyond. For the remainder of this year, we will focus on 3 priorities to continue to grow our business, further increase our account growth and subsequent onboarding of deposit balances, which will well position us to execute our lending strategy with a competitive pricing strategy. We expect lending will both increase our profitability and customer retention rates.

Speaker 1

Continue to build our internal lending function and optimize income from originating underwriting and servicing credit facilities, which will enable us to expedite our processes and scale the lending portfolio alongside our depository growth and optimize our financial institution relationships to secure more product and service offerings for our CRB accounts with expanded balance sheet capacity and the syndication network for financing larger credit facilities. With that, I'll open of the call for questions. Operator?

Operator

Thank

Speaker 1

Siefried,

Operator

Our first question comes from the line of Michael Albanese from E. F. Hutton.

Speaker 3

Yes. Hey, guys. Nice Seifried. Congratulations on the partnership there with 5 Star. Just a couple of questions from me.

Speaker 3

I guess, First off on the deposit side and the increase in the monthly average balances held with clients, can you just provide a little insight as to what's driving this? I mean is this Just Abacus and more underneath there, and any additional color there would be helpful.

Speaker 1

Sure. I'll go ahead and take that. This is Sundy. And it's a combination of both, but it was not totally AbbVieco. We've just seen a good growth in our The base held mostly by Partner Colorado Credit Union at this point in time.

Speaker 1

So a lot of organic growth is in there as well. The AbbVaca acquisition brought probably $30,000,000 to $40,000,000 $50,000,000 at the most So there's organic growth there as well.

Speaker 3

Got it. Thank you. That's helpful. And Just regarding the deal with 5 Star and the additional $1,000,000,000 in deposit capacity, obviously, this is significant for you guys. And so I guess first in relation to that, I mean, what does it do for you guys strategically in regards to potential MSO business?

Speaker 3

And then just beyond that, I mean, what does the health of the lending pipeline look like at the current moment? I think you kind of alluded Seifried. I'm paraphrasing, but demand is holding up pretty well. Just Some additional color in terms of what you're seeing there and how you can kind of attack that market opportunity.

Speaker 1

Well, first, I think that the financial institutions with whom we're partnering at this point in time really Are looking toward that longer term relationship and the ability to enter the market through safe harbor and get those lending Opportunities with us, whether they participate directly on those loans or they actually allow us to utilize their balance sheet. So I think that it's a combination there of what we'll be able to do with them. Otherwise, I don't know that they would actually be looking toward us just for the cannabis However, deposits are attractive. Now we don't loan out 100% of our deposits. Obviously, we keep A good portion of them liquids, certainly because we work within the confines of the regulated institutions with whom we work.

Speaker 1

I think what we're seeing is that these new financial institutions being banks come to the table are willing to offer additional commercial services to our clients, which We find very attractive anything for as an example from a line of credit to interest bearing accounts. So while we have worked under the partner Colorado Credit Union and smaller banks up to this point in time, we are now expanding into these Larger opportunities, the $1,000,000,000 or up to $1,000,000,000 access that we can utilize or work with 5 Star Bank on Allows us to take a client that may have $20,000,000 in deposit as an MSO in their corporate account and put it on that balance sheet where at the Partner Colorado, we have maxed out that balance sheet as we have with other partners that we are using at this point in time. So it gives us the opportunity to now expand our client base with larger funds on the balance sheet and negotiate with those financial institutions how we can use those accounts or that balance.

Speaker 3

Got it. No, that's really helpful and that's really great. I mean, just I guess in layman's terms, you're now set up, you now have the infrastructure in place to really be able to provide Services to MSOs, right, and that's an attractive setup for you guys. So what is the this might be a question for Jim, but where does the lending book stand today? I didn't see it in the press release.

Speaker 3

I might not have just gone in-depth enough there, and I'm not sure if you said it, so my apologies if you're repeating yourself.

Speaker 1

Jim, I'll let you know. I don't know if

Speaker 2

we reported Okay. Yes, thank you, Michael. I don't know if we reported it Specifically, we had a small increase in the loan book in the Q1, not a Material increase, but I think we have some news upcoming, so please stay tuned.

Speaker 1

Yes.

Speaker 3

And I mean this is prior to the announcement With 5 Star anyways, so that being March 31. So okay, that's really all I have on my end. Thanks guys. And again, congratulations on a nice

Operator

Thank you.

Speaker 1

I

Operator

would now like to turn the conference back over to Ms. Seifried.

Speaker 1

Thank you, operator. We are excited about our Q1 accomplishments and look forward to sharing our continued progress and updates on our strategy during our next call. And thank you all for joining

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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SHF Q1 2023
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