Aspen Technology Q1 2024 Earnings Call Transcript

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May 13, 2024

There are 4 speakers on the call.

Operator

Thank you for standing by. My name is Benjamin, and I will be your conference operator today. At this time, I would like to welcome everyone to Safe Harbor Financial First Quarter 20 24 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would like to turn the call over to Erica Kaye. Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to the Q1 2024 earnings conference call for Safe Harbor Port Financial. 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 statements. Actual 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.

Speaker 1

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, including the company's annual report on Form 10 ks for the year ended December 31, 2023, as well as the limitation factors included in the forward looking statements in the company's annual report on Form 10 ks for the year ended December 31, 2023, which are available at www.sec.gov or on our website at ir.shfinancial.org. The forward looking statements in this call may 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 find on the company's Investor Relations website or on the SEC website. Finally, the content of this call may contain time sensitive information accurate only as of today, May 13, 2024.

Speaker 1

SHF Holdings, Inc. Undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances other than the date of this call. All dollar amounts expressed today are in U. S. Currency.

Speaker 1

Presenting today will be Sundy Seabreeze, Chief Executive Officer and Jim Dennedy, Chief Financial Officer of Safe Harbor. I'll now hand the call over to Sundy. Sundy, please go ahead.

Speaker 2

Thank you, Erica, and welcome to our Q1 2024 earnings call. We entered 2024 with our most expansive suite of financial compliance products and services in place. In the Q1, we specifically focused on advancing newer lines of business as we continue to drive more diversified income streams and enhance our position as a premier financial services provider for cannabis related businesses or CRBs across the country. It is important to understand the significance of our lending program in the context of the obstacles CRBs continue to face even with regulatory changes in motion when trying to gain access to capital to grow their businesses. Traditional banks and credit unions remain hesitant to engage in Canada's financing due to the industry's complex structure.

Speaker 2

And if they do participate, loans often carry high interest rates with less favorable terms compared to loans provided to businesses and other sectors. Given our success in serving over 7 50 clients through our proven compliant cannabis finance infrastructure and facilitating over $22,000,000,000 in deposits across 41 states since our inception in 2015, incorporating lending into our platform was a natural extension for the business. Safe Harbor is one of just a handful of financial service providers capable of providing CRVs access to compliant deposit tools and traditional lending. Our results in the Q1 demonstrate the success we have achieved in developing this high margin business channel to further enhance our competitive position. To provide some perspective on growth of our lending program since it was first introduced in 2022, it is important to understand how our revenue composition has evolved over the past year.

Speaker 2

Given our success working with financial institutions to onboard, monitor and ensure compliance of CRB funds, we accrued a strong deposit base from which to lend. To address our clients' increased requirements for growth capital, we have worked closely with our financial partners to lend against deposits. Increased deposits result in higher lending capacity. Given Safe Harbor's unique lending capabilities, we believe new lending opportunities will help drive strong organic deposit growth. When we began ramping up our lending program in Q1 2023, loan interest income was a nominal percentage of our business at approximately 11%.

Speaker 2

At the end of Q1 2024, the value of our loan book nearly tripled year over year and loan income represented just over 40% of revenue in the quarter. The results clearly demonstrate market acceptance of this truly unique capability and support our goal of creating a more diversified income stream. Our business model centers on leveraging our experience in Canada Finance and our proprietary and compliant FinTech platform to create a one stop shop financial service center for cannabis businesses across the country. By expanding our product and service offerings, we have proven our ability to scale and differentiate Safe Harbor from the competition, which experienced high barriers to entry in providing the same array of services due to the high level of compliance, oversight and monitoring required. Today, we are less reliant on our depository fees to drive our growth.

Speaker 2

We are now operating multiple synergistic business channels with increasing income being derived from loan interest, lending fees and investment income. As a result, I am pleased to report that in the Q1 of 2024, our loan income increased 2 50% year over year to $1,600,000 in the Q1 of 2024 compared to $466,000 in the comparable period of 2023. As I mentioned during our Q4 2023 call, our deposit base has decreased due to the July 2023 termination of our master services and revenue sharing agreement with Central Bank in Arkansas. As a result, our total number of client accounts dropped from 10.40 as of March 31, 2023 to 7.57 as of March 31, 2024, which negatively impacted our quarterly depository fees. For the Q1 of 2024, these fees decreased 28% to $1,620,000 compared to $2,250,000 in Q1 of 2023.

Speaker 2

A decrease in depository fees does not surprise us due to the present market and need to increase deposits at all financial institutions. We anticipated this change in the market and remain competitive with our pricing to continue to retain and attract new clients. Our primary focus is to continue to attract lending opportunities, which in turn create relationships with businesses in the long term. We believe the key takeaway from our Q1 results is our ability to provide our customer base with additional value added products and services, such as our high margin lending program, where we believe we will remain at the forefront of the cannabis finance industry. In addition, with a greater array of financial tools now available for our platform, we are positioned to capture new customers and in turn add new deposit accounts.

Speaker 2

We will lead with lending as more and more financial institutions with sizable bank balances look to safe harbor to support the additional banking needs of these cannabis businesses. Many of these financial institutions do not want to attempt

Speaker 3

to

Speaker 2

replicate our model as it has proven extremely difficult to execute. Our near term growth strategy is to acquire portfolios from banks looking to exit the business, increase our deposit base and further leverage our platform to meet the demands of CRBs across the country. With the rollout of more and more deposit and credit tools along with our ability to serve large multi state operators or MSOs in every legal market across the country, we are strategically positioned for growth. For example, with the launch of our interest bearing commercial deposit accounts in 2023, more and more CRBs are recognizing the breadth of our service offering. It is also important to note that our business fundamentals remain strong resulting in continued improvement to our bottom line.

Speaker 2

We impactfully reduced our total operating expense by over 36% to $3,730,000 dollars in the Q1 of 2024 compared to $5,800,000 in Q1 2023. These improvements improved operating efficiency to deliver positive net operating margins. Before I turn the call over to Jim to discuss our Q1 results, I would like to discuss the incredible step forward made recently in legitimizing the cannabis industry with the proposed rescheduling of cannabis from Schedule 1 substance to a Schedule 3 substance and what this means for our industry's growth as well as safe harbors. We believe the rescheduling of cannabis will be a significant catalyst for the industry, leading to greater access to traditional financing channels that have far Q long been inaccessible. The prospect of rescheduling cannabis would go a long way in evening the playing field for our cannabis businesses.

Speaker 2

Without the constraints of Section 280E, the internal revenue code, which prohibits businesses dealing with Schedule 1 substances from writing off business expenses on their federal tax returns, these businesses can deliver much stronger financial returns. In the near term, we believe the potential of rescheduling will attract more capital to the industry, allowing for greater growth and financial stability. In effect, these businesses will have more money to deposit into their bank accounts, which potentially lead to greater lending opportunities for Safe Harbor. The rescheduling of cannabis would be a huge win for the cannabis industry, including Safe Harbor. As more financial institutions open their doors cannabis businesses, we expect the demand for our services to support these businesses will dramatically increase.

Speaker 2

Issues with payment networks will unfortunately continue to exist, leaving the industry predominantly cash intensive. In addition to the fact that cannabis will remain under this Controlled Substance Act. Another catalyst for the industry's growth is SAFE for Banking Act, which will allow state legal cannabis businesses to transition from being primarily cash based operations and allow the industry participants to gain greater access to traditional financial institutions. While this act is moving closer to becoming law, it does not eliminate the need to meet the compliance and oversight requirements of the Bank Secrecy Act or BSA. Most financial institutions are either unable or unwilling to undertake the compliance management needed to process these funds.

Speaker 2

Therefore, we view the SAFR Banking Act as a neutral event for Safe Harbor given the continued need to navigate the BSA. It is becoming increasingly important to ensure new businesses entering the market are properly processed and managed. Over the past 10 years, we have tailored our FinTech platform to expand with the evolving cannabis regulatory landscape. Our ability to streamline operations and ensure proper compliance is unmatched. The cannabis industry remains complex and will continue to change.

Speaker 2

We pride ourselves in our unique capability to consistently deliver trusted financial services to the cannabis entrepreneurs nationwide. I'd now like to turn the call over to Jim to discuss our financial results for the quarter ended March 31, 2024. Jim?

Speaker 3

Thanks, Sundi, and good afternoon, everyone. Total revenue in the Q1 of 2024 was $4,100,000 compared to $4,200,000 in the prior year period, primarily attributable to a decrease in investment income and deposit activity and onboarding income. This decrease was a result of fewer accounts being opened and lower deposit balances in the current period versus the prior year period. The decline in these two revenue streams was offset by a substantial increase in loan interest income by more than 2 50 percent in the current period to $1,600,000 versus the prior year period of 466,000 Operating expense in the Q1 of 2024 decreased by more than 35% to $3,700,000 compared to $5,800,000 in the prior year period. The lower operating expenses in the Q1 were primarily driven by significantly lower compensation and employee benefit expense, including stock based compensation expense, lower advertising and marketing expense and lower general and administrative expenses.

Speaker 3

The company reported net income in the Q1 of 2024 of nearly $2,000,000 versus a net loss of $1,400,000 in the prior year period, primarily due to the company generating positive operating income during the Q1 of 2024 and favorable changes to the fair value of our warrant liability and the fair value of deferred consideration owed to the Abacus shareholders. When adjusting the net income for interest, taxes and depreciation and amortization expense and further adjustments to exclude non cash, unusual and or infrequent costs, we compute an adjusted EBITDA, which management believes is an important measure to evaluate our operating performance. A reconciliation of net income to adjusted EBITDA is provided in the press release and current report of Form 8 ks filed earlier today. Adjusted EBITDA for the quarter ending March 31, 2024 was $1,000,000 versus $409,000 in the prior year period. Moving to the balance sheet, at March 31, 2024, the company reported cash and cash equivalents of $5,600,000 compared to $4,900,000 at December 31, 2023.

Speaker 3

Cash generated by operating activities in the Q1 of 2024 was $1,400,000 versus $232,000 of cash used by operations during the same period in 2023. The improvements in cash flow was mainly due to a decrease in operating expenses. Turning to our liquidity. Our net working capital in the Q1 of 2024 improved to just short of $318,000 versus the working capital deficit of $135,000 reported at December 31, 2023. The improvement in our working capital is primarily attributable to lower operating expense and a greater number of performing loans at better rates than at year end.

Speaker 3

Looking ahead to the full year for 2024, we expect to generate slightly better adjusted EBITDA on modestly higher revenue compared to our full year of 2023, which reported $3,600,000 of adjusted EBITDA on $17,600,000 of total revenue. The reconciliation of adjusted EBITDA to GAAP net income for the full year of 2023 was provided in the Form 10 ks for 2023 filed with the Securities and Exchange Commission on March 25, 2024. We will provide updates to this guidance and subsequent earnings call throughout the year. With that, I will now turn the call back to the operator to open the call for questions.

Operator

Thank you. We will now begin the question and answer session. And there being no questions in the queue. This concludes today's conference call. Thank you for participating.

Operator

You may now disconnect.

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Earnings Conference Call
Aspen Technology Q1 2024
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